[Federal Register Volume 65, Number 22 (Wednesday, February 2, 2000)]
[Notices]
[Pages 5006-5011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2287]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42348; File No. SR-CHX-99-26]


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

January 18, 2000.
    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 December 2, 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. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to list and trade a trust issued receipt 
based on the stocks of selected biotechnology companies, Biotech 
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
    On October 22, 1999, the Commission approved a new CHX rule, 
Article XXVIII, \3\ Rule 27, which provides listing standards for trust 
issued receipts. At the same time, the Commission authorized the 
Exchange to list and trade Internet HOLDRs, a particular type of trust 
issued receipt.\4\ As noted in that approval order, the Exchange must 
consult with the Commission prior to listing and trading other 
similarly structured products, including trust issued receipts based on 
other industries. The Exchange now proposes to list and trade a new 
type of trust issued receipt, Biotech HOLDRs, pursuant to unlisted 
trading privileges.
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    \3\ All references in this filing should be to Article XXVIII, 
not XXVII, pursuant to telephone conversation between Ellen J. 
Neely, Vice President and General Counsel, CHX, and Heather Traeger, 
Attorney, Division of Market Regulation, SEC, on December 21, 1999.
    \4\ Securities Exchange Act Release No. 42056 (October 22, 
1999), 64 FR 58870 (November 1, 1999).
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    As noted in the CHX's earlier submission, trust issued receipts 
provide investors with a flexible, cost-effective way to purchase, hold 
and transfer the securities of one or more specified companies. Except 
for the individual securities that are deposited in the Biotech HOLDRs 
trust, this trust issued receipt is structurally identical to the 
Internet HOLDRs that the Commission has already approved for listing 
and trading on the Exchange.
i. 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 issued 
receipts. Trust issued receipts allow investors to hold securities 
investments from a variety of companies in a single, exchange-traded 
instrument that represents their beneficial ownership of each of the 
deposited securities, evidenced by the receipts. Holders may cancel 
their trust issued receipts at any time to receive the deposited 
securities.
    The initial offering price for a trust issued receipt will be 
established on the dates the receipts are priced for sale to the 
public. The amounts 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.

[[Page 5007]]

    Beneficial owners of the receipts have the same rights and 
privileges as they would have if they beneficially 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 distrusted 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, net of any 
applicable taxes and fees.
     Creation of a Trust. Trust issued receipts are 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 
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.
ii. Creation of Biotech HOLDRs \5\
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    \5\ This section of the CHX's submission, as well as other 
sections, contains information about Biotech, HOLDRs. This 
information is based upon descriptions included in the Biotech 
HOLDRs prospectus, the American Stock Exchange (``Amex'') 
submissions relating to its proposal to list and trade Biotech 
HOLDRs and the Commission's order approving the Amex proposal.
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    The Biotech HOLDRS trust was formed under a depository trust 
agreement, dated November 18, 1999, among the Bank of New York, as 
trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, other 
depositors and the owners of the trust issued receipts. The Biotech 
HOLDRs trust will hold shares of common stock issued by 20 specified 
companies that are generally considered to be involved in various 
segments of the biotechnology industry. The specific share amounts for 
each round-lot of 100 Biotech HOLDRs were determined as of October 27, 
1999, as that the initial weightings of each underlying security 
approximated the relative market capitalization of the specified 
companies, subject to a maximum weight of 20%.
    The deposited securities underlying the Biotech HOLDRs are: Amgen, 
Inc. (AMGN), Genentech, Inc. (DNA), Biogen, Inc. (BGEN), Immunex 
Corporation (IMNX), PE Corp.--PE Biosystems Group (PEB), MedImmune, 
Inc. (MEDI), Chiron Corporation (CHIR), Genzyme Corporation (GENZ), 
Gilead Sciences, Inc. (GILD), Sepracor Inc. (SEPR), IDEC 
Pharmaceuticals Corporation (IDPH), QLT Phote Therapeutics Inc. (QLTI), 
Millenium Pharmaceuticals, Inc. (MLNM), BioChem Pharma Inc. (BCHE), 
Affymetrix, Inc. (AFFX), Human Genome Sciences, Inc. (HGSI), ICOS 
Corporation (ICOS), Enzon, Inc. (ENZN), Celera Genomics (CRA) and 
Alkermes, Inc. (ALKS).
    The twenty companies represented by the securities in the portfolio 
underlying the Biotech HOLDRs trust were required to meet the following 
minimum criteria: (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 must be a 
reported national market system security; (4) the average daily trading 
volume for each stock must be at least 100,000 shares during the 
preceding 60-day trading period; (5) the average daily dollar value of 
the shares traded during the preceding 60-day trading period must be at 
least $1 million; and (6) the initial weighting of each security in the 
portfolio must be based on market capitalization; however, any security 
that represents more than 20% of the receipt value on the date the 
weighting is determined, must be reduced to no more than 20% of the 
receipt value.
    In addition, each of the companies whose common stock is included 
in Biotech HOLDRs also met the following criteria when they were 
selected on October 27, 1999: (1) the market capitalization for each 
company was equal to or greater than $840 million; (2) the average 
daily trading volume for each security was at least 200,000 shares over 
the 60 trading days prior to and including October 27, 1999; (3) the 
average daily dollar value of the shares traded for each company during 
the sixty-day trading period prior to and including October 27, 1999 
was at least $7.5 million; and (4) each company was traded on a 
national securities exchange or Nasdaq/NM for at least ninety days 
prior to October 27, 1999.
iii. Criteria for Initial and Continued Listing of Biotech HOLDRs
    Initial Listing. Under Article XXVIII, Rule 27, the Exchange must 
establish a minimum number of trust issued receipts that is required to 
be outstanding on the date trading begins on the Exchange. The Exchange 
anticipates that a minimum of 150,000 Biotech HOLDRs will be required 
to be outstanding when CHX trading begins. The Exchange understands 
that approximately 4.5 million Biotech HOLDRS were outstanding on 
November 24, 1999, the date the receipts were first traded on the Amex.
    Continued Listing. Under applicable listing standards, the Exchange 
will consider the suspension of trading in, or removal from listing of, 
Biotech HOLDRs 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 the receipts issued and outstanding is less than $1,000,000; 
or (4) if any other event occurs, or any other condition exist, 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 those trust issued 
receipts for trading on the Exchange.
    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.
iv. Exchange Rules and Procedures Applicable to the Trading of Biotech 
HOLDRs
    Trust issued receipts, including Biotech HOLDRs, 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. \6\ Exchange equity margin rules will apply.
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    \6\ There are two exceptions to this general principle. First, 
because 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 the Commission has provided an exemption from the short sale 
rule, Rule 10a-1 under the Act, for transactions in Internet HOLDRs. 
17 CFR 240.10a-1. To the extent that this exemption also applies to 
Biotech HOLDRs, the Exchange will issue a notice to its members 
detailing the terms of the exemption.

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[[Page 5008]]

    Biotech HOLDs will trade in the minimum fractional increments 
described in CHX Article XX, Rule 22. To the extent that Biotech HOLDRs 
are also traded on the Amex, those receipts will trade at a minimum 
variation of \1/16\th of $1.00 trust issued receipts selling at or 
above $.25 and \1/32\nd of $1.00 for 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 Biotech HOLDRs will be 
similar to the procedures used for portfolio depository receipts and 
will incorporate and rely upon existing CHX surveillance systems.
    Prior to the commencement of trading of Biotech HOLDRs and any 
other trust issued receipt, the Exchange will distribute a circular to 
its members and member organizations alerting them to the unique 
characteristics of trust 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 extent 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.
v. Disclosure to Customers
    As with Internet HOLDRs, the Exchange will require its members to 
provide all purchasers of newly issued Biotech HOLDRs and other trust 
issued receipts with a prospectus for that series of trust issued 
receipts. The Exchange also notes that, under federal securities laws, 
all investors in trust issued receipts who purchase in the initial 
offering are required to receive a prospectus and that any person 
purchasing a trust issued receipt directly from the trust (by 
delivering the underlying securities to the trust) is also required to 
receive a prospectus.
vi. Trading of Biotech HOLDRs
    General Information. Trust issued receipts are unleveraged 
instruments and therefore do not possess many 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 presented by the receipt.
    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 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 trust issued receipts deviates enough from 
the portfolio of deposited securities to create a material discount or 
premium, and arbitrage opportunity is created allowing the arbitrageur 
to either buy trust issued receipts 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.
    Issuance and Cancellation of Biotech HOLDRs. A round lot of 100 
Biotech HOLDRs represents a holder's individual and undivided 
beneficial ownership interest in the whole number of securities 
represented by the receipt. The trust will issue and cancel, and an 
investor may obtain, hold, trade and surrender, Biotech HOLDRs only in 
a round lot of 100 trust issued receipts and round-lot multiples.\7\ 
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.
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    \7\ 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 (but not around-lot multiple) will 
be filled to the extent of the largest round-lot multiple, rejecting 
the remaining odd lot. For example, an order 50 trust issued 
receipts will be rejected and an order for 1,050 trust issued 
receipts will be executed in part (1,000) and rejected in part (50).
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    An investor may obtain trust issued receipts by either purchasing 
them on an exchange or by delivering to the trustee, during normal 
business hours, 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.
    Maintenance of the Biotech 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 Biotech HOLDRs prospectus, under no circumstances will a new 
company be added to the group of issuers of the underlying securities.
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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 Biotech HOLDRs 
prospectus, the securities underlying the trust issued receipts will be 
automatically distributed to the beneficial owners of the receipts in 
four circumstances, called ``reconstitution events'':
    (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;

[[Page 5009]]

    (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 merger, consolidation or other 
corporate combination is between companies whose securities are already 
included in the trust issued receipts as underlying 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 reconstituion 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.
    Termination of the Trust. As described in the Biotech HOLDRs 
prospectus, the trust will terminate on the earliest of the following 
occurrences: (1) 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; (2) 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; (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) of the 
Act \9\ in 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 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 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-99-26 and 
should be submitted by [insert date 21 days from date of publication].

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

A. Generally

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act \10\ and the rules 
and regulations thereunder applicable to a national securities 
exchange. Specifically, the Commission finds, as it did in the orders 
approving the listing and trading of trust issued receipts generally, 
and Internet HOLDRs and Biotech HOLDRs specifically,\11\ that the 
proposal to list and trade Biotech 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 by allowing them to purchase and sell a single security 
replicating the performance of a broad portfolio of biotechnology 
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, 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 Securities Exchange Act Release No. 41892 (September 
21, 1999), 64 FR 52559 (September 29, 1999) (approving listing and 
trading of trust issued receipts and Internet HOLDRs on the Amex); 
Securities Exchange Act Release No. 42159 (November 19, 1999), 64 FR 
66947 (November 30, 1999) (approving listing and trading of Biotech 
HOLDRs on the Amex); and Securities Exchange Act Release No. 42056 
(October 22, 1999), 64 FR 58870 (November 1, 1999) (approving 
listing and trading of trust issued receipts and Internet HOLDRs on 
the CHX pursuant to UTP).
    \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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    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 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 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 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

[[Page 5010]]

securities.\13\ Nevertheless, the 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 issued receipts whether listed or pursuant to UTP, 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 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 to trade Biotech 
HOLDRs meets all of the specific criteria and listing standards that 
were approved in the Amex order approving the listing and trading of 
Biotech HOLDRs, pursuant to UTP. \14\ Biotech HOLDRs 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. 
\15\
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    \14\ See supra, note 11.
    \15\ 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 delisting criteria 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 representation that Biotech HOLDRs will not trade at a 
material discount or premium in relation to the overall 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 has developed surveillance procedures for trust 
issued receipts that 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 of Biotech HOLDRs, 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 Biotech HOLDRs, including a statement regarding 
their redeemability and method of creation. The Commission notes that 
all investors in Biotech HOLDRs who purchase in the initial offering 
will receive a prospectus. In addition, anyone purchasing Biotech 
HOLDRs directly from the trust (by delivering the underlying securities 
to the trust) will also receive a prospectus. Finally, all CHX member 
firms who purchase Biotech HOLDRs 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 notes the Exchange members' prospectus 
delivery requirements, and highlights the characteristics of Biotech 
HOLDRs. The circular also will inform members of Exchange policies 
regarding trading halts in Biotech HOLDRs.

D. Accelerated Approval

    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 Biotech HOLDRs pursuant to UTP 
privileges, will provide investors with a convenient and less expensive 
ways 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 products. Specifically, the Commission believes 
that by increasing the availability of trust issued receipts, and in 
particular Biotech HOLDRs, as an investment tool, the CHX's proposal 
should help provide investors with increased flexibility in satisfying 
their investment needs. This is achieved by allowing investors 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 Biotech HOLDRs, 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. Moreover, 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 Biotech HOLDRs at the Amex, under rules that are substantially 
similar to CHX Article XXVIII, Rule 27. The trading requirements of 
trust issued receipts at the CHX are 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.\16\The 
Commission believes that the trading of this product raises no new 
regulatory issues and, except for the composition of securities 
deposited in trust, the Biotech HOLDRs are structurally the same as the 
Internet HOLDRs trust issued receipts previously approved by the 
Commission by listing and trading on the Amex and CHX. Accordingly, the 
Commission finds good cause for approving the proposed rule change 
prior to the thirtieth day after the date of publication of notice of 
the filing thereof in the Federal Register.
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    \16\ See supra, note 11.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\that the

[[Page 5011]]

proposed rule change (SR-CHX-99-26), is hereby approved on an 
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accelerated basis.


    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2287 Filed 2-1-00; 8:45 am]
BILLING CODE 8010-01-M