[Federal Register Volume 64, Number 210 (Monday, November 1, 1999)]
[Notices]
[Pages 58870-58875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28457]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42056; File No. SR-CHX-99-22]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1, 2 and 3 by the Chicago Stock Exchange, Inc., Relating to 
Listing Standards for Trust Issued Receipts

October 22, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),1 and Rule 19b-4 thereunder,2 notice is 
hereby given that on October 7, 1999, the Chicago Stock Exchange, Inc., 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. Amendment Nos. 1, 2, and 3 were filed on October 13, 15, 
and 20, 1999, respectively.3 The Commission is publishing 
this notice to solicit comments on the proposed rule change and 
Amendment Nos. 1, 2, and 3 from interested persons and to grant 
accelerated approval to the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 added new text regarding the arbitrage 
process and the trust issued receipt's trading price. Amendment No. 
2 added additional minimum listing requirements for securities to 
qualify for inclusion in a trust issued receipt. Amendment No. 3 
changed the figure for initial distribution of Internet HOLDRs from 
150,000 to approximately 3.7 million. See Letters from Paul B. 
O'Kelly, Executive Vice President, Market Regulation and Legal, CHX, 
to Heather Traeger, Attorney, Division of Market Regulation, SEC, 
dated October 13, 1999, October 15, 1999 and October 20, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to add a new Rule 27 to Article XXVIII of the 
Exchange's rules to adopt listing standards for trust receipts. Once 
these listing standards have been approved, the Exchange intends to 
trade Internet Holding Company Depository Receipts (``Internet 
HOLDRs''), a trust issued receipt. The Exchange also proposes to trade 
Internet HOLDRs pursuant to unlisted trading privileges (``UTP''). The 
text of the proposed rule change is available at the Office of the 
Secretary, CHX and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing listing criteria to allow the Exchange to 
list trust issued receipts, and to trade Internet HOLDRs, a type of 
trust issued receipt, pursuant to UTP. The Exchange represents that 
trust issued receipts provide investors with a flexible, cost-effective 
way to purchase, hold and transfer the securities of one or more 
specified companies.
    a. Trust Issued Receipts Generally.--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

[[Page 58871]]

issued receipts. Trust issued receipts allow investors to hold 
securities investments from a variety of companies throughout a 
particular industry in a single, exchange-listed and traded instrument 
that represents their beneficial ownership of each of 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 have the same rights, privileges 
and obligations as they would have if they benefically owned the 
deposited securities outside of the trust issued receipt program. For 
example, 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 if any are declared and paid 
by the issuers of the deposited securities to the trustee.
    Creation of a trust. Trust issued receipts will be issued by a 
trust created pursuant to a depository trust 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.
    b. Criteria for Initial and Continued Listing. The Exchange 
believes that the listing criteria proposed in its new rule are 
generally consistent with the ``Other Securities'' criteria currently 
found in Article XXVIII, Rule 13 of the CHX Rules as well as the trust 
issued receipt listing criteria currently used by the American Stock 
Exchange.\4\
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    \4\ The American Stock Exchange's (``Amex'') listing criteria 
were approved by the Commission on September 21, 1999. See 
Securities Exchange Act Release No. 41892 (September 21, 1999), 64 
FR 52559 (September 29, 1999).
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    Initial Listing. Under the proposed rule, if trust issued receipts 
are to be listed on the Exchange, the Exchange will establish a minimum 
number of trust issued receipts required to be outstanding at the time 
trading commences on the Exchange and will include that number in any 
required submission to the Commission.
    Continued Listing. 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 when any of the following circumstances 
arise: (1) If the trust has more than 60 days remaining until 
termination and there are fewer than 50 record and/or beneficial 
holders of the trust issued receipts for 30 or more consecutive trading 
days; (2) if the trust has fewer than 50,000 receipts issued and 
outstanding; (3) if the market value of all receipts issued and 
outstanding is less than $1,000,000; or (4) if any other event occurs, 
or any other condition exists, which, in the opinion of the Exchange, 
makes further trading on the Exchange inadvisable. These flexible 
criteria allow the Exchange to avoid delisting trust issued receipts 
(leading to a possible termination of the trust) because of relatively 
brief fluctuations in market conditions that may cause the number of 
holders to vary.
    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. Notwithstanding, in the first 
year and thereafter, if the number of companies represented by the 
deposited securities drops to less than nine, and each 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.
    c. Exchange Rules Applicable to the Trading of Trust Issued 
Receipts. Trust issued receipts are considered ``securities'' under the 
Rules of the Exchange and are subject to all applicable trading rules, 
including the provisions of Article XX, Rule 40, ITS Trade-Throughs and 
Locked Markets, which prohibit CHX members from initiating trade-
throughs for ITS securities, as well as rules governing priority, 
parity and precedence of orders, market volatility-related trading halt 
provisions and responsibilities of the assigned specialist firm.\5\ 
Exchange equity margin rules will apply.
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    \5\ There are two possible exceptions to this general rule. 
First, if trust issued receipts are traded only in round lots (or 
round-lot multiples), the Exchange's rules relating to odd-lot 
executions will not apply. Additionally, the Exchange understands 
that application for exemption from the short sale rule, Rule 10a-1 
under the Act, 17 CFR 240.10a-1, has been made with respect to 
Internet HOLDRs and is currently pending with the Commission. If 
that request is granted and if it applies to trust issued receipts 
traded on the Exchange, the Exchange will issue a notice to its 
members detailing the terms of the exemption and confirming that 
applicable CHX rules relating to short sales do not apply.
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    Trust issued receipts will trade in the minimum fractional 
increments described in CHX Article XX, Rule 22. If the trust issued 
receipts are also traded on the American Stock Exchange, those receipts 
will trade at a minimum variation of 1/16th of $1.00 for trust issued 
receipts selling at or above $.25 and 1/32nd of $1.00 for those selling 
below $.25. If the trust issued receipts are traded on any other 
exchange or are exclusively listed on the CHX, different minimum 
fractional increments may apply.
    The Exchange's surveillance procedures for trust issued receipts 
will be similar to the procedures used for portfolio depositary 
receipts and will incorporate and rely upon existing CHX surveillance 
systems.
    Prior to the commencement of trading of each new trust issued 
receipt, the Exchange will distribute a circular to its members and 
member organizations alerting them to the unique characteristics of 
trust issued receipts, including the fact that trust issued receipts 
are not individually redeemable. The circular will also confirm that 
trust issued receipts are subject to the Exchange's rule relating to 
trading halts due to extraordinary market volatility (Article IX, Rule 
10A) and that the underlying securities included in the trust are 
subject to the Exchange's rule which allows Exchange officials to halt 
trading in specific securities, under certain circumstances (Article 
IX, Rule 10(b)). The circular will advise members that, in exercising 
the discretion described in Article IX, Rule 10(b), appropriate 
Exchange officials may consider a variety of factors, including the 
event to which trading is not occurring in an underlying security and 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
    d. Disclosure to Customers. The Exchange will require its members 
to provide all purchasers of newly issued trust issues receipts with a 
prospectus for that series of trust issued receipts.
    e. Trading of Internet HOLDRs. As noted above, upon approval of the 
CHX's listing standards for trust issued receipts, the Exchange intends 
to begin trading a particular series of trust issued receipts, Internet 
HOLDRs pursuant to UTP privileges. The following section of this 
submission contains information about Internet HOLDRs. This information 
is based upon descriptions included in the Internet HOLDRs prospectus, 
the Internet HOLDRs depositary trust agreement, the Amex submissions 
relating to its trust issued receipt listing proposal and the

[[Page 58872]]

Commission's order approving the Amex proposal.\6\
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    \6\See supra, note 4.
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    Creation of Internet HOLDRs. 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 
understands that approximately 3.7 million trust issued receipts were 
issued in connection with the initial distribution of Internet HOLDRs.
    The deposited securities underlying Internet HOLDRs are: America 
Online (AOL), Yahoo Inc. (YHOO), Amazon.com Inc. (AMZN), eBay Inc. 
(EBY), At Home Corp. (ATHM), PricelineCom Inc. (PCLIN), CMGI Inc. 
(CMGI), Inktomi Corporation (INKT), RealNetworks, Inc. (RNWK), Exodus 
Communications, Inc. (EXDS), E*TRADE Group Inc. (EGRP), DoubleClick 
Inc. (DCLK), Ameritrade Holding Corp. (AMTD), Lycos, Inc. (LCOS), CNET, 
Inc. (CNET), PSINet Inc. (PSIX), Network Associates, Inc. (NETA), 
Earthlink Network, Inc. (ELNK), Mindspring Enterprises, Inc. (MSPG), 
and Go2NET, Inc. (GNET).
    The twenty companies represented by the securities in the portfolio 
underlying the Internet HOLDRs trust were required to meet the 
following minimum criteria when they were selected on August 31, 1999: 
(1) each company's 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 
be either listed on a national securities exchange or traded through 
the facilities of Nasdaq and reported national market system 
securities; (4) the average daily trading volume must be at least 
100,000 shares during the preceding sixty-day period; and (5) the 
average daily dollar value of the shares traded during the preceding 
sixty-day period must be at least $1 million. the initial weighting of 
each security in the portfolio was based on its market capitalization 
as of August 31, 1999; however, any security that represented more than 
20% of the overall value of the receipt on the date the weighting was 
determined, was reduced to no more than 20% of the receipt value.
    In addition, each of the companies whose common stock is included 
in the Internet HOLDRs also met the following criteria: (1) the market 
capitalization for each company was equal to or greater than $1 
billion; (2) the average daily trading volume for each security was at 
least 1.2 million shares over the 60 trading days prior to August 31, 
1999; (3) the average daily dollar volume of the shares traded for each 
company during the sixty-day trading period prior to August 31, 1999 
was at least $60 million; and (4) each company was traded on a national 
securities exchange or Nasdaq/NM for at least ninety days prior to 
August 31, 1999.
    Trading Issues. A round lot of 100 Internet HOLDRs represents a 
holder's individual and undivided beneficial ownership interest in the 
whole number of securities represented by the receipt. Because Internet 
HOLDRs 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 filled to the extent of the largest 
round lot multiple, rejecting the remaining odd lot.\7\
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    \7\ For example, an order for 50 trust issued receipts will be 
rejected and an order for 1050 trust issued receipts will be 
executed in part (1,000) and rejected in part (50).
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    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.
    Maintenance of the Internet HOLDRs Portfolio. Except when a 
reconstitution event occurs, as described below, the securities 
represented by a trust issued receipt will not change.\8\ According to 
the Internet HOLDRs prospectus, under no circumstances will a new 
company be added to the group of issuers of the underlying securities 
and weightings of component securities will not be adjusted after they 
are initially set.
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    \8\ Even if a reconstitution event does not occur, 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 and the relative weightings among the deposited 
securities may change based on the current market price of the 
deposited securities.
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    Reconstitution Events. As described in the Internet HOLDRs 
prospectus, the securities underlying the trust issued receipts will be 
automatically distributed to the beneficial owners of the receipts in 
four circumstances:
    (1) If the issuer of the underlying securities no longer has a 
class of common stock registered under Section 12 of the Act, then its 
securities will no longer be an underlying security and the trustee 
will distribute the shares of that company to the owners of the trust 
issued receipts;
    (2) If the Commission finds that an issuer of underlying securities 
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 shares of 
that company to the owners of the trust issued receipts;
    (3) If the underlying securities of an issuer cease to be 
outstanding as a result of a merger, consolidation or other corporate 
combination, the trustee will distribute the consideration paid by and 
received from the acquiring company to the beneficial owners of the 
trust issued receipts, unless the acquiring company's securities are 
already included in the trust issued receipts as deposited securities 
and the consideration paid is additional underlying securities, in 
which case the additional securities will be deposited into the trust; 
and
    (4) If an issuer's underlying securities are delisted from trading 
on a national securities exchange or Nasdaq and are not listed for 
trading on another national securities exchange or through Nasdaq 
within five business days from the date the securities are delisted.
    As described in the prospectus, if a reconstitution event occurs, 
the trustee will deliver the underlying security to the investor as 
promptly as practicable after the date that the trustee has knowledge 
of the occurrence of a reconstitution event.
    Issuance and Cancellation of Internet HOLDRs. The trust will issue 
and cancel, and an investor may obtain, hold, trade and surrender, 
Internet

[[Page 58873]]

HOLDRs only in a round lot of 100 trust issued receipts and round-lot 
multiples. Nevertheless, the bid and asked prices will be quoted on a 
per receipt basis. The trust will issue additional receipts on a 
continuous basis when an investor deposits the required securities with 
the trust.
    An investor may obtain trust issued receipts by either purchasing 
them on an exchange or by delivering to the trustee the underlying 
securities evidencing a round lot of trust issued receipts. The trustee 
will charge investors an issuance fee of up to $10 for each round lot 
of 100 trust issued receipts. An investor may cancel trust issued 
receipts and withdraw the deposited securities by delivering a round 
lot or round-lot multiple of the trust issued receipts to the trustee, 
during normal business hours. The trustee will charge investors a 
cancellation fee of up to $10 for each round lot of 100 trust issued 
receipts. Lower charges may be assigned based on the volume, frequency 
and size of issuances and cancellations. According to the prospectus, 
the trustee expects that, in most cases, it will deliver the deposited 
securities within one business day of the withdrawal request.
    Termination of the Trust. As described in the Internet HOLDRs 
prospectus, the trust will terminate on the earliest of the following 
occurrences: (1) If the trustee resigns and no successor trustee is 
appointed by the initial depositor within 60 days from the date the 
trustee provides notice to the initial depositor of its intent to 
resign; (2) If the trust issued receipts are delisted from the Amex and 
are not listed for trading on another national securities exchange or 
through Nasdaq within five business days from the date the receipts are 
delisted; (3) If 75% of the beneficial owners of outstanding trust 
issued receipts (other than Merrill Lynch, Pierce, Fenner & Smith 
Incorporated) vote to dissolve and liquidate the trust; or (4) December 
31, 2039. If a termination event occurs, the trustee will distribute 
the underlying securities to beneficial owners as promptly as 
practicable after the termination event.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) \9\ of 
the Act is that it is designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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-CHX-99-22 and should be submitted by November 22, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

A. Generally

    The Commission finds that the proposed rule change,as amended, is 
consistent with the requirements of Section 6(b)(5) of a the Act \10\ 
and the rules and regulations thereunder applicable to a national 
securities exchange. Specifically, the Commission finds, as it did in 
the Amex order approving the listing and trading of trust issued 
receipts and Internet HOLDRs,\11\ that the proposal establishing 
listing standards for trust issued receipts and to trade Internet 
HOLDRs will provide investors with a convenient and less expensive way 
of participating in the securities markets. The proposal should advance 
the public interest by providing investors with increased flexibility 
in satisfying their investment needs 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 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, to 
protect investors and the public interest, and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.\12\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See supra, note 4.
    \12\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    As noted in the Amex approval order, 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 negotiated prices. Trust issue receipts 
will allow 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 continuous 
basis, a single security representing a portfolio of securities that 
the investors 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 issued 
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.\13\ Nevertheless, the

[[Page 58874]]

Commission believes that the unique nature of trust issued receipts 
raises certain product design, disclosure, trading, and other issues.
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    \13\ The Commission has concerns about continued trading of the 
trust receipts whether listed or pursuant to UTP, if the number of 
component securities falls to a level below nine securities, because 
the receipts may not longer adequately reflect a cross section of 
the selected industry. Accordingly, the CHX has agreed to consult 
the Commission concerning continued trading, once the trust has 
fewer than nine component securities, and for each subsequent loss 
of a security thereafter.
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B. Trading of Trust Issued Receipts--Listing and UTP

    The Commission finds that the CHX's proposal contains adequate 
rules and procedures to govern the trading of trust issued receipts 
whether by listing or pursuant to UTP. Trust issued receipts are equity 
securities that will be subject to the full panoply of CHX rules 
governing the trading of equity securities on the CHX, including, among 
others, rules governing the priority, parity and precedence of orders, 
responsibilities of the specialist, account opening and customer 
suitability requirements, and the election of a stop or limit 
order.\14\
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    \14\ 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 CHX 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 also allows the CHX 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 CHX 
flexibility to delist trust issued receipts if circumstances warrant 
such action. CHX'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/
16th 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 CHX will apply surveillance procedures for trust 
issued receipts that will be similar to the procedures used for 
portfolio depositary receipts and will incorporate and rely upon 
existing CHX 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 risk 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 CHX 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.
    CHX has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice in the Federal Register. The Commission believes 
that the Exchange's proposal to trade trust issued receipts, and 
specifically Internet HOLDRs pursuant to UTP privileges, will provide 
investors with a convenient and less expensive way of participating in 
the securities markets. The Commission believes that the proposed rule 
change could produce added benefits to investors through the increased 
competition between other market centers trading the product. 
Specifically, the Commission believes that by increasing the 
availability of trust issued receipts, and in particular Internet 
HOLDRs, as an investment tool, the CHX's proposal should help provide 
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. The Commission notes, 
however, 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 by the Exchange prior to contacting Division staff. In 
addition, the CHX may be required to submit a rule filing prior to 
trading a new issue or series on the Exchange.
    As noted above, the Commission has approved the listing and trading 
of trust issued receipts, including Internet HOLDs, at the Amex, under 
rules that are substantially similar to CHX Article XXVII, rule 27. The 
trading requirements of trust issued receipts at the CHX will be 
substantially similar to the trading requirements of trust issued 
receipts at the Amex. The Commission published those rules in the 
Federal Register for the full notice and comment period. No comments 
were received on the proposed rules, and the Commission found them 
consistent with the Act.\15\ The Commission does not believe that 
trading of this product raises novel regulatory issues that were not 
addressed in the previous filing. Accordingly, the Commission finds 
good cause for approving the proposed rule change, as amended, prior to 
the thirtieth day after the date of publication of notice in the 
Federal Register.
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    \15\ See Securities Exchange Act Release No. 48192 (September 
21, 1999), 64 FR 52559 (September 29, 1999).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CHX-99-22),

[[Page 58875]]

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as amended, is hereby approved on an accelerated basis.

    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-28457 Filed 10-29-99; 8:45 am]
BILLING CODE 8010-01-M