[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]
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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\
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\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.
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[[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\
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\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.
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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.
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\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.
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The Nasdaq-100 Index\17\
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\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.
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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.
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\18\ See Amendment No. 4, supra note 6.
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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\
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\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.
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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\
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\20\ See Preliminay Prospectus for Nasdaq-100 Trust, Series 1,
at 38 (January 28, 1999).
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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\
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\21\ See Preliminary Prospectus for Nasdaq-100 Trust, Series 1,
at 38 (January 28, 1999).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\26\ See Amendment No. 3, supra note 5.
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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.
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\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).
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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\
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\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.
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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.
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\29\ See Amendment No. 3, Supra note 5.
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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\
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\30\ See Amex Rule 918C.
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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).
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\31\ See Amendment No. 3, supra note 5.
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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\
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\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.
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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.
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\35\ See Amendment No. 4, supra note 6.
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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\
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\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).
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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\
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\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.
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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.
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\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.
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\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.
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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\
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\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.
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(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.
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\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.
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(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\
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\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).
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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.
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\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.
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(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.
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\55\ See description section.
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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.
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\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).
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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).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5718 Filed 3-8-99; 8:45 am]
BILLING CODE 8010-01-M