[Federal Register Volume 65, Number 60 (Tuesday, March 28, 2000)]
[Notices]
[Pages 16433-16437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7533]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42543; File No. SR-Amex-99-49]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by American Stock Exchange LLC Relating to Investment Series of 
the iSharesSM Trust Based on Foreign Stock Indexes

March 17, 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 28, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III 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.
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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 Amex proposes to list the trade under rules 1000A et seq. 
(``Index Fund Shares'') series of the iSharesSM Trust based 
on stock indexes that consist in whole or part of foreign stocks. The 
text of the proposed rule change is available at the Office of the 
Secretary, the Amex 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 self-regulatory organization 
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 IV below. The self-regulatory organization 
has prepared summaries, set forth in section 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
    Amex rules 1000A et seq. provide for the listing and trading of 
Index Fund Shares, which are shares issued by an open-end management 
investment company that seeks to provide investment results that 
correspond generally to the price and yield performance of a specified 
foreign or domestic index.\3\ The Exchange currently lists under Amex 
rules 1000A et seq. seventeen series of World Equity Benchmark 
SharesSM (``WEBSTM'') based on Morgan Stanley 
Capital International foreign stock indices; \4\ and nine series of 
Select Sector SPDRs based on Select Sector Indexes comprised 
of stocks representing various industry sectors and included in the S&P 
500 Index.\5\
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    \3\ See Securities Exchange Act Release No. 36947 (March 8, 
1996), 61 FR 10606 (March 14, 1996).
    \4\ ``World Equity Benchmark Shares'' and ``WEBS'' are service 
marks of Morgan Stanley Group, Inc. See Securities Exchange Act 
Release No. 41983 (October 6, 1999), 64 FR 56008 (October 15, 1999).
    \5\ ``S&P'', ``S&P 500'' and 
``SPDRs'' are trademarks of The McGraw-Hill Companies, 
Inc., and ``Selected Sector SPDR'' is a service mark of The McGraw-
Hill Companies, Inc., See Securities Exchange Act Release 40479 
(December 4, 1998), 63 FR 68483 (December 11, 1998).
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    The Exchange proposes to list and trade under Amex rules 1000A et 
seq. the following investment series (each a ``Fund'' and collectively, 
the ``Funds'') of the iSharesSM Trust \6\ (``Trust'') based 
on indexes (referred to herein as ``Underlying Indices'') comprised in 
whole or part of equity securities issued by foreign issuers as 
follows: (1) iShares S&P Europe 350 Fund and (2) iShares S&P/TSE 60 
Fund.
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    \6\ The Trust has filed with the Commission an Application for 
Orders (``Application'') under Sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (``1940 Act'') as amended, for the 
purpose of exempting the Trust from various provisions of the 1940 
Act and Amex Rules thereunder (File No. 812-11598).
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    In addition to the Funds listed above, the Trust's Investment 
Company Act of 1940 (``1940 Act'') exemptive application requests that 
the exemptive relief sought in the Application apply to Funds (referred 
to herein as ``Additional Funds'') based on the following indexes: (1) 
S&P Euro Index; (2) Dow Jones Global Media Sector Index; (3) Dow Jones 
Global Pharmaceuticals Sector Index; and (4) Dow Jones Global 
Telecommunications Sector Index. Funds on these indexes will not be the 
subject of the Trust's initial registration statement, which will 
cover, among other Funds,\7\ the iShares S&P Europe 350 Fund and the 
iShares S&P/TSE 60 Fund. The Exchange proposes to list and trade the 
Additional Funds, listed above, that are the subject of the Trust's 
1940 Act exemptive application after an effective registration 
statement is in place for those funds. All descriptions herein that 
apply to the two proposed

[[Page 16434]]

iShares Funds also apply to the Additional Funds.
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    \7\ See File No. SR-Amex-99-48 for a description of iShares 
Funds based on indexes composed of stocks traded in the U.S.
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    A detailed description of each Underlying Index for the iShares 
Funds and the Additional Funds, as prepared by the compilers of the 
Underlying Indices, is available in the Commission's public reference 
room as Exhibit B. These descriptions include information regarding 
component selection criteria, issue changes, index maintenance, index 
availability, index description, and industry group distribution by 
market capitalization.
    ``Passive'' or Indexing Investment Approach. The investment 
objective of each Fund is to provide investment results that, before 
expenses, correspond generally to the price and yield performance of 
companies in the Underlying Index. In seeking to achieve the respective 
investment objective of each Fund, Barclays Global Fund Advisors, 
(``the Adviser''), will utilize some variety of ``passive'' or indexing 
investment approach. Certain Funds will use a replication strategy by 
which an index fund seeks to match an Underlying Index's performance, 
before fees and expenses, by buying and selling all of the Underlying 
Index's securities in the same proportion as they are reflected in the 
Underlying Index. These Funds reserve the right not to invest in every 
security in the Underlying Index if the Adviser believes it is not 
practical to do so under the circumstances. It is anticipated that the 
iShares S&P/TSE 60 Fund will use a replication strategy.
    Representative Portfolio Sampling Approach. Other Funds may not 
hold all or most of the securities in the Underlying Index (``Component 
Securities''). This may be the case, for example, when there are 
substantial costs involved in compiling an entire Underlying Index 
basket that contains scores of Component Securities or, in certain 
instances, when a Component Security is illiquid. In cases such as 
these, a Fund will attempt to hold a representative sample of the 
Component Securities in the Underlying Index, which will be selected by 
the Adviser utilizing quantitative analytical models in a strategy 
known as ``representative portfolio sampling.'' It is anticipated that 
the iShares S&P Europe 350 Fund will use this technique.
    No Fund will concentrate (i.e., hold more than 25% of its assets in 
the stocks of a single industry or a group of industries) its 
investments in issuers of one or more particular industries, except 
that a Fund will concentrate to the extent that its Underlying Index 
concentrates in the stocks of such particular industry or industries.
    Under this strategy, each security is considered for inclusion in a 
Fund based on its contribution to certain capitalization, industry, and 
fundamental investment characteristics. The Adviser will seek to 
construct the portfolio of a Fund so that it will have capitalization, 
industry and fundamental investment characteristics that perform like 
those in the corresponding Underlying Index. From time to time, 
adjustments, will be made in the portfolio of each Fund in accordance 
with changes in the composition of the Underlying Index, or to maintain 
compliance as a ``regulated company'' under the Internal Revenue 
Code.\8\ Certain of these Funds may also hold some securities that are 
not components of the relevant Underlying Index if the Adviser decides 
it is appropriate in view of such Funds' investment objectives and 
investment or tax constraints. If the representative portfolio sampling 
technique is used, a Fund will not be expected to track its Underlying 
Index with the same degree of accuracy as would an investment vehicle 
that invested in every Component Security of the Underlying with the 
same weighting as the Underlying Index. It is anticipated that, over 
time, the Adviser in such case will be able to employ representative 
portfolio sampling techniques such that the expected tracking error of 
a Fund relative to the performance of its Underlying Index will be less 
than 5 percent.
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    \8\ In order for a Fund to qualify for tax treatment as a 
regulated investment company, it must meet several requirements 
under the Internal Revenue Code. Among these is the requirement 
that, at the close of each quarter of the Fund's taxable year, (1) 
at least 50 percent of the market value of the Fund's total assets 
must be represented by cash items, U.S. government securities, 
securities of other regulated investment companies and other 
securities, with such other securities limited for purposes of this 
calculation in respect of any one issuer to an amount not greater 
than 5 percent of the value of the Fund's assets and not greater 
than 10 percent of the outstanding voting securities of such issuer, 
and (2) not more than 25 percent of the value of its total assets 
may be invested in the securities of any one issuer, or of two or 
more issuers that are controlled by the Fund (within the meaning of 
Section 851(b)(4)(B) of the Internal Revenue Code) and that are 
engaged in the same or similar trades or business or related trades 
or business (other than U.S. government securities or the securities 
of other regulated investment companies.)
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    Procedures for Creation and Redemption of iShares of the Funds. 
Procedures for the creation and redemption of iShares of the proposed 
Funds similar to procedures for creation and redemption of certain 
other Index Fund Shares based on a foreign stock index currently listed 
on the Amex (i.e., WEBS), which do not utilize processes of the 
National Securities Clearing Corporation (``NSCC'') in connection with 
the transmittal of trade instructions, the transfer of component 
securities and the cash component, and the transfer of iShares on 
creation and redemption. In contrast, creation and redemption 
procedures applicable to Portfolio Depositary Receipts, such as SPDRs 
and Index Fund Shares, such as Select Sector SPDRs based on domestic 
stock indexes, utilize such NSCC processes.
    Purchase or Creation of Creation Unit Aggregations. The Trust will 
issue and sell iShares of each Fund only in Creation Unit Aggregations 
\9\ on a continuous basis through the distributor, SEI Investments 
Distribution Company (``the Distributor''), without a sales load at 
their net asset value (``NAV'') next determined after receipt, on any 
business day, of an order in proper form. The consideration for 
purchase of Creation Unit Aggregations of a Fund generally consists of 
the in-kind deposit of a designated portfolio of equity securities (the 
``Deposit Securities'') per each Creation Unit Aggregation of the 
stocks and weightings in the relevant Fund's portfolio (``Fund 
Securities'') and an amount of cash (the ``Cash Component'') computed 
as described below. Together, the Deposit Securities and the Cash 
Component constitute the ``Fund Deposit,'' which represents the minimum 
initial and subsequent investment amount for a Creation Unit 
Aggregation of any Fund. The Trust will impose a Transaction Fee in 
connection with the creation and redemption of Creation Unit 
Aggregations.
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    \9\ iShares cannot be redeemed individually but must be redeemed 
in Creation Unit Aggregations applicable to the specific Fund.
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    The Cash Component is an amount equal to the Balancing Amount. The 
``Balancing Amount'' is an amount equal to the difference between the 
NAV of the iShares (per Creation Unit Aggregation) and the ``Deposit 
Amount,'' an amount equal to the market value of the Deposit 
Securities. If the Balancing Amount is a positive number, (i.e., the 
NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Cash 
Component will be paid to the Trust by the creator. If the Balancing 
Amount is a negative number, (i.e., the NAV per Creation Unit. 
Aggregation is less than the Deposit Amount), the creator will receive 
cash in an amount equal to the differential.
    The Adviser, through NSCC will make available on each Business Day 
immediately prior to the opening of business on the Amex, currently 
9:30 a.m., New York time, the list of the

[[Page 16435]]

names and the required number of shares of each Deposit Security to be 
included in the current Fund Deposit for each Fund. Such Fund Deposit 
is applicable, subject to any adjustments, to effect creations of 
Creation Unit Aggregations of a given Fund, until such time as the 
next-announced composition of the Deposit Securities is made available.
    It is anticipated that the deposit of Deposit Securities and the 
Cash Component in exchange for iShares will be made primarily by 
institutional investors, arbitrageurs, and the Exchange specialist. 
Creation Unit Aggregations are separable upon issuance into identical 
shares that are listed and traded on the Amex.
    Redemption of Creation Unit Aggregations. Shares may be redeemed 
only in Creation Unit Aggregations at their NAV next determined after 
receipt of a redemption request in proper form by the Fund through the 
Distributor and only on a business day. Immediately prior to the 
opening of business on the Amex on each business day, the Adviser, 
through NSCC, will identity the Fund Securities that will be applicable 
(subject to possible amendment or correction) to redemption requests 
for each Fund received in proper form on that day. Fund securities 
received on redemption may not be identical to Deposit Securities that 
are applicable to creations of Creation Unit Aggregations.
    Unless cash redemptions are available or specified for a Fund, the 
redemption proceeds for a Creation Unit Aggregation generally consist 
of Fund Securities--as announced by the Adviser on the business day of 
the request for redemption received in proper form--plus cash in an 
amount equal to the difference between the NAV of the iShares being 
redeemed, as next determined after a receipt of a request in proper 
form, and the value of the Fund Securities (the ``Cash Redemption 
Amount'').
    If it is not possible to effect deliveries of the Fund Securities, 
the Trust may in its discretion exercise its option to redeem iShares 
in cash, and the redeeming beneficial owner will be required to receive 
redemption proceeds in cash. In addition, an investor may request a 
redemption in cash which the Fund may, in its sole discretion, permit. 
In either case, the investor will receive a cash payment equal to the 
NAV of its iShares based on the NAV of iShares of the relevant Fund 
next determined after the redemption request is received in proper 
form. A Fund may also, in its sole discretion, upon request of a 
shareholder, provide the redeemer a portfolio of securities that 
differs from the exact composition of the Fund Securities but does not 
differ in NAV.
    Availability of Information Regarding Fund Shares and Underlying 
Indices. In addition to the list of names and amount of each security 
constituting the current Deposit Securities of the Portfolio Deposit, 
the Cash Component effective as of the previous business day, per 
outstanding share of each Fund, is expected to be made available each 
business day. The Exchange expects to disseminate, every 15 seconds 
during regular Amex trading hours, through the facilities of the 
Consolidated Tape Association (``CTA''), an amount per Fund Share 
representing the sum of the estimated Cash Component effective through 
and including the previous business day, plus the current value of the 
Deposit Securities in U.S. dollars, on a per share basis.
    The value of each Underlying Index will be updated intra-day on a 
real time basis as individual Component Securities change in price. 
These intra-day values of the Underlying Indices will be disseminated 
every 15 seconds throughout the trading day. In addition, these 
organizations will disseminate a value for each Underlying Index once 
each trading day, based on closing prices in the relevant exchange 
market. Each Fund will make available on a daily basis the names and 
required number of shares of each of the Deposit Securities in a 
Creation Unit Aggregation, as well as information regarding the cash-
balancing amount. The NAV for each Fund will be calculated and 
disseminated daily. In addition, the Adviser maintains a website that 
provides information about the returns and methodology of various 
indices, and will include the relevant Underlying Index for each Fund. 
The Trust also intends to maintain a website that will include the 
relevant prospectuses and additional quantitative information that is 
updated on a daily basis, including daily trading volume and closing 
price for each Fund. The Amex also intends to disseminate a variety of 
data with respect to each Index Series on a daily basis by means of CTA 
and Consolidated Quotation High Speed Lines, including shares 
outstanding and cash amount per Creation Unit Aggregation, which will 
be made available prior to the opening of the Amex. The closing prices 
of the Funds' Deposit Securities are readily available from, as 
applicable, the relevant exchanges, automated quotation systems, or on-
line information services such as Bloomberg or Reuters.
    Dissemination of Indicative Portfolio Value. In order to provide 
updated information relating to each Fund for use by investors, 
professionals and persons wishing to create or redeem iShares based on 
indexes with non-U.S. components, it is expected that the Exchange will 
disseminate through the facilities of the CTA an updated indicative 
portfolio value (``Value'') for each of the Funds traded on the 
Exchange as calculated by a securities information provider (``Value 
calculator''). It is anticipated that the methodology utilized in 
connection with the Funds will be similar to procedures used to 
calculate the Value for WEBS currently trading on the Exchange. The 
Value will be disseminated on a per iShares basis every 15 seconds 
during regular Amex trading hours of 9:30 a.m. to 4:15 p.m. New York 
time. The equity securities values included in the Value are the values 
of the Deposit Securities, which are the same as the portfolio that is 
to be utilized generally in connection with creations and redemptions 
of iShares in Creation Unit Aggregations on that day. The equity 
securities included in the Value reflects the same market 
capitalization weighting as the Deposit Securities in the portfolio for 
the particular iShares Fund. In addition to the value of the Deposit 
Securities for each Fund, the Value includes the Cash Component. The 
Value also reflects changes in currency exchange rates between the U.S. 
dollar and the applicable home foreign currency.
    The Value may not reflect the value of all securities included in 
the applicable Underlying Index. In addition, the Value does not 
necessarily reflect the precise composition of the current portfolio of 
securities held by each Fund at a particular point in time. Therefore, 
the Value on a per iShares basis disseminated during Amex trading hours 
should not be viewed as a real time updated of the NAV of a particular 
Fund, which is calculated only once a day. While the Value that will be 
disseminated by the Amex at 9:30 a.m. is expected to be generally very 
close to the most recently calculated Fund NAV on a per iShares basis, 
it is possible that the value of the portfolio of securities held by a 
Fund may diverge from the Deposit Securities Values during any trading 
day. In such case, the Value will not precisely reflect the value of 
the Fund portfolio.
    However, during the trading day, the Value can be expected to 
closely approximate the value per Fund share of the portfolio of 
securities for each Fund except under unusual circumstances (e.g., in 
the case of extensive

[[Page 16436]]

rebalancing of multiple securities in a Fund at the same time by the 
Advisor). The circumstances that might cause the Value to be based on 
calculations different from the valuation per Fund share of the actual 
portfolio of a Fund would not be different than circumstances causing 
any index fund or trust to diverge from an underlying benchmark index.
    The Exchange believes that dissemination of the Value based on the 
Deposit Securities provides additional information regarding each Fund 
that would not otherwise be available to the public and is useful to 
professionals and investors in connection with iShares trading on the 
Exchange or the creation or redemption of iShares.
    For each Fund the Value calculator will utilize closing prices (in 
applicable foreign currency prices) in the principles foreign market(s) 
for securities in the Fund portfolio, and convert the price to U.S. 
dollars. This Value will be updated every 15 seconds during the Amex 
trading hours to reflect change in currency exchange rates between the 
U.S. dollars and the applicable foreign currency. The Value will also 
include the applicable Cash Component for each Fund.
    For Funds that include foreign stocks, the principal foreign 
markets for which have trading hours overlapping regular Amex trading 
hours, the Value calculator will update the applicable Value every 15 
seconds to reflect price changes in the applicable foreign market or 
markets, and convert such prices into U.S. dollars based on the current 
currency exchange rate. When the foreign market or markets are closed 
but the Amex is open, the Value will be updated every 15 seconds to 
reflect changes in currency exchange rates after the foreign markets 
close.
    Other Characteristics of iShares. It is anticipated that a minimum 
of two Creation Unit Aggregations for each Fund will be outstanding at 
the commencement of trading on the Exchange. The number of shares per 
Creation Unit Aggregation is anticipated to be approximately 50,000 
shares.
    Funds shares will be registered in book-entry form through the 
Depository Trust Company (``DTC''). Trading in Funds shares on the 
Exchange will be effected until 4:15 p.m. each business day. The 
minimum trading increment under Amex rule 127 for Fund Shares will be 
\1/64\ of $1.00.
    Dividends from net investment income will be declared and paid at 
least annually by each Fund. Distributions of realized securities 
gains, if any, generally will be declared and paid at least once a 
year, but each Fund may make distributions on a more frequent basis to 
comply with Internal Revenue Code distribution requirements. Certain of 
the Funds intend to make the DTC book-entry Dividend Reinvestment 
Service available for use by beneficial owners of the Fund through DTC 
Participants for reinvestment of their cash proceeds.
    The Exchange, in an information circular, will inform member firms, 
prior to commencement of trading, that investors purchasing iShares 
will be required to receive a fund prospectus prior to or concurrently 
with the confirmation of a transaction therein.\10\
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    \10\ In its 1940 Act exemptive application, the Trust requests 
relief from the prospectus delivery requirements imposed by Section 
24(d) of the 1940 Act. The Exchange will inform member firms of the 
prospectus delivery requirements applicable at commencement of 
trading.
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    Original and Annual Listing Fees. The Amex original listing fee 
applicable to the listing of iShares is $5,000 for each Fund. In 
addition, the annual listing fee under Section 141 of the Amex Company 
Guide will be based upon the year-end aggregate number of outstanding 
iShares for all Funds combined.
    Stop and Stop Limit Orders. Amex rule 154, Commentary .04(c) 
provides that stop and stop limit orders to buy or sell a security 
other than an option, which is covered by Amex rule 950(f) and 
Commentary thereto, the price of which is derivatively priced based 
upon an other security or index of securities, may with the prior 
approval of a Floor Official be elected by a quotation, as set forth in 
Commentary .04(c) (i-v). The Exchange has designated iShares as 
eligible for this treatment.\11\
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    \11\ See Securities Act Release No. 29063, note 9, (SR-Amex-90-
31) regarding Exchange designation of equity derivative securities 
as eligible for such treatment under Amex Rule 154, Commentary 
.04(c).
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    Trading Halts. In addition to other factors that may be relevant, 
the Exchange may consider factors such as those set forth in Amex rule 
918C(b) in exercising its discretion to halt or suspend trading in a 
Fund. These factors would include: (1) The extent to which trading is 
not occurring in stocks underlying the specific underlying index; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
iShares will halt in the event that market-wide circuit breakers are 
triggered pursuant to Amex rule 117.

2. Statutory Basis

    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and, in general to protect 
investors and the public interest.

B. Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
burden on competition.

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

    The Exchange neither solicited nor received written comments.

III. Date of Effectiveness of the Proposed Rule Change and timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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, 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 also will be

[[Page 16437]]

available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Amex-99-49 and 
should be submitted by April 18, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7533 Filed 3-27-00; 8:45 am]
BILLING CODE 8010-01-M