[Federal Register Volume 64, Number 188 (Wednesday, September 29, 1999)]
[Notices]
[Pages 52559-52564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25281]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41892; File No. SR-Amex-99-20]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1, 2, 3 and 4 Relating to the 
Listing and Trading of Trust Issued Receipts

September 21, 1999.

1. Introduction

    On May 28, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish listing standards 
for trust issued receipts, and to trade Internet Holding Company 
Depositary Receipts (``Internet HOLDRs''), a type of trust issued 
receipt.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on July 9, 1999.\3\ No comments were received on the proposal. 
The proposal was amended on September 3, 13, 17 and 21, 1999.\4\ In 
this notice and order, the Commission is seeking comment from 
interested persons on the amendments, and is approving the proposed 
rule change, as amended, including accelerated approval of the 
amendments.
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    \3\ Securities Exchange Act Release No. 41593 (July 1, 1999), 64 
FR 37178.
    \4\ See letters from Scott G. Van Hatten, Counsel, Derivative 
Securities, Amex to Richard Strasser, Assistant Director, Division 
of Market Regulation (``Division''), SEC, dated September 2, 10, 16 
and 21, 1999 (``Amendment Nos. 1, 2, 3 and 4,'' respectively). In 
Amendment No. 1, Amex revised the proposal to describe the listing 
and continued listing criteria in greater detail. The Amex also 
supplemented the Exchange listing suspension and removal criteria. 
In Amendment No. 2, Amex identified the companies comprising the 
Internet HOLDRs. In Amendment No. 3, Amex amended proposed Amex Rule 
1201 to more accurately reflect the proposal. In Amendment No. 4, 
Amex clarified certain prospectus delivery requirements related to 
trust issued receipts.
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II. Description of the Proposal

    The Amex proposes: (1) To add new Rules 1200 et seq. to accommodate 
the trading of trust issued receipts that are intended to provide 
investors with a flexible, cost-effective way of purchasing, holding 
and transferring the securities of one or more specified companies, 
generally; and (2) to list particular trust issued receipts 
representing a selection of companies in the Internet industry, that 
are issued by the Internet HOLDRs Trust. The language of the proposal, 
as amended, follows. New text is italicized.
* * * * *

TRUST ISSUED RECEIPTS

Rule 1200

    (a) Applicability. The Rules in this Chapter (Trading of Trust 
Issued Receipts) are applicable only to Trust Issued Receipts. 
Except to the extent that specific Rules in this Chapter govern, or 
unless the context otherwise requires, the provisions of the 
Constitution and all other rules and policies of the Board of 
Governors shall be applicable to the trading on the Exchange of such 
securities. Pursuant to the provisions of Article 1, Section 3(i) of 
the Constitution, Trust Issued Receipts are included within the 
definition of ``security'' or ``securities'' as such terms are used 
in the Constitution and Rules of the Exchange.
    (b) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    Trust Issued Receipts. The term ``Trust Issued Receipt'' means a 
security (a) that is issued by a trust (``Trust'') which holds 
specified securities deposited with the Trust; (b) that, when 
aggregated in some specified minimum number, may be surrendered to 
the trust by the beneficial owner to receive the securities; and (c) 
that pays beneficial owners dividends and other distributions on the 
deposited securities, if any are declared and paid to the trustee by 
an issuer of the deposited securities.

Commentary

    .01 The Exchange requires that members and member organizations 
provide to all purchasers of newly issued Trust Issued Receipts a 
prospectus for the series of Trust Issued Receipts.
    .02 Transactions in Trust Issued Receipts may be effected until 
4:00 pm each business day.

Designation

Rule 1201

    The Exchange may list and trade Trust Issued Receipts based on 
one or more securities. The Trust Issued Receipts based on 
particular securities shall be designated as a separate series and 
shall be identified by a unique symbol. The securities that are 
included in a series of Trust Issued Receipts

[[Page 52560]]

shall be selected by the Exchange or its agent, a wholly-owned 
subsidiary of the Exchange, or by such other person as shall have a 
proprietary interest in such Trust Issued Receipts.

Initial and Continued Listing

Rule 1202

    Trust Issued Receipts will be listed and traded on the Exchange 
subject to application of the following criteria:
    (a) Initial Listing--For each Trust, the Exchange will establish 
a minimum number of Trust Issued Receipts required to be outstanding 
at the time of commencement of trading on the Exchange.
    (b) Continued Listing--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in or 
removal from listing of a Trust upon which a series of Trust Issued 
Receipts is based under any of the following circumstances:
    (i) if the Trust has more than 60 days remaining until 
termination and there are fewer than 50 record and/or beneficial 
holders of Trust Issued Receipts for 30 or more consecutive trading 
days;
    (ii) if the Trust has fewer than 50,000 receipts issued and 
outstanding;
    (iii) if the market value of all receipts issued and outstanding 
is less than $1,000,000; or
    (iv) if such other event shall occur or condition exists in the 
opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    Upon termination of a Trust, the Exchange requires that Trust 
Issued Receipts issued in connection with such Trust be removed from 
Exchange listing. A Trust may terminate in accordance with the 
provision of the Trust prospectus, which may provide for termination 
if the value of securities in the Trust falls below a specified 
amount.
    (c) Term--The stated term of the Trust shall be as stated in the 
Trust prospectus. However, a Trust may be terminated under such 
earlier circumstances as may be specified in the Trust prospectus.
    (d) Trustee--The requirements of paragraph (a) of Section #811 
of the Exchange Company Guide apply.
    (e) Voting--Voting rights shall be as set forth in the Trust 
prospectus.

Specialist Transactions with Public Customers

Rule 190

    (a)-(e) No change.

Commentary

    .01-.04 No change.
     Nothing in paragraph (a) of this rule should be construed to 
restrict a specialist registered in a security issued by a trust, 
listed pursuant to Rules 1200 et seq., from purchasing and canceling 
the listed security or securities included in the portfolio held by 
the trust that can be deposited with the trust in connection with 
the issuance of the listed security, from the issuer as appropriate 
to facilitate the maintenance of a fair and orderly market in the 
subject security.

A. Description

    Trust issued receipts are negotiable receipts which are issued by a 
trust representing securities of issuers that have been deposited and 
are held on behalf of the holders of the trust issued receipts. Trust 
issued receipts are designed to allow investors to hold securities 
investments from a variety of companies throughout a particular 
industry in a single, exchange-listed and trade instrument that 
represents their beneficial ownership in the deposited securities. 
Holders of trust issued receipts maintain beneficial ownership of each 
of the deposited securities evidenced by trust issued receipts. Holders 
may cancel their trust issued receipts at any time to receive the 
deposited securities.
    Beneficial owners of the receipts will have the same rights, 
privileges and obligations as they would have if they beneficially 
owned the deposited securities outside of the trust issued receipt 
program. Holders of the receipts have the right to instruct the trustee 
to vote the deposited securities evidenced by the receipts, will 
receive reports, proxies and other information distributed by the 
issuers of the deposited securities to their security holders, and will 
receive dividends and other distributions declared and paid by the 
issuers of the deposited securities to the trustee.
    Trust issued receipts are not leveraged instruments, and therefore 
do not possess any of the attributes of stock index options. The 
Exchange believes that the level of risk involved in the purchase and 
sale of trust issued receipts is almost identical to the risk involved 
in the purchase or sale of the common stocks represented by the 
receipt. Although the Exchange anticipates listing trust issued 
receipts on one or more groups of securities other than those described 
herein, it notes that it will be required to submit a proposal, 
pursuant to Section 19(b) of the Act, before either listing trust 
issued receipts on a new group of securities or listing options on the 
trust issued receipts described in this proposal.

B. Creation of the Trust

    Trust issued receipts will be issued by a trust created pursuant to 
a depositary trust agreement. After the initial offering, the trust may 
issue additional receipts on a continuous basis agreement. After the 
initial offering, the trust may issue additional receipts on a 
continuous basis when an investor deposits the requisite securities 
with the trust. An investor in trust issued receipts will be permitted 
to withdraw his or her deposited securities upon delivery to the 
trustee of one or more round-lots of 100 trust issued receipts and to 
deposit such securities to receive trust issued receipts.
    The Internet HOLDRs will be issued by the Internet HOLDRs Trust, 
which was created pursuant to a depositary trust agreement dated 
September 2, 1999, among The Bank of New York, as trustee, Merrill 
Lynch Pierce Fenner & Smith Incorporated, other depositors and the 
owners of the Internet HOLDRs. The Exchange anticipates that 150,000 
trust issued receipts will be issued in connection with the initial 
distribution of the Internet HOLDRs.
    The deposited securities underlying the Internet HOLDRs are:

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                                                                                   Initial
                Name of company                       Symbol           Share      weighting     Primary trading
                                                                      amounts     (percent)         market
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America Online................................  AOL...............           21        19.60  NYSE.
Yahoo Inc.....................................  YHOO..............           13        19.60  NASDAQ.
Amazon.com Inc................................  AMZN..............           18        11.44  NASDAQ.
EBay Inc......................................  EBAY..............            6         7.70  NASDAQ.
At Home Corp..................................  ATHM..............           17         6.97  NASDAQ.
Priceline.Com.Inc.............................  PCLN..............            7         4.87  NASDAQ.
CMGI Inc......................................  CMGI..............            5         4.29  NASDAQ.
Inktomi Corporation...........................  INKT..............            3         3.48  NASDAQ.
RealNetworks, Inc.............................  RNWK..............            4         3.34  NASDAQ.
Exodus Corporation, Inc.......................  EXDS..............            4         3.29  NASDAQ.
E*TRADE Group Inc.............................  EGRP..............           12         3.07  NASDAQ.
Double Click Inc..............................  DCLK..............            2         2.04  NASDAQ.

[[Page 52561]]

 
Ameritrade Holding Corp.......................  AMTD..............            9         1.87  NASDAQ.
Lycos Inc.....................................  LCOS..............            4         1.66  NASDAQ.
CNET, Inc.....................................  CNET..............            4         1.54  NASDAQ.
PSINet Inc....................................  PSIX..............            3         1.47  NASDAQ.
Network Associates, Inc.......................  NETA..............            7         1.21  NASDAQ.
Earthlink Network, Inc........................  ELNK..............            2         1.00  NASDAQ.
MindSpring Enterprises, Inc...................  MSPG..............            3         0.90  NASDAQ.
Go2Net, Inc...................................  GNET..............            1         0.66  NASDAQ.
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C. The Trust Issued Receipts Portfolio

    The companies represented by the securities in the portfolio 
underlying the trust issued receipts must meet the following minimum 
criteria:
    (1) The companies' common stock must be registered under Section 12 
of the Exchange Act.
    (2) The minimum public float of each company included in the 
portfolio must be at least $150 million.
    (3) Each security must either be listed on a national securities 
exchange or be traded through the facilities of Nasdaq and be a 
reported national market system security.
    (4) The average daily trading volume for each security must be at 
least 100,000 shares during the preceding sixty-day trading period.
    (5) The average daily dollar value of the shares traded during the 
preceding sixty-day trading period must be at least $1 million.
    The initial weighting of each security in the portfolio will be 
based on its market capitalization, however, if on the date such 
weighting is determined, a security would represent more than 20% of 
the overall value of the receipt, then the amount of such security will 
be reduced to no more than 20% of the receipt value. Once initially 
set, the securities represented by a receipt will not change, except in 
accordance with the reconstitution events described below.
    Each of the companies whose common stock is included in the 
portfolio of the Internet HOLDRs Trust also meet the following 
criteria:
    (1) The market capitalization for each company is equal to or 
greater than $1 billion.
    (2) The average daily trading volume for each security was at least 
1.2 million shares during the sixty-day trading period prior to August 
31, 1999.
    (3) The average daily dollar value of the shares traded during the 
sixty-day trading period prior to August 31, 1999 was at least $60 
million.
    (4) Each company was traded on a national securities exchange or 
Nasdaq/NM for at least ninety days prior to August 31, 1999.

D. Trading of Trust Issued Receipts

    A round-lot of 100 trust issued receipts represents a holder's 
individual and undivided beneficial ownership interest in the whole 
number of securities represented by the receipt. The amount of 
deposited securities for each round-lot of 100 trust issued receipts 
will be determined at the beginning of the marketing period and will be 
disclosed in the prospectus to investors. Trust issued receipts may be 
acquired, held or transferred only in round-lot amounts (or round-lot 
multiples) of 100 receipts. Orders for less than a round-lot will be 
rejected, while orders for greater than a round-lot, but not a round-
lot multiple will be executed to the extent of the largest round lot 
multiple, rejecting the remaining odd-lot (e.g., an order for 50 trust 
issued receipts will be rejected, while for an order for 1050 trust 
issued receipts, 1000 will be executed and 50 will be rejected). The 
initial offering price for a trust issued receipt will be established 
on the date the receipts are priced for sale to the public.
    Trust issued receipts will be deemed ``Eligible Securities,'' as 
defined in Amex rule 230, for purposes of the Intermarket Trading 
System Plan and therefore will be subject to the trade through 
provisions of Amex Rule 236 which require that Amex members avoid 
initiating trade-throughs for ITS securities. Further, specialist 
transactions with the trust issued receipts' trust made in connection 
with the creation and redemption of trust issued receipts will not be 
subject to the prohibitions of Amex rule 190, which prohibits, among 
other things, any business transaction between a specialist and the 
company in which stock the specialists is registered. Finally, 
application for an exemption from the short sale rule, Rule 10a-1 under 
the Act,\5\ has been made for trust issued receipts and is currently 
pending with the Commission.
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    \5\ 17 CFR 240.10a-1.
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    Trust issued receipts will trade in minimum fractional increments 
pursuant to Amex rule 127. Application of Amex rule 127 will result in 
a minimum fractional change of \1/16\th of $1.00 for those trust issued 
receipts selling at or above $0.25 and \1/32\nd of $1.00 for those 
selling below $0.25.
    The Exchange believes that trust issued receipts will not trade at 
a material discount or premium to the assets held by the issuing trust. 
The exchange represents that the arbitrage process--which provides the 
opportunity to profit from differences in prices of the same or similar 
securities (e.g., the trust issued receipts and the portfolio of 
deposited securities), increases the efficiency of the markets and 
serves to prevent potentially manipulative efforts should promote 
correlative pricing between the trust issued receipts and the deposited 
securities. If the price of the trust issued receipt deviates enough 
from the portfolio of deposited securities to create a material 
discount or premium, an arbitrage opportunity is created allowing the 
arbitrageur to either buy the trust issued receipt at a discount, 
immediately cancel them in exchange for the deposited securities and 
sell the shares in the cash market at a profit, or sell the trust 
issued receipts short at a premium and buy the securities represented 
by the receipts to deposit in exchange for the trust issued receipts to 
deliver against the short position. In both instances, the arbitrageur 
locks in a profit and the markets move back into line.

E. Maintenance of the Trust Issued Receipts Portfolio

    Except when a reconstitution event occurs, as described below, the 
securities represented by a trust issued receipt will not change. 
Notwithstanding, the static nature of the portfolio, the number of each 
security represented in a receipt may change due to certain corporate 
events such as stock splits or reverse stock splits on the deposited 
securities or when a reconstitution event occurs. In addition, the 
relative weightings among the deposited securities will change based

[[Page 52562]]

on the current market price of the deposited securities and upon the 
reconstitution events discussed below. Under no circumstances will a 
new security be added to the list of securities after a particular 
receipt program is established, nor will weightings of component 
securities be adjusted after they are initially set. If the portfolio 
of securities underlying the trust issued receipts drops to fewer than 
nine, Amex will consult with the Commission to confirm the 
appropriateness of continued listing of such trust issued receipts.

F. Reconstitution Events

    The trust agreement provides for the automatic distribution of 
specified deposited securities in the trust's portfolio to the 
beneficial owner of such receipts in the circumstances referred to in 
the prospectus as ``reconstitution events.'' The reconstitution events 
occur under the following circumstances:
    (1) If the deposited securities of a company evidenced by a trust 
issued receipt no longer has a class of common stock registered under 
Section 12 of the Act, then those securities will no longer be 
considered deposited securities and the trustee will distribute the 
securities of that company to the owners of the trust receipts;
    (2) If the Commission finds that a company with deposited 
securities evidenced by the trust issued receipts is a company that 
should be registered as an investment company under the Investment 
Company Act of 1940, and the trustee has actual knowledge of the 
Commission's finding, then the trustee will distribute the securities 
of that company of the owners of the trust issued receipts.
    (3) If the deposited securities of a company evidenced by a trust 
issued receipt are no longer outstanding because the securities were 
acquired by another company, the trustee will distribute the 
consideration paid by and received from the acquiring company to the 
beneficial owners of trust issued receipts, unless the consideration is 
additional deposited securities (i.e., the acquiring company's 
securities are already included in the trust issued receipt as 
deposited securities), in which case such additional securities will be 
deposited into the trust; and
    (4) If an underlying issuer's deposited securities are delisted 
from trading on their primary exchange or market and are not listed for 
trading on another national securities exchange or through Nasdaq 
within five business days from the date the deposited securities are 
delisted.\6\
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    \6\ This provision is designed for the purpose of permitting a 
deposited security to move its listing between, e.g., the Amex and 
Nasdaq without requiring the automatic distribution of the deposited 
security to beneficial owners of the receipts. Should deposited 
securities be moved to a market other than a national securities 
exchange or Nasdaq, (e.g., the OTC Bulletin Board) such securities 
will be automatically distributed to the beneficial owners of the 
receipts.
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    If the trustee removes a deposited security from the trust due to 
the occurrence of one of the reconstitution events described above, the 
trustee, in accordance with the depositary trust agreement, will 
deliver the deposited security to the investor as promptly as 
practicable after the date that the trustee has knowledge of the 
occurrence of a reconstitution event.

G. Issuance and Cancellation of Trust Issued Receipts

    The trust will issue and cancel, and an investor may obtain, hold, 
trade or surrender, receipts only in a round-lot of 100 trust issued 
receipts and round-lot multiples. While investors will be able to 
acquire, hold, transfer and surrender a round-lot of 100 trust issued 
receipts, the bid and asked prices will be quoted on a per receipt 
basis.\7\ The trust will issue additional receipts on a continuous 
basis when an investor deposits the required securities with the trust.
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    \7\ The per receipt amount will be disseminated by the Amex 
every 15 seconds over the Consolidated Tape Association's Network B.
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    A holder may obtain trust issued receipts by either purchasing them 
on the Exchange or by delivering to the trust during its normal 
business hours the requisite securities evidencing a round-lot of trust 
issued receipts. The trustee will charge an issuance fee of up to 
$10.00 per 100 trust issued receipts. If a holder wants to cancel trust 
issued receipts and withdraw the deposited securities the holder may do 
so by surrendering the receipts to the trust during normal business 
hours. The trustee will charge a cancellation fee of up to $10.00 per 
100 trust issued receipts. Lower charges may be assigned for bulk 
issuances and cancellations. The holder will receive the deposited 
securities no later than the business day after the trustee receives 
the request.

H. Termination of the Trust

    The trust shall terminate upon the earlier of: (i) The removal of 
the receipts from Amex listing if they are not listed for trading on 
another national securities exchange or through the facilities of 
Nasdaq within five business days from the date the receipts are 
delisted; (ii) the trustee resigns and no successor trustee is 
appointed within sixty days from the date the trustee provides notice 
to the initial depositor of its intent to resign; (iii) seventy-five 
percent of beneficial owners of outstanding trust issued receipts vote 
to dissolve and liquidate the trust; or (iv) December 31, 2039. If a 
termination event occurs, the trustee will distribute the underlying 
securities to the beneficial owners as promptly as practicable after 
the termination event.

I. Criteria for Initial and Continued Listing

    Because of the continuous issuance and cancellation of trust issued 
receipts, 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 
receipts that must be outstanding at commencement of Exchange trading, 
and such minimum number will be included in any required submission 
under Rule 19b-4. The Exchange anticipates requiring a minimum of 
150,000 outstanding receipts before trading can commence.
    In connection with continued listing, and because the number of 
holders can be subject to substantial fluctuations depending on market 
conditions, the Exchange believes it would be inappropriate and 
burdensome on trust issued receipt holders if the Exchange considers 
suspending trading in or delisting a series of receipts with the 
consequent termination of the trust, unless the number of holders 
remains severely depressed over an extended time period. Therefore, the 
Exchange will consider suspending or delisting a trust from trading 
when, in its opinion, further dealing in such securities appears 
unwarranted under the following circumstances:
    (a) If the trust has more than sixty days remaining until 
termination and there have been fewer than fifty record and/or 
beneficial holders of the trust issued receipts for the previous thirty 
or more consecutive trading days;
    (b) If the aggregate number of trust issued receipts outstanding is 
less than 50,000; \8\
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    \8\ See supra note 4.
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    (c) If the aggregate market value of trust issued receipts publicly 
held is less than $1 million; \9\ or
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    \9\ Id.
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    (d) If such other event occurs or condition exists which, in the 
opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.

[[Page 52563]]

    The Exchange will not, however, be required to suspend or delist 
from trading, based on the above factors, any trust issued receipts for 
a period of one year after the initial listing of such trust issued 
receipts for trading on the Exchange. In addition, if the number of 
companies represented by the deposited securities drops to less than 
nine, and such time thereafter the number of companies is reduced, the 
Exchange will consult with the Commission to confirm the 
appropriateness of continued listing of the trust issued receipts.

J. Exchange Rules Applicable to Trading of Trust Issued Receipts

    Trust issued receipts will be deemed equity securities subject to 
all Amex rules governing the trading of equity securities, including, 
among others, rules governing priority, parity and precedence of 
orders, responsibilities of the specialist, account opening and 
customer suitability (Amex Rule 411) and the election, with the prior 
approval of a floor official, of a stop or limit order by a quotation 
(Amex Rule 154, Commentary .04(c)). Equity margin requirements of fifty 
percent and the regular equity trading hours of 9:30 a.m. to 4:00 p.m. 
will apply to transactions in trust issued receipts. However, trading 
rules pertaining to the availability of odd-lot trading in Amex 
equities will not apply to the trading of trust issued receipts, since 
they can only be traded in round-lots. Application for exemption from 
the short sale rule, Rule 10a-1 under the Act, has been made and is 
currently pending with the Commission. If granted, the Exchange will 
issue a notice to its members detailing the terms of the exemption. 
Amex's surveillance procedures for trust issued receipts will be 
similar to those used for portfolio depositary receipts and will 
incorporate and rely upon existing Amex surveillance procedures 
governing options and equities.

K. Disclosure

    With respect to investor disclosure, the Exchange notes that all 
investors in trust issued receipts who purchase in the initial offering 
will receive a prospectus. In addition, anyone purchasing a trust 
issued receipt directly from the trust (by delivering the underlying 
securities to the trust) will also receive a prospectus. Finally, all 
Amex members purchasing trust issued receipts from the trust for resale 
to customers will deliver a prospectus to such customers.
    Prior to the commencement of trading in trust issued receipts, the 
Exchange will issue a circular to members highlighting the 
characteristics of purchases in trust issued receipts including that 
trust issued receipts are not individually redeemable. In addition, the 
circular will inform members of Exchange policies about trading halts 
in such securities. First, the circular will advise that trading will 
be halted in the event the market volatility trading halt parameters 
set forth in Amex Rule 117 have been reached. Second, the circular will 
advise that, in addition to other factors that may be relevant, the 
Exchange may consider factors such as the extent to which trading is 
not occurring in a deposited security(s) and whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.

III. Discussion

A. Generally

    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).\10\ Specifically, 
the Commission finds that the proposal to list and trade trust issued 
receipts will provide investors with a convenient and less expensive 
way of participating in the securities markets. The Exchange's proposal 
should advance the public interest by providing investors with 
increased flexibility in satisfying their investment needs by allowing 
them to purchase and sell a single security replicating the performance 
of a broad portfolio of stocks at negotiated prices throughout the 
business day. Accordingly, the Commission finds that the Exchange's 
proposal will facilitate transactions in securities, remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\11\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 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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    The Commission believes that trust issued receipts will provide 
investors with an alternative to trading a broad range of securities on 
an individual basis, and will give investors the ability to trade trust 
issued receipts representing a portfolio of securities continuously 
throughout the business day in secondary market transactions at 
negotiated prices. Trust issued receipts will allows investors to: (1) 
Respond quickly to changes in the overall securities markets generally 
and for the industry represented by a particular trust; (2) trade, at a 
price disseminated on a continous basis, a single security representing 
a portfolio of securities that the investor owns beneficially; (3) 
engage in hedging strategies similar to those used by institutional 
investors; (4) reduce transaction costs for trading a portfolio of 
securities; and (5) retain beneficial ownership of the securities 
underlying the trust receipts.
    Although trust issued receipts are not leveraged instruments, and, 
therefore, do not possess any of the attributes of stock index options, 
their prices will be derived and based upon the securities held in 
their respective trusts. Accordingly, the level of risk involved in the 
purchase or sale of trust issued receipts is similar to the risk 
involved in the purchase or sale of traditional common stock, with the 
exception that the pricing mechanism for trust issued receipts is based 
on a basket of securities.\12\ Nevertheless, the Commission believes 
that the unique nature of trust issued receipts raises certain product 
design, disclosure, trading, and other issues that must be addressed.
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    \12\ The Commission has concerns about continued listing of the 
trust issued receipts if the number of component securities falls to 
a level below nine securities, because the receipts may no longer 
adequately reflect a cross section of the selected industry. 
Accordingly, the Amex has agreed to consult the Commission, once the 
trust has fewer than nine component securities, and for each 
subsequent loss of a security thereafter.
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B. Lasting and Trading of Trust Issued Receipts

    The Commission finds that the Amex's proposal contains adequate 
rules and procedures to govern the trading of turest issued receipts. 
Trust issued receipts are equity securities that will be subject to the 
full panoply of Amex rules governing the trading of equity securities 
on the Amex, including, among others, rules governing the priority, 
parity and procedence of orders, responsibilities of the specialist, 
account opening and customer suitability requirements, and the election 
of a stop or limit oder.\13\
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    \13\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because trust issued receipts only can be 
traded in round-lots.
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    In addition, the Amex has developed specific listing and delisting 
criteria for trust issued receipts that will help to ensure that a 
minimum level of liquidity will exist for trust issued receipts to 
allow for the maintenance of fair and orderly markets. The delisting 
criteria

[[Page 52564]]

also allows the Amex to consider the suspension of trading and the 
delisting of a trust issued receipt if an event occurred that made 
further dealings in such securities inadvisable. This will give the 
Amex flexibility to delist trust issued receipts if circumstances 
warrant such action. Amex's proposal also provides procedures to halt 
trading in trust issued receipts in certain enumerated circumstances.
    Moreover, in approving this proposal, the Commission notes the 
Exchange's belief that trust issued receipts will not trade at a 
material discount or premium in relation to the overall value of the 
trusts' assets because of potential arbitrage opportunities. The 
Exchange represents that the potential for arbitrage should keep the 
market price of a trust issued receipt comparable to the overall value 
of the deposited securities.
    Furthermore, the Commission believes that the Exchange's proposal 
to trade trust issued receipts in minimum fractional increments of \1/
16\th of $1.00 is consistent with the Act. The Commission believes that 
such trading should enhance market liquidity, and should promote more 
accurate pricing, tighter quotations, and reduced price fluctuations. 
The Commission also believes that such trading should allow customers 
to receive the best possible execution of their transactions in trust 
issued receipts.
    Finally, the Amex has developed surveillance procedures for trust 
issued precepts that incorporate and rely upon existing Amex 
surveillance procedures governing equities. The Commission believes 
that these surveillance procedures are adequate to address concerns 
associated with listing and trading trust issued receipts, including 
any concerns associated with purchasing and redeeming round-lots of 100 
receipts. Accordingly, the Commission believes that the rules governing 
the trading of trust issued receipts provide adequate safeguards to 
prevent manipulative acts and practices and to protect investors and 
the public interest.

C. Disclosure and Dissemination of Information

    The Commission believes that the Exchange's proposal will ensure 
that investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading trust 
issued receipts. The prospectus will address the special 
characteristics of a particular trust issued receipt basket, including 
a statement regarding its redeemability and method of creation. The 
Commission notes that all investors in trust issued receipts who 
purchase in the initial offering will receive a prospectus. In 
addition, anyone purchasing a trust issued receipt directly from the 
trust (by delivering the underlying securities to the trust) will also 
receive a prospectus. Finally, all Amex member firms who purchase trust 
issued receipts from the trust for resale to customers must deliver a 
prospectus to such customers.
    The Commission also notes that upon the initial listing of any 
trust issued receipts, the Exchange will issue a circular to its 
members explaining the unique characteristics and risks of this type of 
security. The circular also will note the Exchange members' prospectus 
delivery requirements, and highlight the characteristics of purchases 
in trust issued receipts. The circular also will inform members of 
Exchange policies regarding trading halts in trust issued receipts.

D. Scope of the Commission's Order

    The Commission is approving in general the Amex's proposed listing 
standards for trust issued receipts, and, specifically, the listing of 
the Internet HOLDRs described herein. The Commission specifically notes 
that, notwithstanding approval of the listing standards for trust 
issued receipts, other similarly structured products, including trust 
issued receipts based on other industries, will require review by the 
Commission prior to being traded on the Exchange. Additional series 
cannot be listed prior to contacting Division staff. In addition, the 
Amex may be required to submit a rule filing prior to trading a new 
issue or series on the Exchange.

E. Accelerated Approval

    The Commission finds good cause for approving proposed Amendment 
Nos. 1, 2, 3 and 4 prior to the thirtieth day after the day after the 
date of publication of notice of filing in the Federal Register. 
Specifically, the amendments strengthen the proposed rule change by 
clarifying and expanding the explanations regarding the nature and 
composition of the trust issued receipts, the trading halt procedures, 
the applicable equity trading rules, the minimum fractional change, the 
potential for arbitrage opportunities, the disclosure requirements, the 
reconstitution events, the termination events and the continued listing 
criteria. Moreover, the Commission notes that the proposed rule change 
was noticed for the full statutory period and no comment letters were 
received. Finally, Amendment Nos. 1, 2, 3 and 4 do not raise any new 
regulatory issues. Accordingly, the Commission finds that there is good 
cause, consistent with Section 6(b)(5) of the Act, to approve Amendment 
Nos. 1, 2, 3 and 4 to the proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments Nos. 1, 2, 3 and 4, including whether 
these amendments are 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 20549-0609. 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 such 
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-99-20 and should be submitted by October 20, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-99-20), as amended, is 
approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25281 Filed 9-28-99; 8:45 am]
BILLING CODE 8010-01-M