[Federal Register Volume 64, Number 45 (Tuesday, March 9, 1999)]
[Notices]
[Pages 11510-11519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5718]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41119; File No. SR-Amex-98-34]


Self-Regulatory Organization; American Stock Exchange LLC; Order 
Approving and Notice of Filing and Order Granting Accelerated Approval 
of Amendment Nos. 3 and 4 to the Proposed Rule Change Relating to the 
Listing and Trading of Shares of the Nasdaq-100 Trust

February 26, 1999.

I. Introduction

    On September 21, 1998, The American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade under Amex Rules 1000 et seq., Nasdaq-
100 Shares, units of beneficial interest in the Nasdaq-
100 Trust. The proposed rule change and Amendment Nos. 1 and 
2 \3\ were published for comment in the Federal Register on December 
18, 1998.\4\ On February 5, 1999 and February 24, 1999, the Exchange 
filed Amendment Nos. 3 \5\ and 4,\6\ respectively. No comments were 
received on the proposal. This order approves the proposed rule filing 
as amended.\7\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 to the original proposal 
to clarify the nature and operation of the Nasdaq-100 Trust shares 
(``Amendment No. 1''). See Letter from Geraldine M. Brindisi, Vice 
President and Corporate Secretary, Amex, to Michael Walinskas, 
Market Regulation, Commission, dated December 16, 1998. In Amendment 
No. 2, the Exchange discusses the basis for the mandatory 
termination date of the Trust. (``Amendment No. 2''). See Letter 
from Mike Cavalier, Associate General Counsel, Legal and Regulatory 
Policy, Amex, to Hong-anh Tran, Staff Attorney, Market Regulation, 
Commission, dated December 16, 1998.
    \4\ Securities Exchange Act Release No. 40809 (December 18, 
1998), 63 FR 71524 (December 28, 1998).
    \5\ In Amendment No. 3, the Exchange discusses, among other 
things, the real-time information that will be available regarding 
the Nasdaq-100 Trust shares (``Amendment No. 3). See Letter from 
Michael Cavalier, Associate General Counsel, Legal & Regulatory 
Policy, Amex, to Katherine England, Assistant Director, Market 
Regulation, Commission, dated February 5, 1999.
    \6\ In Amendment No. 4, the Exchange amends the product 
description; provides the new name of the Trust Shares Sponsor, and 
discusses the proposed Amex Rule 1006 (``Amendment No. 4'') See 
Letter from James Duffy, Amex, to Katherine A. England, Assistant 
Director, Market Regulation, Commission, dated February 22, 1999.
    \7\ This order is granting approval for Nasdaq-100 Trust shares 
to be listed and traded on the Amex. If at a subsequent date, Trust 
shares are to be listed and traded on another national securities 
exchange or a quotation medium operated by a national securities 
association, such self-regulatory organization (``SRO'') must 
contact the Commission to determine if it must file, pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder, a proposed 
rule change for such listing and trading.

---------------------------------------------------------------------------

[[Page 11511]]

II. Description

    On December 11, 1992,\8\ the Commission approves Amex Rules 1000 et 
seq. to accommodate trading on the Exchange of Portfolio Depositary 
ReceiptsSM (``PDRs''), securities which represent interests 
in a unit investment trust (``Trust'') operating on an open-end basis 
and that hold a portfolio of securities.\9\ Each Trust is intended to 
provide investors with an instrument that closely tracks the underlying 
securities portfolio, that trades like a share of common stock, and 
that pays to PDR holders periodic dividends proportionate to those paid 
with respect to the underlying portfolio of securities, less certain 
expenses, as described in the applicable Trust prospectus. The first 
Trust to be formed in connection with the issuance of PDRs was based on 
the Standard & Poor's 500 Index (``S&P 500 Index''), known as Standard 
& Poor's Depositary Receipts (``SPDRs''), which have been 
trading on the Exchange since January 29, 1993.\10\ In 1995, the 
Commission approved Amex's listing and trading of PDRs based on the 
Standard & Poor's MidCap 400 Index (``MidCap SPDRs'').\11\ In January 
1998, the Commission approved the listing and trading of PDRs based on 
the Dow Jones Industrial AverageSM (``DIAMONDS'') \12\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 31591 (December 11, 
1992), 57 FR 60253 (December 18, 1992) (``SPDRs Order'').
    \9\ ``PDRs'' is a service mark of PDR Services LLC, a wholly-
owned subsidiary of the Exchange.
    \10\ See SPDRs Order, supra note 8.
    \11\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995) (``MidCap SPDRs Order''). 
``Standard & Poor's 500,'' ``Standard & Poor's MidCap 400 Index,'' 
``Standard & Poor's Depositary Receipts,'' 
``SPDRs,'' ``Standard & Poor's MidCap 499 Depositary 
Receipts'' and ``MidCap SPDRs'' are trademarks of The McGraw-Hill 
Companies, Inc. and are being used by the Exchange and the Sponsor 
under license among Standard & Poor's, a division of The McGraw-Hill 
Companies, Inc., the Exchange and the Sponsor. ``SPDRs'' and 
``MidCap SPDRs'' are not sponsored, endorsed, sold, or promoted by 
S&P, and S&P makes no representation regarding the advisability of 
investing in SPDRs or MidCap SPDRs.
    \12\ See Securities Exchange Act Release No. 39525 (January 8, 
1998), 63 FR 2438 (January 15, 1998) (``DIAMONDS Order''). ``Dow 
Jones Industrial Average,''SM ``DJIA,''SM 
``Dow Jones''SM and ``DIAMONDS'' are each trademarks and 
service marks of Dow Jones & Company, Inc. (``Dow Jones'') and have 
been licensed for use for certain purposes by the Exchange and the 
Sponsor. DIAMONDS are not sponsored, endorsed, sold or promoted by 
Dow Jones, and Dow Jones makes no representation regarding the 
advisability of investing in such product. The Sponsor for the SPDR, 
MidCap SPDR, and DIAMONDS Trust is PDR Services LLC.
---------------------------------------------------------------------------

    The Exchange now proposes to list and trade under Rules 1000 et 
seq. Nasdaq-100 Shares (referred to herein as ``Trust shares''), units 
of beneficial interest in the Nasdaq-100 Trust, Series 1, a unit 
investment trust based on the Nasdaq-100 Index (``Nasdaq-
100 Trust'' or ``Trust'').\13\ The Trust Sponsor, Nasdaq-Amex 
Investment Product Services, Inc.,\14\ which is wholly-owned by The 
Nasdaq Stock Market, Inc. (``Nasdaq''), will enter into a trust 
agreement with The Bank of New York as trustee (the ``Trustee'') in 
accordance with Section 26 of the Investment Company Act of 1940.\15\ A 
distributor, Alps Mutual Funds, Inc., will act as underwriter of the 
Nasdaq-100 Trust on an agency basis.\16\ All orders to create Trust 
shares in Creation Unit size aggregations must be placed with the 
distributor, and it will be the responsibility of the distributor to 
transmit the orders to the Trustee. The distributor is a registered 
broker-dealer and a member of the National Association of Securities 
Dealers, Inc.
---------------------------------------------------------------------------

    \13\ The ``Nasdaq-100 Index,'' ``Nasdaq-
100,'' ``Nasdaq,'' and ``The Nasdaq Stock 
Market'' are trademarks of Nasdaq and have been licensed 
for use for certain purposes by Investment Product Services, Inc. 
pursuant to a License Agreement and Nasdaq. The specific name of the 
Trust and units of beneficial interest based on the Nasdaq-100 Index 
are subject to change and any such change will be filed with the 
Commission as an amendment hereto.
    \14\ See Amendment No. 4, supra note 6.
    \15\ An Application for Orders pursuant to Section 6(c) of the 
Investment Company Act of 1940 (``1940 Act'') has been filed with 
respect to the Trust (the ``Application''). In the interest of 
facilitating secondary market transactions in Trust shares, the 
Application seeks, among other things, an order (1) permitting 
secondary market transactions in Trust shares at negotiated prices 
rather than at a current public offering price described in the 
prospectus and based on current net asset value as required by 
Section 22(d) of the 1940 Act and Rule 22c-1 thereunder, and (2) 
permitting the sale of Trust shares to purchasers in the secondary 
market unaccompanied by a prospectus, when prospectus delivery is 
not required by Section 4(3) of the Securities Act of 1933 but may 
be required according to Section 24(d) of the 1940 Act for 
redeemable securities issued by a unit investment trust. In addition 
a registration statement on Form S-6, including a preliminary 
prospectus for the Trust (No. 333-61001), has been filed with the 
Commission. These exemptions, if granted, will permit individual 
Trust shares to be traded in secondary market transactions similar 
to a closed end investment company. Both the Application and the 
registration statement provide additional detail relating to a 
number of the procedures referenced in SR-Amex-98-34.
    \16\ See Amendment No. 4, supra note 6.
---------------------------------------------------------------------------

The Nasdaq-100 Index\17\
---------------------------------------------------------------------------

    \17\ The description of the Nasdaq-100 Index herein as well as 
discussion of eligibility criteria, annual ranking review, ongoing 
index administration, and index rebalancing are based on materials 
prepared by The Nasdaq Stock Market.
---------------------------------------------------------------------------

    The Nasdaq-100 Index (``Index'') constitutes a clearly 
diversified segment of the largest and most actively traded securities 
listed on the Nasdaq Stock Market. Additionally, the Index has achieved 
wide acceptance by both investors and market professionals. 
Specifically, the Index is composed of 100 of the largest and most 
actively traded non-financial companies listed on the Nasdaq National 
Market tier of the Nasdaq Stock Market.
    The Index was first published in January 1985, and includes 
companies across a variety of major industry groups. The major industry 
groups covered in the Index are: computer and office equipment, 
computer and software/services, telecommunications, retail/wholesale 
trade, and biotechnology.\18\ The five largest companies represented in 
the Index as of December 14, 1998, are as follows: Microsoft 
Corporation, Intel Corporation, Cisco Systems Inc., Dell Computer 
Corporation, and MCI WORLDCOM, Inc. Current information regarding the 
market value of the Index is available from Nasdaq as well as numerous 
market information services. The Index is determined, composed, and 
calculated by Nasdaq without regard to the Trust.
---------------------------------------------------------------------------

    \18\ See Amendment No. 4, supra note 6.
---------------------------------------------------------------------------

    At any moment in time, the value of the Index equals the aggregate 
value of the then-current Index share weights (described below) of each 
of the component 100 securities in the Index (the ``Index Securities) 
multiplied by each such security's respective last sale price on the 
Nasdaq Stock Market, and divided by a scaling factor (the ``divisor'') 
which becomes the basis for the reported Index value. The divisor 
serves the purpose of scaling such aggregate value (otherwise in the 
hundreds of billions) to a lower order of magnitude which is more 
desirable for Index reporting purposes.\19\
---------------------------------------------------------------------------

    \19\ For example, on November 12, 1998, the aggregate value of 
the then-current Index share weights of each of the Index Securities 
multiplied by their respective last sale price on the Nasdaq Stock 
Market was $1,218,098,456,568, the divisor was 830,593,408, and the 
reported Index value was 1,466.54.
---------------------------------------------------------------------------

    The Index share weights of the component securities of the Index at 
any time are based upon the total shares outstanding in each of the 100 
Index Securities and will be additionally subject (prior to the 
issuance of Trust shares) to rebalancing to ensure that the relative 
weighting of the Index Securities continues to meet minimum pre-
established requirements for a diversified portfolio (see ``Rebalancing 
of the Index''). Accordingly, each Index Security's influence on the 
value of the Index is directly proportional to the

[[Page 11512]]

value of its Index share weight. At any time at which the composition 
and/or Index share weights are adjusted as described herein, a new 
divisor will be determined and become effective so as to offset the 
change in aggregate value of the Index Securities in order to ensure 
the continuity of the value of the Index in connection with such 
adjustment.

Index Security Eligibility Criteria and Annual Ranking Review

    To be eligible for inclusion in the Index, a security must be 
traded on the Nasdaq National Market tier of the Nasdaq Stock Market 
and meet the following criteria:
     The security must be of a non-financial company;
     Only one class of security per issuer is allowed;
     The security may not be issued by an issuer currently in 
bankruptcy proceedings;
     The security must have average daily trading volume of at 
least 100,000 shares per day;
     The security must have ``seasoned'' on the Nasdaq Stock 
Market or another recognized market (generally, a company is considered 
to be seasoned by Nasdaq if it has been listed on a market for at least 
two years; in the case of spin-offs, the operating history of the spin-
off will be considered);
     If a security would otherwise qualify to be in the top 25% 
of the issuers included in the Index by market capitalization, then a 
one year ``seasoning'' criteria would apply; \20\
---------------------------------------------------------------------------

    \20\ See Preliminay Prospectus for Nasdaq-100 Trust, Series 1, 
at 38 (January 28, 1999).
---------------------------------------------------------------------------

     If the security is of a foreign issuer, the company must 
have a worldwide market value of at least $10 billion, a U.S. market 
value of at least $4 billion, and average trading volume on the Nasdaq 
Stock Market of at least 200,000 shares per day; in addition, foreign 
securities must be eligible for listed options trading; and
     The issuer of the security may not have entered into a 
definitive agreement or other arrangement which would result in the 
security no longer being listed on the Nasdaq Stock Market within the 
next six months.\21\
---------------------------------------------------------------------------

    \21\ See Preliminary Prospectus for Nasdaq-100 Trust, Series 1, 
at 38 (January 28, 1999).
---------------------------------------------------------------------------

    The Index Securities are evaluated annually based on market data as 
of the end of October as follows (``Annual Ranking Review''). 
Securities listed on the Nasdaq Stock Market which meet the above 
eligibility criteria are ranked by market value as of the end of 
October. Index-eligible securities which are already in the Index and 
which are in the top 150 eligible securities (based on market value) 
are retained in the Index provided that such security was ranked in the 
top 100 eligible securities as of the previous year's annual review. 
Securities not meeting the criteria are replaced. The replacement 
securities chosen are those Index-eligible securities not currently in 
the Index which have the largest market capitalization. The list of 
annual additions and deletions is publicly announced via a press 
release in the early part of December. Replacements are made effective 
after the close of trading on the third Friday in December. Moreover, 
if at any time during the year an Index Security is no longer traded on 
the Nasdaq Stock Market, or is otherwise determined by Nasdaq to become 
ineligible for continued inclusion in the Index, the security will be 
replaced with the largest market capitalization security not currently 
in the Index and meeting the Index eligibility criteria listed above.

Ongoing Index Administration

    In addition to the Annual Ranking Review, the securities in the 
Index are monitored every day by Nasdaq with respect to changes in 
total shares outstanding arising from secondary offerings, stock 
repurchases, conversions, or other corporate actions. Periodically 
(typically, several times per quarter), Nasdaq may determine that total 
shares outstanding have changed in one or more Index Securities as a 
result of such events and Nasdaq has adopted the following quarterly 
scheduled weight adjustment procedures with respect to such changes. If 
the change in total shares outstanding arising from such corporate 
action is greater than or equal to 5.0%, such change is ordinarily made 
to the Index on the evening prior to the effective date of the 
corporate action. Otherwise, if the change in total shares outstanding 
is less than 5.0%, then all the changes are accumulated and made 
effective at one time on a quarterly basis after the close of trading 
on the third Friday in each of March, June, September, and December. In 
either case, the Index Share weights for such Index Securities are 
adjusted by the same percentage amount by which the total shares 
outstanding have changed in the Index Securities. Ordinarily, whenever 
there is a change in Index share weights or a change in a component 
security included in the Index, Nasdaq adjusts the divisor to assure 
that there is no discontinuity in the value of the Index which might 
otherwise be caused by any such change.
    As noted above, Nasdaq may also during each quarter (ordinarily, 
several times per quarter) replace one or more component securities in 
the Index due to mergers, acquisitions, bankruptcies, or due to 
delistings if an issuer chooses to list its securities on another 
marketplace, or if the issuers of the component securities fail to meet 
the eligibility criteria for continued inclusion in the Index.

Rebalancing of the Index

    Effective on December 18, 1998, the Index will be calculated under 
a ``modified capitalization weighted'' methodology, which is a hybrid 
between equal weighting and conventional capitalization weighting. This 
methodology is expected to: (1) retain in general the economic 
attributes of capitalization weighting; (2) promote portfolio weight 
diversification (thereby limiting domination of the Index by a few 
large stocks); (3) reduce Index performance distortion by preserving 
the capitalization ranking of companies; and (4) reduce market impact 
on the smallest component securities form necessary weight 
rebalancings.
    Specifically, on a quarterly basis coinciding with Nasdaq's 
quarterly scheduled weight adjustment procedures (see ``Ongoing Index 
Administration''), the Index Securities are categorized as either 
``Large Stocks'' or ``Small Stocks'' depending on whether their current 
percentage weights (after taking into account such scheduled weight 
adjustments due to stock repurchases, secondary offerings, or other 
corporate actions) are greater than, or less than or equal to, the 
average percentage weight in the Index (i.e., as a 100-stock index, the 
average percentage weight in the Index is 1.0%).
    Such quarterly examination will result in an index rebalancing if 
either one or both of the following two weight distribution 
requirements are not met: (1) the current weight of the single largest 
market capitalization stock in the Index must be less than or equal to 
24.0% and (2) the ``collective weight'' of those stocks whose 
individual current weights are in excess of 4.5%, when added together, 
must be less than or equal to 48.0%.
    If either one or both of these weight distribution requirements are 
not met upon quarterly review, a weight rebalancing will be performed 
in accordance with the following plan. First, relating to weight 
distribution requirement (1) above, if the current weight of the single 
largest stock in the Index exceeds 24.0%, then the weights

[[Page 11513]]

of all Large Stocks will be scaled down proportionately towards 1.0% by 
enough for the adjusted weight of the single largest stock to be set to 
20.0%. Second, relating to weight distribution requirement (2) above, 
for those stocks whose individual current weights or adjusted weights 
in accordance with the preceding step are in excess of 4.5%, if their 
``collective weight'' exceeds 48.0%, then the weights of all Large 
Stocks will be scaled down proportionately towards 1.0% by just enough 
for the ``collective weight,'' so adjusted, to be set to 40.0%.\22\
---------------------------------------------------------------------------

    \22\ By applying the weight rebalancing methodology, the Trust 
is able to meet, among other things, certain diversification tests 
which enable the Trust to maintain its tax treatment as a 
``regulated investment company'' under Subchapter M of the Internal 
Revenue Code of 1986, as amended.
---------------------------------------------------------------------------

    The aggregate weight reduction among the Large Stocks resulting 
from either or both of the above rescalings will then be redistributed 
to the Small Stocks in the following iterative manner. In the first 
iteration, the weight of the largest Small Stock will be scaled upwards 
by a factor which sets it equal to the average index weight of 1.0%. 
The weights of each of the smaller remaining Small Stocks will be 
scaled up by the same factor reduced in relation to each stock's 
relative ranking among the Small Stocks such that the smaller the stock 
in the ranking, the less the scale-up of its weight. This is intended 
to reduce the market impact of the weight rebalancing on the smallest 
component securities in the Index.
    In the second iteration, the weight of the second largest Small 
Stock, already adjusted in the first iteration, will be scaled upwards 
by a factor which sets it equal to the average index weights of 1.0%. 
The weights of each of the smaller remaining Small Stocks will be 
scaled up by this same factor reduced in relation to each stock's 
relative ranking among the Small Stocks such that, once again, the 
smaller the stock in the ranking, the less the scale-up of its weight.
    Additional iterations will be performed until the accumulated 
increase in weight among the Small Stocks exactly equals the aggregate 
weight reduction among the Large Stocks from rebalancing in accordance 
with weight distribution requirement (1) and/or weight distribution 
requirement (2) above.
    To complete the rebalancing procedure, once the final percent 
weights of each stock in the Index are set, the Index share weights 
will be determined anew based upon the last sale prices and aggregate 
capitalization of the Index at the close of trading on the Thursday in 
the week immediately preceding the week of the third Friday in March, 
June, September, and December. Changes to the Index share weights will 
be made effective after the close of trading on the third Friday in 
March, June, September, and December and a corresponding adjustment to 
the Index divisor will be made to ensure continuity of the Index. Such 
changes to the Index share weights would result either from (1) 
adjustments to reflect changes in total shares outstanding in one or 
more Index Securities made during Nasdaq's quarterly scheduled weight 
adjustment procedures (see ``Ongoing Index Administration''), (2) 
changes effective in the quarter ending in December in connection with 
the Annual Ranking Review (see  ``Index Security Eligibility Criteria 
and Annual Ranking Review''); or (3) changes based on the rebalancing 
of the Index in accordance with procedures described above.\23\
---------------------------------------------------------------------------

    \23\ Effective on December 21, 1998, Nasdaq will be maintaining 
two versions of the Nasdaq-100 Index, calculated based on (1) 
conventional capitalization weighting and (2) modified 
capitalization weighting. Nasdaq-100 Index options listed for 
trading on the Chicago Board Options Exchange (``CBOE'') prior to 
December 21, 1998, (whose expiration dates extend as far out as 
March 1999) will continue to be based on the conventional 
capitalization weighted version. Nasdaq-100 Index options listed for 
trading on the CBOE on or after December 21, 1998, will be based on 
the modified capitalization weighted version. After expiration of 
March index option contracts on March 20, 1999, the Index version 
based on the conventional weighting method will no longer be 
calculated. At all times, the Trust intends to replicate the 
composition and weighting of the Nasdaq-100 Index based on the 
modified capitalization weighting method.
---------------------------------------------------------------------------

The Nasdaq-100 Trust

    To be eligible to place orders to create Trust shares, as described 
below, an entity or person must either be a participant in the 
Continuous Net Settlement (``CNS'') system of the National Securities 
Clearing Corporation (``NSCC'') or a Depository Trust company (``DTC'') 
participant. Upon acceptance of an order to create Trust shares, the 
distributor will instruct the Trustee to initiate the book-entry 
movement of the appropriate number of Trust shares to the account of 
the entity placing the order. Trust shares will be registered in book 
entry only, which records will be kept by DTC.
    Payment with respect to creation orders placed through the 
distributor will be made by (1) the ``in-kind'' deposit with the 
Trustee of a specified portfolio of securities that is substantially 
similar in composition to the component shares of the underlying index 
or portfolio; and, in addition, (2) an amount equal to the ``Income Net 
of Expense Amount,'' plus or minus, as the case may be, the ``Balancing 
Amount.'' The ``Income Net Expense Amount'' is an amount equal, on a 
per Creation Unit basis, to the dividends accumulated in respect of the 
securities held in the Trust from the most recent ex-dividend date for 
Trust shares through and including the day on which the creation order 
is placed, net of accrued expenses and liabilities of the Trust for 
such period. The ``Balancing Amount'' serves the function of 
compensating for any differences between (1) the value of the portfolio 
of securities deposited with the Trustee in connection with a creation 
of Trust shares, together with the Income Net of Expense Amount, and 
(2) the net asset value of the Trust on a per Creation Unit basis. The 
``Income Net of Expense Amount'' and the ``Balancing Amount'' are 
collectively referred to as the ``Cash Component'' in the Trust 
Application and registration statement, and the deposit of a specified 
portfolio of securities (as referenced above) and the Cash Component 
are collectively referred to as a ``Portfolio Deposit.'' On any given 
day, the Cash Component of the Portfolio Deposit may be payable either 
by the Trustee on behalf of the Trust to the creator of Trust shares, 
or by the creator of Trust shares to the Trustee on behalf of the 
Trust, depending on the respective amounts of the ``Income Net of 
Expense Amount'' and the ``balancing Amount.''
    In connection with redemptions of Creation Unit size aggregations 
of Trust shares, the redeeming party receives a portfolio of securities 
typically identical in composition and weighting to the securities 
portion of a Portfolio Deposit as in effect on the date a request for 
redemption is deemed received by the Trustee, in addition, in certain 
cases, to a ``Cash Redemption Amount'' (as defined in the Trust 
prospectus) which is typically identical to the amount of the ``Cash 
Component,'' as in effect on such date. The ``Cash Redemption Amount'' 
will either be paid to the Trustee on behalf of the Trust by the 
redeemer or paid to the redeemer by the Trustee on behalf of the Trust, 
again depending upon the respective amounts of the ``Income Net of 
Expense Amount'' and the ``Balancing Amount,'' as described in the 
Trust prospectus.
    The mandatory termination date of the Trust will be the first to 
occur of (i) a date in 2124 \24\ or (ii) the date 20 years after the 
death of the last survivor of 15 specified persons named in the Trust 
Agreement between the Trust Sponsor and the Trustee, the oldest of whom 
was

[[Page 11514]]

born in 1986 and the youngest of whom was born in 1996.\25\
---------------------------------------------------------------------------

    \24\ See Amendment No. 4, supra note 6.
    \25\ The SEC staff notes that Amex has stated that the basis of 
the mandatory termination date of the Trust is to comply with the 
common law rule against perpetuities which provides, in brief, that 
no estate is valid unless it vests not later than twenty-one years 
after lives in being at the creation of the estate, and that any 
future or present estate is void in its creation if it suspends the 
absolute power of alienation longer than this period. See Amendment 
No. 2, supra note 3.
---------------------------------------------------------------------------

Issuance

    Upon receipt of a Portfolio Deposit in payment for a creation order 
placed through the distributor as described above, the Trustee will 
issue a specified number of Trust shares, this aggregate number is 
referred to as a ``Creation Unit.'' The Exchange anticipates that, with 
respect to the Nasdaq-100 Trust, a Creation Unit will be made up of 
50,000 Trust shares.
    Individual Trust shares can then be traded in the secondary market 
like other equity securities. It is expected that Portfolio Deposits 
will be made primarily by institutional investors, arbitrageurs and the 
Exchange specialist. The Trust has been structured to provide for the 
initial issuance of Trust shares at a per share price which would 
approximate \1/20\th of the prevailing value of the Nasdaq-100 Index. 
As of November 12, 1998, it is estimated that the value of an 
individual Trust share would be approximately $74 (\1/20\th of the 
prevailing value of the Index on such date).
    The Trust Sponsor, Investment Product Services, Inc., intends to 
make available itself, or by other persons designated to do so by the 
Sponsor, a list of the names and the required number of shares for each 
of the securities in the current Portfolio Deposit. The Trust Sponsor 
also intends to make available through the facilities of the Amex on 
each business day the Income Net of Expense Amount effective through 
and including the previous business day per outstanding Trust share. 
The Sponsor may also choose within its discretion to make available, 
frequently throughout each business day, a number representing, on a 
per Trust share basis, the sum of the Income Net of Expense Amount 
effective through and including the previous business day plus the 
current value of the securities portion of a Portfolio Deposit as in 
effect on such day (which value will occasionally include a cash-in-
lieu amount to compensate for the omission of a particular Index 
Security from such Portfolio Deposit). If the Sponsor elects to make 
such information available, it would be calculated based upon the best 
information available to the Sponsor and may be calculated by other 
persons designated to do so by the Sponsor (e.g., the Amex).\26\ In 
addition, the Trustee will make available to NSCC prior to commencement 
of trading on each business day a list of the names and required number 
of shares of each of the Index Securities in the current Portfolio 
Deposit as well as the Income Net of Expense Amount for the previous 
business day.
---------------------------------------------------------------------------

    \26\ See Amendment No. 3, supra note 5.
---------------------------------------------------------------------------

    Transactions in Trust shares may be effected on the Exchange until 
4:15 p.m. New York time each business day. The minimum fractional 
change for Trust shares shall be \1/64\ of $1.00.

Redemption

    Trust shares in Creation Unit size aggregations generally will be 
redeemable in kind \27\ by tendering them to the Trustee. While holders 
may sell Trust shares in the secondary market at any time, they must 
accumulate at least 50,000 (or multiples thereof) to redeem through the 
Trust. Trust shares will remain outstanding until redeemed or until the 
termination of the Trust. Creation Unit size aggregations of Trust 
shares generally will be redeemable on any business day in exchange for 
a portfolio of the securities held by the Trust typically identical in 
composition and weighting to the securities portion of a Portfolio 
Deposit in effect on the date request is made for redemption, together, 
in certain cases, with a ``Cash Redemption Amount'' as referred to 
above), including accumulated dividends, less accrued expenses and 
liabilities of the Trust, through the date of redemption, which will 
either be paid to the Trustee by the redeemer or paid to the redeemer 
by the Trustee on behalf of the Trust depending upon the respective 
amounts of the ``Income Net of Expense Amount,'' and the ``Balancing 
Amount,'' as described previously. The number of shares of each of the 
securities transferred to the redeeming holder generally will be the 
number of shares of each of the component stocks in a Portfolio Deposit 
on the day a redemption notice is received by the Trustee, multiplied 
by the number of Creation Units being redeemed. Nominal service fees 
may be charged in connection with the creation and redemption of 
Creation Units. The Trustee will cancel all Trust shares delivered upon 
redemption.
---------------------------------------------------------------------------

    \27\ The Trustee shall have the discretion to deliver the cash 
equivalent value of an Index security or Index securities, based on 
the market value of such Index security or securities as of the 
Evaluation Time on the date such redemption is deemed received by 
the Trustee, as a part of the Cash Redemption Payment in lieu of 
delivering the Index security or securities if: (1) the Trustee 
determines in its discretion that an Index security is likely to be 
unavailable or available in insufficient quantity for delivery by 
the Trust upon redemption; or (2) a redeeming investor requests 
redemption in cash with respect to one or more Index securities, if, 
for example, the redeemer is restricted by regulation or otherwise 
from investing or engaging in a transaction in one or more Index 
securities. See Preliminary Prospectus for Nasdaq-100 Trust, Series 
1, at 6 (January 28, 1999).
---------------------------------------------------------------------------

    The Trustee, in its discretion, upon the request of the redeeming 
investor, may redeem Creation Units in whole or in part by providing 
the redeemer with a portfolio of securities differing in exact 
composition and weighting from the Index Securities but not differing 
in net asset value from the then current net asset value of Trust 
shares. Such a redemption is likely to be made only if it were to be 
determined that this composition would be appropriate in order to 
maintain the portfolio of the Trust in correlation to the composition 
and weighting of the Index, for instance, in connection with a 
replacement of one of the Index Securities (e.g., due to a merger, 
acquisition, or bankruptcy, or in connection with the rebalancing of 
the Index).

Distributions

    Distributions by the Trust will be made quarterly in the event that 
dividends accumulated in respect of the Trust securities and other 
income, if any, received by the Trust, exceed Trust fees and expenses 
accrued during the quarter. Based on historical dividend payment rates 
of the portfolio of stocks comprising the Index and estimated ordinary 
operating expenses of the Trust, little or no such distributions are 
currently anticipated. The regular quarterly Ex-Dividend Date with 
respect to net dividends, if any, for the Trust will be the third 
Friday in each of March, June, September, and December, unless such day 
is not a business day, in which case the Ex-Dividend Date will be the 
immediately preceding business day. However, there shall be no net 
dividend distribution in any given quarter, and any net dividend 
amounts will be rolled into the next quarterly accumulation period, if 
the aggregate net dividend distribution would be in an amount less than 
\5/100\ of one percent (0.05%) of the net asset value of the Trust as 
of the Friday in the week immediately preceding the Ex-Dividend Date, 
unless the Trustee determines that such net dividend distribution is 
required to be made in order to maintain the Trust's status as a 
regulated investment company or to avoid the imposition of income or 
excise taxes on undistributed income.

[[Page 11515]]

    Beneficial owners as reflected on the records of the Depository and 
the DTC Participants on the second business day following the ex-
dividend date (the ``record date'') are entitled to receive an amount, 
if any, representing dividends accumulated through the quarter, net of 
the fees and expenses of the Trust, accrued daily for the period. For 
the purposes of such distributions, dividends per Trust share are 
calculated at least to the nearest \1/100\th of $0.01. When net 
dividend payments are to be made by the Trust, payment will be made on 
the last business day in the calendar month following each Ex-Dividend 
Date (the ``Dividend Payment Date''). Dividend payments will be made 
through the Depository and the DTC Participants to Beneficial Owners 
then of record with funds received from the Trustee. The Sponsor 
reserves the right to make the DTC Dividend Reinvestment Service (the 
``Service'') available in the future for use by Trust shareholders 
through DTC Participants for reinvestment of their periodic cash 
distributions, if any. In the event the Service is made available, not 
all DTC Participants may choose to utilize this Service and an 
interested investor would have to consult his or her broker to 
ascertain the availability of dividend reinvestment through such 
broker, as well as applicable procedures.

Criteria for Initial and Continued Listing

    Because of the open-end nature of the Trust upon which a series of 
PDRs is based, the Exchange believes it is necessary to maintain 
appropriate flexibility in connection with listing a specific Trust. In 
connection with initial listing, the Exchange will establish a minimum 
number of PDRs required to be outstanding at the time of commencement 
of Exchange trading. For Trust shares, it is anticipated that a minimum 
of 150,000 Trust shares (i.e., three Creation Units of 50,000 Trust 
shares each), will be required to be outstanding when trading begins.
    The Trust will be subject to the initial and continued listing 
criteria of Rule 1002(b). Rule 1002(b) provides that, following twelve 
months from the formation of a trust and commencement of Exchange 
trading, the Exchange will consider suspension of trading in, or 
removal from listing of a trust when, in its opinion, further dealing 
in such securities appears unwarranted under the following 
circumstances:
    (a) if the trust has more than 60 days remaining until termination 
and there have been fewer than 50 record and/or beneficial holders of 
the PDRs for 30 or more consecutive trading days; or
    (b) if the index on which the trust is based is no longer 
calculated; or
    (c) if such other event shall occur or condition exists which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    A trust terminate upon removal from Exchange listing and its PDRs 
shall be redeemed in accordance with provisions of the trust 
prospectus. A trust may also terminate under such other conditions as 
may be set forth in the trust prospectus. For example, the Sponsor, 
following notice to Trust shareholders, shall have discretion to direct 
that the Trust be terminated if the value of securities in the Trust is 
below a specified amount. The Trust may also terminate if the license 
agreement with Nasdaq terminates.\28\
---------------------------------------------------------------------------

    \28\ With respect to the Trust, the Sponsor has the 
discretionary right to direct the Trustee to terminate the Trust if 
at any time after six months following and prior to three years 
following the inception of the Trust the net asset value falls below 
$150,000,000, or if at any time on or after three years following 
inception of the Trust the net asset value of the Trust is below 
$350,000,000 in value, adjusted annually for inflation.
---------------------------------------------------------------------------

Listing Fee \29\

    The Trust will not pay a listing fee to the Amex in connection with 
the listing of Nasdaq-100 Shares on the Amex.
---------------------------------------------------------------------------

    \29\ See Amendment No. 3, Supra note 5.
---------------------------------------------------------------------------

Trading Halts

    Prior to commencement of trading in Trust shares, the Exchange will 
issue a circular to members informing them of Exchange policies 
regarding trading halts in such securities. The circular will make 
clear that, in addition to other factors that may be relevant, the 
Exchange may consider factors such as those set forth in Rule 918C(b) 
in exercising its discretion to halt or suspend trading in PDRs, 
including Trust shares. These factors include, but are not limited to 
(1) the extent to which trading is not occurring in stocks underlying 
the Index; and (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.\30\
---------------------------------------------------------------------------

    \30\ See Amex Rule 918C.
---------------------------------------------------------------------------

    In addition, trading in Trust shares will be halted if the circuit 
breaker parameters under Amex Rule 117 have been reached. The 
triggering of futures price limits for index futures contracts such as 
Nasdaq 100 Index futures, will not, in itself, require a halt in Trust 
shares trading or a delayed opening. However, such an event could be 
considered by the Exchange along with other factors, such as a halt in 
Nasdaq-100 or other broad-based index options trading, in deciding to 
halt trading in Trust shares or other index-based derivative 
securities.

Dissemination of Information by the Exchange \31\

    The Amex, on behalf of the Trust Sponsor, will disseminate every 15 
seconds during each business day a number (under symbol QXV) 
representing, on a per Nasdaq-100 Share basis, the sum of the Income 
Net of Expense Amount effective through and including the previous 
business day, plus the current value of the securities portion of a 
Portfolio Deposit as in effect on the day (the ``Value'') (which value 
will occasionally include a cash-in-lieu amount to compensate for the 
omission of a particular Index security from the Portfolio Deposit). In 
addition, the Exchange, on behalf of the Trust Sponsor, will 
disseminate each business day the Income Net of Expense Amount 
effective through and including the previous business day per 
outstanding Trust share (symbol: QND).
---------------------------------------------------------------------------

    \31\ See Amendment No. 3, supra note 5.
---------------------------------------------------------------------------

Terms and Characteristics

    Under Amex Rule 1000, Commentary .01, Amex members and member 
organizations are required to provide to all purchasers of Trust shares 
a written description of the terms and characteristics of the 
securities, in a form prepared by the Exchange, not later than the time 
a confirmation of the first transaction in each series is delivered to 
the purchaser. The Exchange also requires that the description be 
included with any sales material on the Trust that is provided to 
customers or the public. In addition, the Exchange requires that 
members and member organizations provide customers the prospectus for 
the Trust upon request.
    A member or member organization carrying an omnibus account for a 
non-member broker-dealer is required to inform the non-member that 
execution of an order to purchase Trust shares for the omnibus account 
will be deemed to constitute agreement by the non-member to make the 
written description available to its customers on the same terms as are 
directly applicable to members and member organizations.
    Prior to commencement of trading of Trust shares, the Exchange will 
distribute to Exchange members and member organizations an Information 
Circular calling attention to characteristics of the Trust and to 
applicable Exchange rules.

[[Page 11516]]

Stop and Stop Limit Orders

    Amex Rule 154, Commentary .04(c) provides that stop and stop limit 
orders to buy or sell a security \32\ (other than an option, which is 
covered by Rule 950(f) and Commentary thereto) the price of which is 
derivatively priced based upon another security or index of 
securities,\33\ may with the prior approval of a Floor Official, be 
elected by a quotation, as set forth in Commentary .04(c)(i-v). The 
Exchange has designated PDRs (Trust shares are PDRs) as eligible for 
this treatment.\34\
---------------------------------------------------------------------------

    \32\ Stop sell orders generally are entered in a stock whose 
price has increased substantially to protect the investor's profits 
should the stock price decline. Similarly, stop buy orders generally 
are entered by investors with short positions to limit losses should 
the stock price increase. Conversely, stop limit orders give 
investors the advantage of specifying the limit price: the maximum 
price an investor will pay in the case of a stop limit order to buy, 
or the minimum price an investor will accept in the case of a stop 
limit order to sell.
    \33\ A stop or stop limit order in a derivative security is 
elected, i.e., becomes a market or limit order, respectively, when 
the quoted market for the derivative security reaches the 
appropriate stop or stop limit price. Once elected, the specialist 
treats the orders like any other market or limit order, 
respectively. The specialist must execute the market order at the 
next best market price, and must execute the limit order at the 
limit price or hold the order on his limit order book until the 
limit price is available.
    \34\ See Securities Exchange Act Release No. 39607 (February 2, 
1998), 63 FR 6587 (February 9, 1998) (File No. SR-Amex-98-04), 
regarding the designation of PDRs as eligible for stop and stop 
limit order election under Amex Rule 154(c). See also Securities 
Exchange Act Release No. 29063 (April 10, 1991), 56 FR 15652 (April 
17, 1991) (File No. SR-Amex-90-31) regarding election of stop and 
stop limit orders by quotation for certain derivative equity 
securities designated by the Exchange as eligible for election.
---------------------------------------------------------------------------

Other Applicable Rules

    Like SPDRs, MidCap SPDRs, and DIAMONDS, trading in Trust shares on 
the Amex will be subject to the provisions of Amex Rules 1000 et seq. 
and regular Exchange equity trading rules will apply, including 
Exchange rules relating to priority, parity and precedence and the 
obligations of specialists. The provisions of Amex Rule 411 (Duty to 
Know and Approve Customers) apply to customer transactions in PDRs, and 
would therefore apply to Trust units transactions; no enhanced 
suitability standards are applicable to such securities.

Adoption of Rule 1006

    The Exchange proposes to adopt Amex Rule 1006 \35\ to provide for 
disclaimers of liability by Nasdaq and the Exchange in connection with 
the Nasdaq-100 Index and trading of Trust Shares. The Exchange states 
that this provision is similar to other Exchange rules relating to 
disclaimers with respect to PDRs (i.e., Amex Rule 1004 for S&P 500 
Index and Amex Rule 1005 for Dow Jones Indexes) as well as index 
options (i.e., Amex Rule 902C). The Exchange further states that the 
last two sentences of proposed Amex Rule 1006, which are similar to 
language included in Amex Rule 902C for index options, clarify that the 
rule provides a disclaimer of liability to Nasdaq and the Exchange with 
respect to the Nasdaq-100 Index.
---------------------------------------------------------------------------

    \35\ See Amendment No. 4, supra note 6.
---------------------------------------------------------------------------

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b)(5).\36\ The 
Commission believes that the Exchange's proposal to list and trade 
Trust shares will offer investors an efficient way of participating in 
the securities markets. The Exchange's proposal should help to provide 
investors with increased flexibility in satisfying their investment 
needs by allowing them to purchase and sell a low cost security 
replicating the performance of a portfolio of stocks at negotiated 
prices throughout the business day.\37\ Specifically, the Commission 
believes that the trading of Trust shares will provide investors with 
increased flexibility in satisfying their investment needs by allowing 
them to purchase and sell a low-cost security replicating the 
performance of a broad portfolio of stocks at negotiated prices 
throughout the business day.\38\ The Commission also believes that PDRs 
in general, and Trust shares in particular, will benefit investors by 
allowing them to trade securities based on a portfolio of stocks in 
secondary market transactions.\39\ Accordingly, as discussed below, the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) that Exchange rules facilitate transactions in securities while 
continuing to further investor protection and the public interest.\40\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b)(5).
    \37\ The Commission notes, however, the unlike typical open-end 
investment companies, where investors have the right to redeem their 
fund shares on a daily basis, investors in Trust shares can redeem 
them in Creation Unit size aggregations only. Nevertheless, Trust 
shares would have the added benefit of liquidity from the secondary 
market and Trust share holders, unlike holders of most other open-
end funds, would be able to dispose of their shares in a secondary 
market transaction.
    \38\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of the product is in the public interest. Such a 
finding would be difficult with respect to a product that served no 
hedging or other economic function, because any benefits that might 
be derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns.
    \39\ See supra note 37.
    \40\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As the Commission noted in previous orders approving other PDR 
products (SPDRs, MidCap SPDRs, and DIAMONDS) for listing and trading on 
Amex,\41\ the Commission believes that the trading of securities like 
PDRs in general, and Trust shares in particular, which replicate the 
performance of a broad portfolio of stocks, could benefit the 
securities markets by, among other things, helping to ameliorate the 
volatility occasionally experienced in these markets. The Commission 
believes that the creation of one or more products where actual 
portfolios of stocks or instruments representing a portfolio of stocks, 
such as Trust shares, which trade at a single location in an auction 
market environment could alter the dynamics of program trading, because 
the availability of such single transaction portfolio trading could, in 
effect, restore the execution of program trades to more traditional 
block trading techniques.\42\
---------------------------------------------------------------------------

    \41\ See supra notes 8, 11, and 12.
    \42\ Program trading is defined as Index arbitrage or any 
trading strategy involving the related purchase or sale of a 
``basket'' or group of fifteen or more stocks having a total market 
value of $1 million or more.
---------------------------------------------------------------------------

    An individual Trust share has a value approximately equal to one-
twentieth of the prevailing value of the Nasdaq-100 Index,\43\ making 
it available and useful to individual retail investors desiring to hold 
a security replicating the performance of a broad portfolio of stocks. 
Accordingly, the Commission believes that trading of Trust shares will 
provide retail investors with a cost efficient means to make investment 
decisions based on the direction of the market as a whole and may 
provide market participants several advantages over existing methods of 
effecting program trades involving stocks.
---------------------------------------------------------------------------

    \43\ As of November 12, 1998, it is estimated that the value of 
an individual Trust share would be approximately $74.
---------------------------------------------------------------------------

    The Commission also believes that PDRs, in general, and Trust 
shares, in particular, will provide investors with several advantages 
over standard open-end mutual fund shares that track a broad-based 
portfolio of stocks such as the Nasdaq-100 Index. In particular,

[[Page 11517]]

investors will have the ability to trade Trust shares continuously 
throughout the business day in secondary market transactions at 
negotiated prices.\44\ In contrast, pursuant to Investment company Act 
Rule 22c-1,\45\ holders and prospective holders of open-end mutual fund 
shares are limited to purchasing or redeeming securities of the fund 
based on the net asset value of the securities held by the fund as 
designated by the board of directors.\46\ Accordingly, PDRs in general, 
and Trust shares in particular, will allow investors to (1) respond 
quickly to changes in the market; (2) trade at a known price; (3) 
engage in hedging strategies not currently available to retail 
investors; (2) trade at a known price; (3) engage in hedging strategies 
not currently available to retail investors; and (4) reduce transaction 
costs for trading a portfolio of securities.
---------------------------------------------------------------------------

    \44\ Because of potential arbitrage opportunities, the 
Commission believes that Nasdaq-100 Trust shares will not trade at a 
material discount or premium in relation to their net asset value. 
The mere potential for arbitrage should keep the market price of a 
Nasdaq-100 Trust share comparable to its net asset value, and 
therefore, arbitrage activity likely will be minimal. In addition, 
the Commission believes the Trust will track the underlying Index 
more closely than an open-end Index fund because the Trust will 
generally accept only in-kind deposits, and, therefore, will not 
incur brokerage expenses in assembling its portfolio. In addition, 
the Trust will generally redeem only in kind, thereby enabling the 
Trust to invest virtually all of its assets in securities comprising 
the underlying Index.
    \45\ Investment Company Act Rule 22c-1 generally requires that a 
registered investment company issuing a redeemable security, its 
principal underwriter, and dealers in that security, may sell, 
redeem, or repurchase the security only at a price based on the net 
asset value next computed after receipt of an investor's request to 
purchase, redeem, or resell. The net asset value of a mutual fund 
generally is computed once daily Monday through Friday as designated 
by the investment company's board of directors. The Commission 
granted the Nasdaq-100 Trust an exemption from this provision in 
order to allow Trust shares to trade a negotiated prices in the 
secondary market. See supra note 15.
    \46\ Id.
---------------------------------------------------------------------------

    Although PDRs in general, and Trust shares in particular, are not 
leveraged instruments, and therefore, do not possess any of the 
attributes of stock index options, their prices will still be derived 
and based upon the securities held in their respective Trusts. In 
essence, Trust shares are equity securities that are priced off a 
portfolios of stocks based on the Nasdaq-100 Index. Accordingly, the 
level of risk involved in the purchase or sale of Trust shares (or a 
PDR in general) is similar to the risk involved in the purchase or sale 
of traditional common stocks, with the exception that the pricing 
mechanism for Trust shares (and PDRs in general) is based on a basket 
of stocks. Based on these factors, the Commission believes that it is 
appropriate to regulate Trust shares in a manner similar to other 
equity securities. Nevertheless, the Commission believes that the 
nature of Trust shares raise certain product design, disclosure, 
trading, market impact, and other issues that must be addressed 
adequately. As discussed in more detail below, the Commission believes 
Amex adequately addresses these concerns.

(a) The Nasdaq-100 Trust Generally

    The Commission believes that the proposed Trust shares are 
reasonably designed to provide investors with an investment vehicle 
that substantially reflects in value the index it is based upon, and in 
turn, the performance of 100 of the largest and most actively traded 
non-financial companies' equity securities listed on the Nasdaq 
National Market tier of the Nasdaq Stock Market. The Nasdaq Stock 
Market is primarily responsible for the assignment of stocks into the 
Nasdaq-100 Index. The Nasdaq Stock Market also imposes specific 
criteria in its selection of the Nasdaq-100 Index components. In 
selecting components for the Nasdaq-100 Index, the Nasdaq Stock Market 
evaluates, among other things, the market capitalization and trading 
volume of the components to assure that the stocks within the Index are 
liquid and highly capitalized.
    The aim of the component selection process is to make the Nasdaq-
100 Index components highly representative of the over-all economic 
sector make-up and market capitalization of a given market. At the same 
time, securities that are illiquid or that have a small capitalization 
are avoided. The Commission believes that these criteria should serve 
to ensure that the underlying securities of this Index are well 
capitalized and actively traded.

(b) Disclosure

    The Commission believes that the Exchange's proposal should ensure 
that investors are adequately apprised of the terms, characteristic, 
and risks of Trading Trust shares. As noted above, the proposal 
contains four aspects addressing disclosure concerns. First, pursuant 
to Amex Rule 1000(a), Commentary .01, Amex members must provide their 
customers trading Trust shares with a written explanation of any 
special characteristics and risks attendant to trading PDR securities 
(such as Trust shares), in a form prepared by Amex. As discussed above, 
members can obtain Trust shares product descriptions for distribution 
to customers from Amex. Second, members and member organizations must 
include this written product description with any sales material 
relating to the series of Trust shares that is provided to customers or 
the public. Third, any other written materials provided by a member or 
member to customers or the public referencing Trust shares as an 
investment vehicle must include a statement, in a form specified by 
Amex, that a circular and prospectus are available from a broker upon 
request. Fourth, a member or member organization carrying account for a 
non-member broker-dealer is required to inform the non-member that 
execution of an order to purchase a series of Trust shares for the 
omnibus account will be deemed to constitute agreement by the non-
member to make the written product description available to its 
customers on the same terms as member firms are required to comply 
with. Accordingly, the Commission believes that investors in PDR 
securities, in general, and Trust shares, in particular, will be 
provided with adequate disclosure of the unique characteristics of the 
PDR instruments and other relevant information pertaining to the 
instruments.
    Finally, under Amex's proposal there will be no special account 
opening of customer suitability rules applicable to the trading of 
Trust shares.\47\ However, pursuant to Amex Rule 1000(a), Amex equity 
rules governing account opening and suitability will apply. 
Specifically, these rules provide that members shall use due diligence 
to learn the essential facts relative to every customer, order or 
account opened, and, prior to or promptly after the completion of a 
transaction for the account, specifically approve the opening of the 
account.\48\
---------------------------------------------------------------------------

    \47\ This reflects the fact that PDRs are equity products and 
not options products, and, therefore, do not necessitate the 
imposition of options-like rules.
    \48\ See Amex Rule 411.
---------------------------------------------------------------------------

(c) Trading of Trust Shares

    The Commission finds that Amex's proposal contains adequate rules 
and procedures to govern the trading of Trust shares. Specifically, 
Trust shares, like other listed PDRs, will be deemed equity securities 
subject to all Amex rules governing the trading of equity securities, 
including, among others, rules governing the priority, parity and 
precedence of orders, market volatility related to trading halt 
provisions pursuant to Rule 117, and responsibilities of specialists. 
The Commission also notes that the Amex may consider halting trading in 
any series of Trust shares under certain other circumstances, including 
those set

[[Page 11518]]

forth in Amex Rule 918C(b)(4) regarding the presence of other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market.
    The Commission is satisfied with the specific listing and delisting 
criteria for PDRs that are applicable to Trust shares.\49\ These 
criteria should help to ensure that a minimum level of liquidity will 
exist for Trust shares and allow for the maintenance of fair and 
orderly markets. The delisting criteria also allows the Exchange to 
consider the suspension of trading and the delisting of a Trust share, 
if an event were to occur that made further dealings in the securities 
inadvisable.\50\ Thus, the Exchange has flexibility to delist any of 
the Trust shares upon which a series of PDRs is based if circumstances 
warrant such action.\51\ Accordingly, the Commission believes that the 
rules governing the trading of PDRs, including Trust shares, provide 
adequate safeguards to prevent manipulative acts and practices and to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \49\ See Amex Rule 1002(b).
    \50\ See Amex Rule 1002(b)(iii).
    \51\ The Commission believes that any restrictions that change 
the Trust shares' fundamental characteristics should raise concerns 
under the delisting criteria. In such a case, the Amex should 
determine whether continued listing as a Trust share is appropriate.
---------------------------------------------------------------------------

(d) Market Impact

    The Commission believes Amex has adequately addressed the potential 
market impact concerns raised by the proposal. First, Amex's proposal 
permits listing and trading of Trust shares only after review by the 
Commission. Second, Amex has developed policies regarding trading halts 
in Trust shares. Specifically, the Exchange would halt trading of Trust 
shares if the circuit breaker parameters under Amex Rule 117 were 
reached.\52\ In addition, in deciding whether to halt trading or 
conduct a delayed opening in PDRs, in general, and Trust shares, in 
particular, Amex represents that it will be guided by, but not 
necessarily bound to, relevant stock index option trading rules. These 
rules would permit Amex, when determining whether to halt trading of 
Trust shares, to consider, among other things, the extent to which 
trading is not occurring in stocks underlying the Index or whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\53\
---------------------------------------------------------------------------

    \52\ In addition, for PDRs tied to an Index, the triggering of 
futures price limits for index futures contracts such as Nasdaq-100 
Index futures, will not, in itself, require a halt in trading of 
Trust shares or a delayed opening. However, the Exchange could 
consider such an event, along with other factors, such as a halt in 
Nasdaq-100 or other broad based index options trading, in deciding 
whether to halt trading in Trust shares or other index-based 
derivative securities.
    \53\ See Amex Rule 918C(b).
---------------------------------------------------------------------------

    The Commission believes that the trading of PDRs in general, and 
Trust shares in particular, on Amex should not adversely affect U.S. 
securities markets. As to the trading of Trust shares, the Commission 
notes that the corpus of the Trust shares is a portfolio of stocks 
replicating the Nasdaq-100 Index, a broad hybrid based equal/
capitalization weighted index, consisting of 100 of the largest and 
most actively traded non-financial companies' equity securities listed 
on the Nasdaq national market tier of the Nasdaq Stock Market. In fact, 
as described above, the Commission believes that the trading of Trust 
shares may provide substantial benefits to the marketplace and 
investors, including, among others, enhancing the stability of the 
markets of individual stocks.\54\ Accordingly, the Commission believes 
that trading of Trust shares does not contain features that will make 
them likely to adversely affect the U.S. securities markets.
---------------------------------------------------------------------------

    \54\ Even through PDR transactions may serve as substitutes for 
transactions in the cash market, and possibly make the order flow in 
individual stocks smaller than would otherwise be the case, the 
Commission acknowledges that during turbulent market conditions the 
ability of large institutions to redeem or create PDRs could 
conceivably have an impact on price levels in the cash market. In 
particular, if a PDR is redeemed, the resulting long stock position 
could be sold into the market, thereby depressing stock prices 
further. The Commission notes, however, that the redemption or 
creation of PDRs likely will not exacerbate a price movement because 
PDRs will be subject to the equity margin requirements of 50% and 
PDRs are non-leveraged instruments. In addition, as noted above, 
during turbulent market conditions, the Commission believes PDRs, 
including SPDRs, MidCap SPDRs, DIAMONDS and Trust shares, in 
particular, will serve as a vehicle to accommodate and ``bundle'' 
order flow that otherwise would flow to the cash market, thereby 
allowing the order flow to be handled more efficiently and 
effectively. Accordingly, although Trust shares, like any other PDR, 
could, in certain circumstances, have an impact on the cash market, 
on balance we believe the product will be beneficial to the 
marketplace and can actually aid in maintaining orderly markets.
---------------------------------------------------------------------------

(e) Dissemination of Information by the Exchange

    The Commission believes that the real-time Value the Exchange 
proposes to disseminate will provide investors with timely and useful 
information concerning the value of the Nasdaq-100 Trust shares on a 
per share basis. The Exchange represents that the information will 
reflect currently-available information concerning the value of the 
assets comprising the securities portion of a Portfolio Deposit. This 
information will be disseminated every 15 seconds during each business 
day. In addition, since it is expected that the Value will closely 
track the value of the Nasdaq-100 Trust shares on a per share basis, 
the Commission believes that the Value will provide investors with 
adequate information to determine the intra-day value of the given 
Nasdaq-100 Trust share. The Commission expects that the Amex will 
monitor the disseminated Value, and if the Amex were to determine that 
the Value does not closely track the value of the Nasdaq-100 trust 
share, it would arrange to disseminate an adequate alternative value.

(f) Surveillance

    The Commission also notes that Amex has submitted surveillance 
procedures for the trading of Trust shares. These procedures 
incorporate the Trust shares into the existing Amex surveillance 
procedures to address concerns associated with the listing and trading 
of such securities.
    The Commission also notes that certain concerns are raised when an 
entity, such as the Nasdaq Stock Market, is involved in the development 
and maintenance of a stock index, upon which a product such as the 
Trust shares is based. The Commission notes that the Nasdaq Stock 
Market has implemented procedures to prevent the misuse of material, 
non-public information regarding changes to component stocks in the 
Nasdaq-100 Index to assuage such concerns. The Commission believes that 
the ``Fire Wall'' procedures put in place by the Nasdaq Stock Market to 
survey and segregate the index administration staff and all the other 
staff members should address concerns raised by the Nasdaq Stock 
Market's involvement in the management of the Nasdaq-100 Index.

(g) Stop and Stop Limit Orders

    As noted above, Amex Rule 154, Commentary .04(c) provides that stop 
and stop limit orders to buy or sell a security (other than an option, 
which is covered by Amex Rule 950(f) and Commentary thereto) the price 
of which is derivatively priced based upon another security or index of 
securities, may with the prior approval of a Floor Official, be elected 
by a quotation, as set forth in Commentary .04(c)(i-v). The Exchange 
has designated PDRs (Trust shares are PDRs), as eligible for this 
treatment. The Commission believes that to allow stop and stop limit 
orders in PDRs to be elected by quotation, a rule typically used in the 
options context, is appropriate because, as a result of their 
derivative nature, Trust

[[Page 11519]]

shares are in effect equity securities that have a pricing and trading 
relationship to the underlying securities similar to the relationship 
between options and their underlying securities.

(h) Accelerated Approval of Amendment Nos. 3 and 4

    The Commission finds good cause to approve Amendment Nos. 3 and 4 
to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 3 strengthens the proposed rule change and 
may prevent manipulative acts and practices by providing for a method 
of disseminating the Value of the Nasdaq-100 Trust Shares on a real-
time basis.\55\ Given the real-time dissemination of the Value of the 
Nasdaq-100 Trust Shares, the Commission believes that investors will be 
able to more closely tracks the actual value of the Nasdaq-100 Trust on 
a per share basis.
---------------------------------------------------------------------------

    \55\ See description section.
---------------------------------------------------------------------------

    In Amendment No. 4, the Exchange proposes Rule 1006, a disclaimer 
of liability provision substantially similar to other disclaimers 
adopted by the Exchange for PDRs and index options products.\56\ The 
Commission notes that proposed Amex Rule 1006 concerns issues that 
previously have been the subject of a full comment period pursuant to 
Section 19(b) of the Act.\57\ The Commission does not believe that 
proposed Amex Rule 1006 raises any new regulatory issues. Accordingly, 
the Commission believes that there is good cause, consistent with 
Section 6(b)(5) and 19(b) of the Act,\58\ to approve Amendment Nos. 3 
and 4 to the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \56\ See Amex Rules 1004, 1005, and 902C. To the extent that 
proposed Amex Rule 1006 differs from Amex Rules 1004 and 1005, the 
Commission encourages the Exchange to amend Amex Rules 1004 and 1005 
to make them consistent with Amex Rule 1006.
    \57\ 15 U.S.C. 78s(b).
    \58\ 15 U.S.C. 78f(b) and 78s(b).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 3 and 4, including whether the 
proposed rule change is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the principal 
office of the Exchange. All submissions should refer to File No. SR-
Amex-98-34 and should be submitted by March 24, 1999.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\59\ that the proposed rule change (SR-Amex-98-34), as amended, is 
approved.

    \59\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\60\
---------------------------------------------------------------------------

    \60\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5718 Filed 3-8-99; 8:45 am]
BILLING CODE 8010-01-M