[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Notices]
[Pages 56008-56012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26897]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41983; International Series Release No. 1206; File No. 
SR-PCX-98-29]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 to Proposed Rule Change 
Relating to the Listing and Trading of Investment Company Units, 
Including World Equity Benchmark Shares (``WEBS'')

October 6, 1999.

I. Introduction

    On June 18, 1998, the Pacific Exchange, Inc. (``Exchange'' or 
``PCX'') filed with the Securities and Exchange Commission 
(``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 adopt rules governing the listing and trading 
of Investment Company Units, including World Equity Benchmark Shares'' 
(``WEBS TM'').\3\ The proposed rule change was published for 
comment in the Federal Register on November 3, 1998.\4\ The Commission 
did not receive any comments on the proposal. The Exchange submitted 
Amendment No. 1 to the proposal on May 13, 1999.\5\ This order approves 
the amended proposed rule change and accelerates approval of Amendment 
No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ``World Equity Benchmark Shares'' and ``WEBS'' are service 
marks of Morgan Stanley Group, Inc.
    \4\ See Securities Exchange Act Release No. 40603 (Oct. 26, 
1998), 63 FR 59354 (Nov. 3, 1998).
    \5\ In Amendment No. 1, the Exchange: (i) provided confidential 
surveillance procedures; (ii) stated its intent to trade WEBS 
pursuant to unlisted trading privileges; (iii) proposed to delay the 
trading of Malaysian WEBS due to Malaysian currency restrictions; 
(iv) provided rule language clarifying that Exchange specialists may 
redeem or create WEBS only on the same terms and conditions as any 
other investor and only at the net asset value; (v) explained how 
the Exchange will review the creation or redemption of WEBS by 
Exchange specialists; (vi) specified how the net asset values for 
Index Series will be disseminated; and (vii) confirmed that Exchange 
members may rely on certain exemptive and no-action relief that the 
Commission previously provided to the American Stock Exchange. See 
Letter from Robert P. Pacileo, Staff Attorney, Regulatory Policy, 
Exchange, to Michael A. Walinskas, Associate Director, Division of 
Market Regulation Commission, dated May 11, 1999 (``Amendment No. 
1'').
---------------------------------------------------------------------------

II. Description of the Proposal

A. Standards for Listing and Trading Investment Company Units

    The Exchange seeks to adopt new rules to accommodated the trading 
of Investment Company Units (``Units''), whether by Exchange listing or 
pursuant to unlisted trading privileges.\6\ A Unit is a security that 
represents an interest in a registered investment company (``Investment 
Company''), which Investment Company is organized as a unit investment 
trust, open-end management investment company, or similar entity.
---------------------------------------------------------------------------

    \6\ Pursuant to Section 12(f) of the Act and the rules 
thereunder, a national securities exchange may extend unlisted 
trading privileges to a security listed and registered on another 
national securities exchange if certain conditions are satisfied. 
See 15 U.S.C. 781(f) and 17 CFR 240.12f-1, 12f-2, 12f-3, 12f-4, and 
12f-5.
---------------------------------------------------------------------------

    Under the Exchange's proposed listing standards, an Investment 
Company that issues Units must: (i) hold securities comprising, or 
otherwise based on or representing an interest in, an index or 
portfolio of seucrities; or (ii) hold securities in another registered 
investment company that holds securities comprising, or otherwise based 
on or representing an interest in, an index or portfolio of securities. 
An index or portfolio may be revised as necessary or appropriate to 
maintain the quality and character of the index or portfolio.
    In addition, the Investment Company must issue Units in a specified 
aggregate number in return for a deposit (``Deposit''). The Deposit 
must consist of: (i) a specified number of shares of securities that 
comprise the index or portfolio, or are otherwise based on or represent 
an investment in securities comprising such index or portfolio, and/or 
a cash amount; or (ii) shares of a registered investment company, which 
investment company holds securities comprising, or otherwise based on 
or representing an interest in, an index or portfolio of securities, 
and/or a cash amount. Units must be redeemable, directly or indirectly, 
from the Investment Company for securities and/or cash then comprising 
the Deposit.\7\ Units must pay holders periodic cash payments 
corresponding to the regular cash dividends or distributions declared 
with respect to the securities held by the Investment Company, less 
applicable expenses and charges. At least 300,000 Units must be 
outstanding before trading in a series of such Units may begin on the 
Exchange.
---------------------------------------------------------------------------

    \7\ For example, as discussed below in Section II(B), WEBS are 
only redeemable from the Foreign Fund, Inc. in ``Creation Unit'' 
sizes. See note 11 infra and accompanying text for a description of 
the various Creation Unit sizes.
---------------------------------------------------------------------------

    Each series of Units traded on the Exchange must be based on a 
specified index or portfolio of securities. The value of the index or 
portfolio must be calculated and disseminated to the public at least 
once per business day.\8\ However, if the securities representing at 
least half the value of the index or portfolio are securities of a 
single country other than the United States, the value of the index or 
portfolio may be calculated and disseminated to the public at least 
once per business day in that country. Units may be either certified or 
issued in the form of a single global certificate.
---------------------------------------------------------------------------

    \8\ The Commission generally believes that updating values on a 
real-time basis throughout the trading day is essential to any 
securities product. In this regard, the Commission notes that the 
Exchange will also disseminate an indicative optimized portfolio 
value (``Value''), which closely approximates the value of the 
portfolio of securities comprising each WEBS series, at least every 
fifteen seconds during regular trading hours. While the Values 
disseminated by the Exchange will not be the official values for the 
portfolios of securities comprising each WEBS series, the Values are 
designed to accurately reflect the value of each WEBS portfolio and 
to provide investors with timely access to important market 
information during trading hours.
---------------------------------------------------------------------------

    The Exchange would be permitted to consider suspending trading and 
delisting (if applicable) a series of Units if: (i) after the initial 
twelve-month period beginning upon the commencement of trading of a 
series of Units, there are fewer than 50 record and/or beneficial 
holders of Units for 30 or more consecutive trading days; (ii) the 
value of the index or portfolio of securities on which the series is 
based is no longer calculated or available; or (iii) such other event 
occurs or condition exists which, in the opinion of the Exchange, makes 
further dealings

[[Page 56009]]

on the Exchange inadvisable. In addition, the Exchange would be allowed 
to remove Units from trading and listing (if applicable) upon 
termination of the issuing Investment Company or upon the termination 
of listing of the Units on their primary market, if the primary market 
is not the Exchange.

B. Trading of WEBS

    Upon approval of the proposed rule change, the Exchange intends to 
trade a specific class of Units--WEBS--pursuant to unlisted trading 
privileges. WEBS are issued by Foreign Fund, Inc. (``Fund'') and are 
structured as shares of separate series (``Index Series''). Each Index 
Series invests primarily in the equity securities traded in a 
designated market in an effort to track the performance of a specified 
equity market index.
    Currently, the Fund offers seventeen WEBS Index Series based on 
seventeen Morgan Stanley Capital International (``MSCI'') Indices 
(individually ``MSCI Index'' and collectively ``MSCI Indices''). The 
countries whose exchange markets are represented by the seventeen MSCI 
Indices are: Australia, Austria, Belgium, Canada, France, Germany, Hong 
Kong, Italy, Japan, Malaysia,\9\ Mexico, Netherlands, Singapore, Spain, 
Sweden, Switzerland, and the United Kingdom. The Commission has already 
approved proposed rule changes to accommodate the listing and trading 
of these seventeen WEBS series on the American Stock Exchange 
(``Amex'') and to permit the trading of the WEBS series on the Chicago 
Stock Exchange (``CHX'') pursuant to unlisted trading privileges.\10\ 
Both the Amex and CHX currently trade all seventeen WEBS series.
---------------------------------------------------------------------------

    \9\ Although the Exchange seeks approval to trade the Malaysia 
Index Series WEBS pursuant to unlisted trading privileges, the 
Exchange will not immediately trade such WEBS due to Malaysian 
currency restrictions. The Exchange will notify the Commission 
before the start of trading in Malaysian Index Series WEBS and, if 
required, will submit a rule filing under Section 19(b) of the Act. 
See Amendment No. 1 supra note 5.
    \10\ See Securities Exchange Act Release Nos. 36947 (Mar. 8, 
1996), 61 FR 10606 (Mar. 14, 1996) (approval of the Amex's request 
to list and trade Index Fund Shares, including WEBS); and 39117 
(Sept. 22, 1997), 62 FR 50973 (Sept. 29, 1997) (approval of the 
CHX's request to trade WEBS pursuant to unlisted trading 
privileges). The Commission notes that the Amex has filed a proposed 
rule change to list for trading eleven additional WEBS based on MSCI 
Indices for Brazil, Greece, Indonesia, South Korea, Portugal, South 
Africa, Taiwan, Thailand, Turkey, the United States, and the EMU 
(European Economic and Monetary Union). The Amex's proposal is still 
pending with the Commission. See Securities Exchange Act Release No. 
41322 (Apr. 22, 1999), 64 FR 23138 (Apr. 29, 1999).
---------------------------------------------------------------------------

    The investment objective of each WEBS series is to provide 
investment results that correspond generally to the aggregate price and 
yield performance of publicly traded securities in particular markets, 
as represented by specific MSCI Indices. Each WEBS series will use a 
``passive'' or indexing investment approach, which attempts to 
approximate the investment performance of its benchmark index through 
quantitative analytical procedures.
    A WEBS series normally will invest at least 95% of its total assets 
in stocks that are represented in the relevant MSCI Index and will at 
all times invest at least 90% of its total assets in such stocks. A 
WEBS series will not hold all of the issues that comprise the subject 
MSCI Index, but will attempt to hold a representative sample of the 
securities comprising the MSCI Index in a technique known as 
``portfolio sampling.''
    The Fund will issue and redeem WEBS of each Index Series only in 
aggregations of shares specified for each Index Series (each 
aggregation is a ``Creation Unit''). The number of shares per Creation 
Unit will range from 40,000 to 600,000.\11\ Following the issuance of 
WEBS in Creation Unit aggregations, WEBS may be traded on the Exchange 
in lots of any size.
---------------------------------------------------------------------------

    \11\ The number of shares per Creation Unit for the seventeen 
WEBS are: (1) Australia Index Series: 200,000; (2) Austria Index 
Series: 100,000; (3) Belgium Index Series: 40,000; (4) Canada Index 
Series: 100,000; (5) France Index Series: 200,000; (6) Germany Index 
Series: 300,000; (7) Hong Kong Index Series: 75,000; (8) Italy Index 
Series: 150,000; (9) Japan Index Series: 600,000; (10) Malaysia 
Index Series: 75,000; (11) Mexico (Free) Index Series: 100,000; (12) 
Netherlands Index Series: 50,000; (13) Singapore (Free) Index 
Series: 100,000; (14) Spain Index Series: 75,000; (15) Sweden Index 
Series: 75,000; (16) Switzerland Index Series: 125,000; and (17) 
United Kingdom Index Series: 200,000.
---------------------------------------------------------------------------

C. Structure of the MSCI Indices

    MSCI generally seeks to have 60% of the capitalization of a 
country's stock market reflected in the MSCI Index for such country. 
The MSCI Indices seek to balance the inclusiveness of an ``all share'' 
index against the replicability of a ``blue chip'' index. MSCI applies 
the same criteria and calculation methodology across all markets for 
all indices, developed and emerging.
    All single-country MSCI Indices are market capitalization weighted. 
For countries that restrict foreign ownership, MSCI calculates two 
types of indices: the MSCI Index and an additional index call the 
``Free Index.'' The Free Index excludes companies and share classes 
that may not be purchased by foreigners. MSCI currently calculates Free 
Indices for Singapore and Mexico, and for those regional and 
international indices which include such markets. The Singapore and 
Mexico WEBS series will be based on the Free Indices for those 
countries.
    All MSCI Indices are calculated daily. The calculation method 
weights stocks in an MSCI Index by their beginning-of-period market 
capitalization. Share prices are ``swept clean'' daily and adjusted for 
any rights issues, stock dividends, or splits. The MSCI Indices 
presently are calculated in each market's local currency,\12\ in U.S. 
dollars, without dividends, and with dividends reinvested.
---------------------------------------------------------------------------

    \12\ To obtain foreign currency exchange rates, MSCI uses WM/
Reuters Closing Spot Rates for all developed and emerging markets 
except those in Latin America. Because of the high volatility of 
currencies in some Latin American countries, MSCI continues to 
calculate its own rates for those countries. Under exception 
circumstances MSCI may elect to use an alternative exchange rate for 
any country if the WM/Reuters Closing Spot Rate is not believed to 
be representative for a given currency on a particular day.
---------------------------------------------------------------------------

    Each MSCI Index underlying a WEBS series is calculated by MSCI for 
each trading day in the applicable market based on official closing 
prices taken from the predominant exchange in such market. For each 
trading day, MSCI publicly disseminates each MSCI Index value for the 
previous day's close. MSCI Indices are reported periodically in major 
financial publications and also are available through vendors of 
financial information.
    The Fund will cause to be made available daily the names and 
required number of shares of each of the securities to be deposited in 
connection with the issuance of WEBS in Creation Unit size aggregations 
for each WEBS series. Also included will be information relating to the 
required cash payment representing, in part, the amount of accrued 
dividends applicable to such WEBS series. This information will be made 
available by the Fund Advisor to any National Securities Clearing 
Corporation (``NSCC'') participant requesting such information. In 
addition, such information may be requested directly from the Fund 
Distributor.

D. Disclosure to Market Participants

    The Fund Administrator, PFPC, Inc., will calculate the net asset 
value (``NAV'') for each Index Series each trading day as of 4:00 P.M., 
Eastern Standard Time. The NAVs will be made available to the public by 
the Fund Distributor by means of a toll-free number and will also be 
accessible to

[[Page 56010]]

NSCC participants through NSCC data. In addition, the NAVs will be 
provided to the Exchange by NSCC, and disseminated through the 
Exchange's Computerized Order Access System (``P/COAST'').
    The Exchange will provide current WEBS pricing information by 
disseminating through the facilities of the Consolidated Tape 
Association (``CTA'') an indicative optimized portfolio value 
(``Value'') for each Index Series as calculated by Bloomberg, L.P. The 
Value will be disseminated on a per WEBS basis every fifteen seconds 
during the Exchange's regular trading hours.\13\
---------------------------------------------------------------------------

    \13\ The Exchange recognizes that each Value is unlikely to 
reflect the value of all securities included in the applicable 
benchmark MSCI Index. In addition, the Exchange believes that the 
Value does not necessarily reflect the precise composition of the 
current portfolio of securities held by the Fund for each WEBS 
series at a particular moment. Therefore, the Exchange believes that 
the Value for each WEBS series disseminated during Exchange trading 
hours should not be viewed as a real-time update of the NAV of the 
Fund, which is calculated only once a day. The Exchange recognizes, 
however, that during the trading day the Value will closely 
approximate the value, per WEBS share, of the portfolio of 
securities for each WEBS series, except under unusual circumstances.
---------------------------------------------------------------------------

    Before the start of trading in WEBS, the Exchange will distribute 
to its members an information circular that discusses the special 
characteristics and risks of trading WEBS. The circular will discuss 
the basic structure of WEBS, creation and redemption over WEBS, 
prospectus delivery to investors purchasing WEBS, applicable Exchange 
rules (e.g., suitability rule), and dissemination of trading 
information. The Exchange will use existing and proposed surveillance 
procedures to surveil trading in WEBS, including specialist compliance 
with Exchange Rule 5.33(a), ``Specialist Trading,'' and proposed 
Commentaries .02 and .03 to Exchange Rule 5.33(a), which contemplate 
specialists engaging in transactions with the issuer of WEBS under 
certain circumstances.\14\
---------------------------------------------------------------------------

    \14\ Proposed Commentary .02 to Exchange Rule 5.33 states that, 
``[s]pecialists may only redeem and create WEBS on the same terms 
and conditions as any other investor and only at the net asset value 
(``NAV''). Proposed commentary .03 to Exchange Rule 5.33 states 
that:
    [n]othing in rule 5.33(a) should be construed to restrict a 
Specialist registered in a security issued by an investment company 
from purchasing and redeeming the listed security, or securities 
that can be subdivided or converted into the listed security from 
the issuer as appropriate to facilitate the maintenance of a fair 
and orderly market in the subject security.
---------------------------------------------------------------------------

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) of the Act.\15\ 
The Commission believes that the Exchange's proposal to adopt new rules 
to accommodate the trading of Units, whether by Exchange listing or 
pursuant to unlisted trading privileges, will establish a framework to 
facilitate the trading of new products such as WEBS. The Commission 
also believes that the Exchange's proposal to trade WEBS pursuant to 
unlisted trading privileges will provide investors with a convenient 
way of participating in foreign securities markets, and could benefit 
investors through increased competition between the market centers 
trading the WEBS product. Moreover, the Commission believes that the 
Exchange's WEBS proposal would provide investors with increased 
flexibility in satisfying their investment needs by allowing them to 
buy and sell, at negotiated prices throughout the trading day, 
securities that replicate the performance of several stock 
portfolios.\16\ Accordingly, as discussed below, the Commission finds 
that the proposal is consistent with the requirements of Section 
6(b)(5) of the Act in that it facilitates transactions in securities, 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system, and, in general, protects 
investors and the public interest.\17\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Unlike typical open-end investment companies, where 
investors have the right to redeem their shares on a per share 
basis, investors in WEBS can redeem them in creation unit size 
aggregations only.
    \17\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission notes that WEBS should provide investors with 
several advantages compared to shares of standard, open-end management 
investment companies (i.e., mutual funds). Specifically, investors will 
be able to trade WEBS continuously throughout the day in secondary 
markets at negotiated prices.\18\ In contrast, Investment Company Act 
Rule 22c-1 \19\ requires investors to purchase and redeem shares issued 
by an open-end management investment company based upon the NAV of the 
securities held by such company. The ability to trade WEBS throughout 
the day should allow investors to respond quickly to market changes and 
provide expanded opportunities to engage in hedging strategies. In 
addition, the cost of WEBS should make them affordable and attractive 
to individual retail investors who wish to purchase a single security 
that replicates the performance of a portfolio of foreign stocks.\20\
---------------------------------------------------------------------------

    \18\ The Commission believes that WEBS will not trade at a 
material discount or premium in relation to their net asset value, 
because of potential arbitrage opportunities. The potential for 
arbitrage should keep the market price of WEBS comparable to their 
net asset values; therefore, arbitrage activity likely will not be 
significant.
    \19\ Investment Company Act Rule 22c-1 generally provides 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. See 17 CFR 270.22c-1. The net asset 
value of an open-end management investment company generally is 
computed once daily Monday to Friday as designated by the investment 
company's board of directors. The Commission granted WEBS an 
exemption from this provision to allow them to trade in the 
secondary market at negotiated prices.See Amex WEBS Approval Order, 
infra note 21.
    \20\ As of the close of trading on October 1, 1999, the Spain 
Index Series WEBS, which was valued at $25.375, was the highest 
priced of the seventeen listed WEBS series. The least expensive WEBS 
series was the Malaysia Index Series, value at $4.9375.
---------------------------------------------------------------------------

    Although the market price of each WEBS series is derived from the 
value of the securities and cash held in the Fund, WEBS are not 
leveraged instruments. Rather, WEBS essentially are equity securities 
that represent an interest in a portfolio of stocks designed to track a 
specific MSCI Index. While the Commission believes that it is 
appropriate to regulate WEBS like other equity securities, the unique 
nature of WEBS raises certain trading, disclosure, and surveillance 
issues. The remainder of this order addresses these issues, although 
they are discussed in greater detail in the Amex WEBS Approval Order, 
where the Commission initially approved WEBS for trading as a new 
product.\21\
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 36947 (Mar. 8, 
1996), 61 FR 10606 (Mar. 14, 1996) (``Amex WEBS Approval Order''). 
The Commission hereby incorporates by reference the discussion and 
rationale for approving WEBS as stated in the Amex WEBS Approval 
Order.
---------------------------------------------------------------------------

A. Trading of WEBS on the Exchange

    Before an exchange begins to trade a security pursuant to unlisted 
trading privileges, Rule 12f-5 of the Act requires the exchange to have 
in place rules providing for transactions in such security.\22\ The 
Commission finds that the Exchange has proposed adequate rules and 
procedures to govern the trading of WEBS on the Exchange. Specifically, 
WEBS will be deemed

[[Page 56011]]

equity securities and will be subject to the Exchange's existing 
general rules that govern the trading of equity securities.\23\ In 
addition, proposed Exchange Rules 3.2(k), ``Investment Company Units,'' 
and 3.5(h), ``Investment Company Units: Continued Listing Criteria,'' 
which contain specific listing and delisting criteria to accommodate 
the trading of Units, will apply to the trading of WEBS.\24\ These 
provisions should help to ensure that a minimum level of liquidity 
exists in each WEBS series to facilitate the maintenance of fair and 
orderly markets. The delisting criteria will allow the Exchange to 
consider the suspension of trading and the delisting of a series of 
Units (including WEBS), if an event were to occur that made further 
dealings in such securities inadvisable. This provision will give the 
Exchange the requisite flexibility to suspend or delist trading in WEBS 
if circumstances warrant. Accordingly, the Commission believes that the 
Exchange's rules in general, and proposed Exchange Rules 3.2(k) and 
3.5(h), in particular, provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest.\25\
---------------------------------------------------------------------------

    \22\ Rule 12f-5 states that, ``[a] national securities exchange 
shall not extend unlisted trading privileges to any security unless 
the national securities exchange has in effect a rule or rules 
providing for transactions in the class or type of security to which 
the exchange extends unlisted trading privileges.'' 17 CFR 240.12f-
5.
    \23\ Such general rules include, for example, margin and net 
capital rules, the short sale rule, trading halt provisions, 
customer suitability requirements, trading hours, and minimum 
trading increments.
    \24\ The Commission notes that the Exchange's rules for listing 
and delisting Units are substantially similar to companion rules 
adopted by the Amex and CHX.
    \25\ The Commission also believes that the proposed rule change 
should help protect investors and the public interest, and help 
perfect the mechanisms of a national market system, in that it will 
allow for the trading of WEBS on the Exchange pursuant to unlisted 
trading privileges, making WEBS more broadly available to the 
investing public.
---------------------------------------------------------------------------

B. Disclosure of Investors and Exchange Members

    The Commission believes that the Exchange's proposal provides for 
adequate disclosure to investors relating to the terms, 
characteristics, and risks of trading WEBS. All investors purchasing 
WEBS on the Exchange will receive a prospectus regarding the specific 
WEBS product. Because the WEBS proposed to be traded on the Exchange 
will be in continuous distribution, the prospectus delivery 
requirements of the Securities Act of 1933 will apply to both the 
initial purchasers and to investors purchasing such WEBS in the 
secondary market on the Exchange. The prospectus will address the 
special characteristics of WEBS, including a statement regarding their 
redeemability and method of creation, and specify that WEBS are not 
individually redeemable.
    The Exchange also drafted an information circular that will be 
distributed to all Exchange members before trading of WEBS begins on 
the Exchange. The Commission has reviewed this draft information 
circular and believes it adequately explains the unique characteristics 
and risks of WEBS. The circular also identifies Exchange member 
responsibilities. For example, before an Exchange member undertakes to 
recommend a transaction in WEBS, the member should make a determination 
that such WEBS transaction is suitable for its customer. The circular 
also addresses members' responsibility to deliver a prospectus to 
investors purchasing WEBS, and highlights that WEBS are redeemable only 
in Creation Unit size aggregations.\26\ The Commission notes that the 
Exchange's draft information circular is very similar to the WEBS 
circulars prepared by the Amex and CHX that were previously reviewed by 
the Commission.
---------------------------------------------------------------------------

    \26\ The Exchange confirmed with the Commission that PCX members 
may rely on certain exemptive and no-action relief regarding WEBS 
that the Commission previously provided to the Amex. The Commission 
gave to Amex exemptive relief from Rules 10a-1, 10b-6, 10b-7, 10b-
10, 10b-13, and 10b-17 under the Act; and no-action relief for 
Section 11(d)(1) of the Act and Rules 11d1-2, 15c1-5 and 15c1-6 
thereunder. To the extent that Regulation M supersedes Rules 10b-6 
and 10b-7, Exchange members may continue to rely upon the relief 
regarding those two rules. See Letter from Robert P. Pacileo, Staff 
Attorney, Regulatory Policy, Exchange, to Michael A. Walinskas, 
Associate Director, Division of Market Regulation, Commission, dated 
May 11, 1999; and letter from Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, to Donald R. Crawshaw, 
Sullivan & Cromwell, dated April 17, 1996.
---------------------------------------------------------------------------

C. Dissemination of WEBS Portfolio Information

    The Commission believes that the dissemination of the Values for 
the seventeen WEBS series will provide investors with timely and useful 
information concerning the value of WEBS, on a per WEBS basis. The 
Commission notes that this information will be disseminated through the 
facilities of the CTA and will closely approximate the value, per WEBS 
share, of the portfolio of securities for each WEBS series. The Values 
will be disseminated every 15 seconds during the Exchange's regular 
trading hours, and will be available to all investors, irrespective of 
the exchange market on which a transaction is executed. Also, because 
each Value is expected to closely track the applicable WEBS series, the 
Commission believes the Values will provide investors with adequate 
information to generally determine the intra-day value of a given WEBS 
series. The Commission expects the Exchange to monitor the disseminated 
Values and, if the Exchange determines that a Value does not closely 
track the applicable WEBS series, arrange to disseminate an adequate 
alternative.

D. Surveillance of WEBS Trading

    The Commission notes that the Exchange submitted confidential 
surveillance procedures regarding the trading of WEBS on its equity 
floor. The Commission believes that the surveillance procedures 
adequately address concerns associated with the trading of WEBS, 
including concerns attendant to the purchase and redemption of Creation 
Units. Specifically, the Commission believes that the surveillance 
procedures should help the Exchange to monitor specialists purchasing 
and redeeming Creation Units, and ensure compliance with Exchange Rules 
5.29(f), ``Specialist Responsibility,'' \27\ and 5.33(a), ``Specialist 
Trading.''
---------------------------------------------------------------------------

    \27\ Exchange Rule 5.29(f) specifies that, ``a Specialist is to 
engage in a course of dealings for his own account to assist in the 
maintenance, insofar as reasonably practicable, of a fair and 
orderly market on the Exchange.''
---------------------------------------------------------------------------

    The Commission believes that adequate safeguards are in place to 
prevent the abuse of inside information relating to the composition of 
the MSCI Indices. In the Amex WEBS Approval Order, the Commission 
discussed abuse of information concerns that arise when a broker-dealer 
is involved in the development and maintenance of a stock index 
underlying a derivative product. The Commission believes that 
procedures to prevent the misuse of material, non-public information 
regarding changes to component stocks in the MSCI Indices have been 
adopted and should help to address concerns raised by Morgan Stanley's 
role in maintaining the MSCI Indices.

E. Specialist Activities

    The Commission finds that it is consistent with the Act to allow a 
specialist registered in a security issued by an Investment Company to 
purchase or redeem the security from the issuer, as appropriate, to 
facilitate the maintenance of a fair and orderly market in that 
security. The Commission generally believes that such market activities 
should enhance liquidity in the security and facilitate a specialist's 
market making responsibilities. In addition, because a WEBS specialist 
will be required to purchase and redeem WEBS only on the

[[Page 56012]]

same terms and conditions as any other investor (and only at the NAV), 
and Creation Unit transactions occur through the Fund Distributor, the 
Commission believes that the potential for abuse is minimized. 
Furthermore, the Exchange's surveillance procedures should help the 
Exchange to monitor specialist trading activity and determine whether a 
specialist's transaction was effected to maintain fair and orderly 
markets, or for some improper or speculative purpose. Finally, the 
Commission notes that its approval of this aspect of the Exchange's 
proposal does not address any other requirements or obligations under 
the federal securities laws that may be applicable.\28\
---------------------------------------------------------------------------

    \28\ The Commission notes that with respect to WEBS, broker-
dealers and other persons are cautioned in the prospectus and/or the 
Fund's Statement of Additional Information that some activities on 
their part may, depending on the circumstances, result in their 
being deemed statutory underwriters and subject them to the 
prospectus delivery and liability provisions of the Securities Act 
of 1933.
---------------------------------------------------------------------------

    The Commission finds good cause for approving proposed Amendment 
No. 1 prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 1 
provides additional information responsive to Commission staff concerns 
and proposes several revisions that strengthen the Exchange's proposed 
rule change. First, Amendment No. 1 provides confidential surveillance 
procedures that describe how the Exchange will monitor trading in WEBS. 
The Commission believes that the procedures are well designed and will 
help the Exchange detect trading abuses and safeguard the integrity of 
WEBS trading on the Exchange. Amendment No. 1 also proposes 
Commentaries .02 and .03 to Exchange Rule 5.33(a), which clarify that: 
(i) Exchange specialists may redeem and create WEBS only on the same 
terms and conditions as any other investor, and only at the NAV; and 
(ii) Exchange specialists registered in an Investment Company security 
may purchase and redeem the listed Investment Company security, or 
securities that can be subdivided or converted into the listed 
Investment Company security, from the issuer as appropriate to 
facilitate the maintenance of a fair and orderly market in the subject 
security. These provisions establish appropriate limitations on the 
trading activities of Exchange specialists, but also provide the 
flexibility necessary to maintain fair and orderly markets.
    Amendment No. 1 also clarifies several aspects of the proposal, 
including: (i) the Exchange's intent to trade WEBS pursuant to unlisted 
trading privileges; (ii) treatment of the Malaysian Index Series WEBS; 
(iii) review of specialist trading activity in WEBS; and (iv) the 
dissemination of NAVs. Lastly, Amendment No. 1 confirms that Exchange 
members may rely on certain exemptive and no-action relief regarding 
WEBS, which the Commission previously provided to the Amex.\29\
---------------------------------------------------------------------------

    \29\ See supra note 5 for a more detailed description of 
Amendment No. 1.
---------------------------------------------------------------------------

    Based on the above, the Commission finds that good cause exists, 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\30\ to 
accelerate approval of Amendment No. 1 to the proposed rule change.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendments No. 
1 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 20549-0609. Copies of 
the submissions, 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 persons, 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 in the Commission's 
Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. 
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-PCX-98-29 and should be submitted by November 5, 1999.

V. Conclusion

    It is Therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-PCX-98-29), as amended, is 
approved.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26897 Filed 10-14-99; 8:45 am]
BILLING CODE 8010-01-M