[Federal Register Volume 65, Number 131 (Friday, July 7, 2000)]
[Notices]
[Pages 42041-42048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17148]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42988; File No. SR-BSE-00-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 by the Boston Stock Exchange, Inc. Relating to Index Fund Shares

June 28, 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 May 9, 2000, the Boston Stock Exchange, Inc. (``BSE'' 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 No. 1 was filed on June 12, 2000.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons, and to approve the proposed rule change, as 
amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which has been incorporated into the 
proposed rule change, the Exchange made certain typographical 
corrections, modified several aspects of the proposed rule text, and 
replaced references to ``World Equity Benchmark Shares'' (``WEBS'') 
with references to ``Morgan Stanley Capital International Index 
Funds'' (``iShares MSCI Index Funds'' or ``iShares MSCI''). See 
Letter from Esher M. Radovsky, Listings Analyst, BSE, to Andrew 
Shipe, Attorney, Division of Market Regulation (``Division''), SEC, 
dated June 9, 2000 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt listing standards and trading rules 
for Index Fund Shares, including generic listing standards which would 
permit the Exchange to trade, either by listing or pursuant to unlisted 
trading privileges (``UTP''), series of Index Fund Shares pursuant to 
Rule 19b-4(e) under the Act.\4\ Once these listing standards are 
approved, the Exchange intends to trade SPDRs and iShares MSCI \5\ 
pursuant to unlisted trading privileges. Below is the text of the 
proposed rule change. New language is italicized.
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    \4\ 15 U.S.C. 78s(b).
    \5\ The BSE represents that the American Stock Exchange LLC 
(``AMEX'') has renamed all Index Shares based in individual foreign 
countries from ``World Equity Benchmark Shares'' to ``Morgan Stanley 
Capital International Index Funds'' (``iShares MSCI Index Funds'' or 
``iShares MSCI''). This proposal extends only to those iShares MSCI 
that were formerly termed ``WEBs.'' The BSE represents that there 
has been no substantive change to this product. See Amendment No. 1, 
supra, note 3.
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* * * * *

Chapter XIV-B

Index Fund Shares

Applicability

    Section 1. (a) This Chapter is applicable only to Index Fund 
Shares. Except to the extent inconsistent with this Chapter, or unless 
the context context otherwise requires, the provisions of the 
Constitution and all other rules and policies of the Exchange shall be 
applicable to the trading on the Exchange of Index Fund Shares. Index 
Fund Shares are included within the definition of ``security'' or 
``securities'' as such terms are used in the Constitution and Rules of 
the Exchange. 

Definitions

    Section 2. The following terms shall have the meanings specified 
herein:

[[Page 42042]]

    (a) The term ``Index Fund Share'' means a security (i) that is 
issued by an open-end management investment company based on a 
portfolio of stocks that seeks to provide investment results that 
correspond generally to the price and yield performance of a specified 
foreign or domestic stock index; (ii) that is issued by such an open-
end management investment company in a specified aggregate minimum 
number in return for a deposit of specified numbers of shares of stock 
and/or a cash amount with a value equal to the next determined net 
asset value; and (iii) that, when aggregated in the same specified 
minimum number, may be redeemed at a holder's request by such open-end 
investment company which will pay to the redeeming holder the stock 
and/or cash with a value equal to the next determined net asset value.
    (b) The term ``Reporting Authority'' with respect to a particular 
series of Index Fund Shares means the Exchange, or an institution or 
reporting service designated by the Exchange, as the official source 
for calculating and reporting information relating to such series, 
including, but not limited to, any current index or portfolio value; 
the current value of the portfolio of any securities required to be 
deposited in connection with issuance of Index Fund Shares; the amount 
of any dividend equivalent payment or cash distribution to holders of 
Index Fund Shares, net asset value, or other information relating to 
the issuance, redemption or trading or Index Fund Shares. Nothing in 
this section shall imply that an institution or reporting service that 
is the source for calculating and reporting information relating to 
Index Fund Shares must be designated by the Exchange, the term 
``Reporting Authority'' shall not refer to an institution or reporting 
service not so designated.

Disclosure

    Section 3. The Exchange requires that members and member 
organizations provide to all purchasers of newly issued Index Fund 
Shares a prospectus for the series of Index Fund Shares.

Designation

    Section 4. The trading of Index Fund Shares based on one or more 
securities, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case-by-case basis. Each issue of 
Index Fund Shares shall be based on each particular stock index or 
portfolio shall be designated as a separate series and shall be 
identified by a unique symbol. The securities that are included in a 
series of Index Fund Shares shall be selected by the Exchange or its 
agent, a wholly-owned subsidiary of the Exchange, or by such other 
person, as shall have authorized use of such index. Such index may be 
revised from time to time as may be deemed necessary or appropriate to 
maintain the quality and character of the index.

Initial and Continued Listing and/or Trading

    Section 5. Each series of Index Fund Shares will be traded on the 
Exchange, whether by listing or pursuant to unlisted trading 
privileges, subject to application of the following criteria:
    (a) Commencement of Trading. For each Series, the Exchange will 
establish a minimum number of Index Fund Shares required to be 
outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading. Following the initial twelve month period 
following commencement of trading on the Exchange of a series of Index 
Fund Shares, the Exchange will consider the suspension of trading, the 
removal from listing, or termination of unlisted trading privileges for 
such series under any of the following circumstances:
    (i) If there are fewer than 50 beneficial holders of the series of 
Index Fund Shares for 30 or more consecutive trading days;
    (ii) If the value of the index or portfolio of securities on which 
the series of Index Fund Shares is based is no longer calculated or 
available; or
    (iii) If such other event shall occur or condition exists which in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    Upon termination of an open-end management investment company, the 
Exchange requires that Index Fund Shares issued in connection with such 
entity be removed from Exchange Listing.
    (c) Voting. Voting rights shall be as set forth in the applicable 
open-end management investment company prospectus.
    * * * Interpretation and Policies:
    .01 The Exchange may approve a series of Index Fund Shares for 
listing pursuant to Rule 19b-4(e) under the Securities Exchange Act of 
1934 provided each of the following criteria is satisfied:
    (a) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Index Fund Shares each component of an index or 
portfolio underlying a series of Index Fund Shares shall meet the 
following criteria as of the date of the initial deposit of securities 
to the fund in connection with the initial issuance of shares of such 
fund:
    (i) Component stocks that in the aggregate account for at least 90% 
of the weight of the index or portfolio shall have a minimum market 
value of at least $75 million;
    (ii) The component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio;
    (iii) The most heavily weighted component stock cannot exceed 25% 
of the weight of the index or portfolio, and the five most heavily 
weighted component stocks cannot exceed 65% of the weight of the index 
or portfolio;
    (iv) The underlying index or portfolio must include minimum of 13 
stocks; and
    (v) All securities in an underlying index or portfolio must be 
listed on a national securities exchange or The Nasdaq Stock Market 
(including the Nasdaq SmallCap Market).
    (b) Index Methodology and Calculation. (i) The index underlying a 
series of Index Fund Shares will be calculated based on either the 
market capitalization, modified market capitalization, price, equal-
dollar or modified equal-dollar weighting methodology; (ii) If the 
index is maintained by a broker-dealer, the broker-dealer shall erect a 
``fire wall'' around the personnel who have access to information 
concerning changes and adjustments to the index and the index shall be 
calculated by a third party who is not a broker-dealer; and (iii) The 
current index value will be disseminated every 15 seconds over the 
Consolidated Tape Association's Network B.
    (c) Disseminated Information. The Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. This may be 
based, for example, upon current information regarding the required 
deposit of securities and cash amount to permit creation of new shares 
of the series or upon the index value.
    (d) Initital Shares Outstanding. A minimum of 100,000 shares of a 
series of Index Fund Shares is required to be outstanding at 
commencement of trading.
    (e) Minimal Fractional Trading Variation. The minimum fractional 
trading variation may vary among different series of Index Fund Shares 
but will be set at \1/16th\, \1/32nd\ or \1/64th\ of $1.00.
    (f) Hours of Trading. Trading will occur between 9:30 a.m. and 
either 4:00

[[Page 42043]]

p.m. or 4:15 p.m. for each series of Index Fund Shares, as specified by 
the Exchange.
    (g) Surveillance Procedures. The Exchange will utilize existing 
surveillance procedures for Index Fund Shares.
    (h) Applicability of Other Rules. The provisions of Chapter XXIV-B 
et seq. will apply to all series of Index Fund Shares.
    02. The following paragraphs only apply to series of Index Fund 
Shares that are the subject of an order by the Securities and Exchange 
Commission exempting such series from certain prospectus delivery 
requirements under Section 24(d) of the Investment Company Act of 1940. 
The Exchange will inform members and member organizations regarding 
application of these provisions to a particular series of Index Fund 
Shares by means of an Information Circular prior to commencement of 
trading in such series.
    The Exchange requires that members and member organizations provide 
to all purchasers of a series of Index Fund Shares a written 
description of the terms and characteristics of such securities, in a 
form prepared by the open-end management investment company issuing 
such securities, not later than the time a confirmation of the first 
transaction in such series is delivered to such purchaser. In addition, 
members and member organizations shall include such a written 
description with any sales material relating to a series of Index Fund 
Shares that is provided to customers or the public. Any other written 
materials provided by a member or member organization to customers or 
the public making specific reference to a series of Index Fund Shares 
as an investment vehicle must include a statement in substantially the 
following form: ``A circular describing the terms and characteristics 
of [the series of Index Fund Shares] has been prepared by the [open-end 
management investment company name] and is available from \6\ your 
broker or the Exchange. It is recommended that you obtain and review 
such circular before purchasing [the series of Index Fund Shares]. In 
addition, upon request you may obtain from your broker a prospectus for 
[the series of Index Fund Shares].''
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    \6\ The Exchange changed the word ``for'' to ``from'' in the 
proposed rule text. Telephone conversation between Esther M. 
Radovsky, Listings Analyst, BSE, and Heather Traeger and Andrew 
Shipe, Attorneys, Division, SEC, on June 28, 2000.
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    A member of member organization carrying an omnibus account for a 
non-member broker-dealer is required to inform such non-member that 
execution of an order to purchase a series of Index Fund Shares for 
such omnibus account will be deemed to constitute agreement by the non-
member to make such written description available to its customers on 
the same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, member or member organization shall 
also provide a prospectus for the particular series of Index Fund 
Shares.
    .03 The Exchange will trade, pursuant to unlisted trading 
privileges, Index Fund Shares of Select Sector SPDR Funds, which are 
known as ``Select Sector SPDRs.''
    .04 The Exchange will trade, pursuant to unlisted trading 
privileges, Index Fund Shares based on Morgan Stanley Capital 
International (MSCI) Index Funds, which are known as ``iShares MSCI.''
    .05 The minimum fractional trading variation will be \1/16th\ of 
$1.00 for iShares MSCI and \1/64th\ of $1.00 for Select Section SPDRs.
* * * * *

Chapter XV

Specialists

Section 11. Restrictions on Transactions by Specialist

    * * *Interpretation and Policies:
    .01 Specialists may only redeem and create Index Fund Shares on the 
same terms and conditions as any other investor and only at the net 
asset value (``NAV'').
    .02 Nothing in Section 11 shall be deemed to restrict a specialist 
registered in a security issued by an investment company from 
purchasing and redeeming the listed security, or securities that can be 
subdivided or converted into the listed security, from the issues as 
appropriate to facilitate the maintenance of a fair and orderly market 
in the subject security.
* * * * *

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 statement 
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
a. Listing Requirements for Index Fund Shares
    The Exchange proposes to adopt new listing and delisting 
requirements to accommodate the trading of Index Fund Shares, i.e., 
securities issued by an open-end management investment company 
(``Fund'') that seek to provide investment results that correspond 
generally to the price and yield performance of a specified foreign or 
domestic equity market index (``Index Fund Shares'' or ``Fund 
Shares''). Once the listing standards for Index Funds Shares are 
approved, the Exchange intends to trade Select Sector SPDRs and iShares 
MSCI \7\ pursuant to UTP.
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    \7\ See supra note 5.
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    Index Fund Shares will be issued by an entity registered with the 
Commission as an open-end management investment company, and which may 
be organized as a series fund providing for the creation of separate 
series of securities, each with a portfolio consisting of some or all 
of the component securities of a specified securities index. Issuances 
of Index Fund Shares by a Fund will be made only in minimum size 
aggregations or multiples thereof (``Creation Units''). The size of the 
applicable Creation Unit size aggregation will be set forth in the 
Fund's prospectus, and will vary from one series of Index Fund Shares 
to another, but generally will be of substantial size (e.g., value in 
excess of $450,000 per Creation Unit). It is expected that a Fund will 
issue and sell Index Fund Shares through a principal underwriter on a 
continuous basis at the net asset value per share next determined after 
an order to purchase Index Fund Shares in Creation Unit size 
aggregations is received in proper form. Index Fund Shares will be 
traded on the Exchange like other equity securities, and Exchange 
equity trading rules will apply to the trading of Index Fund Shares.
    The Exchange expects that Creation Unit size aggregations of Index 
Fund Shares generally will be issued in exchange for the ``in kind'' 
deposit of a specified portfolio of securities, together with a cash 
payment representing, in part, the amount of dividends accrued up to 
the time of issuance. The Exchange anticipates that such deposits will 
be made primarily by institutional investors, arbitragers, and the 
Exchange

[[Page 42044]]

specialist. Redemption of Index Fund Shares generally will be made ``in 
kind'', with a portfolio of securities and cash exchanged for Index 
Fund Shares that have been tendered for redemption. Issuances or 
redemptions also could occur for cash under specified circumstances 
(e.g., if it is not possible to effect delivery of securities 
underlying the specific series in a particular foreign country) and at 
other times in the discretion of the Fund.
    The Exchange expects that a Fund will make available on a daily 
basis a list of the names and the required number of shares of each of 
the securities to be deposited in connection with issuance of Index 
Fund Shares of a particular series in Creation Unit size aggregations, 
as well as information relating to the required cash payment 
representing, in part, the amount of accrued dividends.
    A Fund may make periodic distributions of dividends from net 
investment income, including net foreign currency gains, if any, in an 
amount approximately equal to accumulated dividends on securities held 
by the Fund during the applicable period, net expenses and liabilities 
for such period.
    Index Fund Shares will be registered in book entry form through the 
Depository Trust Company. Trading in Index Fund Shares on the Exchange 
may be effected until either 4 p.m. or 4:15 p.m. (New York time) each 
business day.

Criteria for Initial and Continued Listing

    The Exchange believes that the listing criteria proposed in its new 
rule are generally consistent with the listing standards for ``Hybrid 
Securities'', currently found in Chapter XXVII of the Exchange Rules, 
as well as the Index Fund Shares listing criteria currently used by the 
Amex.\8\
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    \8\ The Amex's listing criteria were approved by the Commission 
on March 8, 1996. See Securities Exchange Act Release No. 36947 
(March 8, 1996), 61 FR 10606 (March 14, 1996).
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    Initial Listing. If Index Fund Shares are to be listed on the 
Exchange, the Exchange will establish a minimum number of Index Fund 
Shares that must be outstanding at commencement of Exchange trading, 
and such minimum number will be included in any required submission 
under Rule 19b-4.
    Continued Listing. In connection with continued listing, the 
Exchange will consider the suspension of trading in, or removal from 
listing of, an Index upon which a series of Index Fund Shares is based 
when any of the following circumstances arise: (1) There are fewer than 
50 beneficial holders of the series of Index Fund Shares for 30 or more 
consecutive trading days; (2) the value of the index or portfolio of 
securities on which the series of Index Fund Shares is based is no 
longer calculated or available; or (3) such other event shall occur or 
condition exists which, in the opinion of the Exchange, makes further 
dealings on the Exchange inadvisable. The Exchange will not, however, 
be required to suspend or delist from trading, based on the above 
factors, any Index Fund Shares for a period of one year after the 
initial listing of such Index Fund Shares for trading on the Exchange. 
The Exchange will require that Index Fund Shares be removed from 
listing upon termination of the Fund that issued such shares.
b. Standards to Permit Trading, Either by Listing or Pursuant to UTP, 
of Index Fund Shares Pursuant to Rule 19b-4(e) under the Act
    The Exchange proposed to adopt generic listing and delisting 
standards to permit the trading, either by listing or pursuant to UTP, 
of Index Fund Shares pursuant to Rule 19b-4(e) under the Act.\9\ Rule 
19b-4(e) permits self-regulatory organizations (``SROs'') to list and 
trade new derivative products that comply with existing SRO trading 
rules, procedures, surveillance programs and listing standards, without 
submitting a proposed rule change under Section 19(b). Accordingly, the 
Exchange proposes to approve a series of Index Fund Shares for listing 
or trading, either by listing or pursuant to UTP, pursuant to Rule 19b-
4(e) under the following criteria.
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    \9\ 17 CFR 240.19b-4(e).
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    Upon the initial listing of a series of Index Fund Shares, 
component stocks that in the aggregate account for at least 90% of the 
weight of the underlying index or portfolio must have a minimum market 
value of at least $75 million. In addition, the component stocks 
representing at least 90% of the weight of the index or portfolio must 
have a minimum monthly trading volume during each of the last six 
months of at least 250,000 shares. Moreover, the most heavily weighted 
component stocks in an underlying index or portfolio cannot exceed 25% 
of the weight of the index or portfolio, and the five most heavily 
weighted component stocks cannot together exceed 65% of the weight of 
the index or portfolio. The index or portfolio must include a minimum 
of 13 stocks.\10\ All securities in an underlying index or portfolio 
must be listed on a national securities exchange or The Nasdaq Stock 
Market (including the Nasdaq SmallCap Market). Finally, any series of 
Index Fund Shares must meet these eligibility criteria as of the date 
of the initial deposit of securities and cash into the trust or fund.
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    \10\ Thirteen stocks is the minimum number to permit 
qualification as a regulated investment company under Subchapter M 
of the Internal Revenue Code. Under Subchapter M of the Internal 
Revenue Code, for a fund to qualify as a regulated investment 
company, the securities of a single issuer can account for no more 
than 25% of a fund's total assets, and at least 50% of a fund's 
total assets must be comprised of cash (including government 
securities) and securities of single issuers whose securities 
account for less than 5% of such fund's total assets.
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    The index underlying a series of Index Fund Shares will be 
calculated based on either the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
methodology. In addition, if the index is maintained by a broker-
dealer, the broker-dealer shall erect a ``fire wall'' around the 
personnel who have access to information concerning changes and 
adjustments to the index and the index shall be calculated by a third 
party who is not a broker-dealer.
    The current index value will be disseminated every 15 seconds over 
the Consolidated Tape Association's Network B. The Reporting Authority 
will disseminate for each series of Index Fund Shares an estimate, 
updated every 15 seconds, of the value of a share of each series. This 
may be based, for example, upon current information regarding the 
required deposit of securities plus any cash amount to permit creation 
of new shares of the series or upon the index value.
    A minimum of 100,000 shares of a series of Index Fund Shares is 
required to be outstanding at commencement of trading. Trading will 
occur between 9:30 a.m. and either 4:00 p.m. or 4:15 p.m. for each 
series of Index Fund Shares, as specified by the Exchange. The 
provisions of BSE Chapter XXIV-B et seq., will apply to all series of 
Index Fund Shares.
c. Exchange Rules Applicable to the Trading of Index Fund Shares
    Index Fund Shares are considered ``securities'' under the Rules of 
the Exchange and are subject to all applicable trading rules, including 
the provisions of BSE Chapter XXXI, Section 4, Trade-Throughs and 
Locked Markets, which prohibit Exchange members from initiating trade-
throughs for Intermarket Trading System securities, as well as rules 
governing priority, parity and precedence of

[[Page 42045]]

orders, market volatility-related trading halt provisions and 
responsibilities of the assigned specialist firm.\11\ Exchange equity 
margin rules will apply.
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    \11\ BSE Chapter VII, Section 2, will also apply to the trading 
of Index Fund Shares. That rule provides, in part, that every member 
and allied-member is required to use due diligence to learn the 
essential facts relative to every customer, including the possible 
use of a name other than that of the interested party, and to every 
order or account accepted by him, except when acting as agent for 
another member.
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    The Exchange also intends to utilize its existing surveillance 
procedures, including procedures adopted for portfolio depositary 
receipts, to surveil trading in Index Fund Shares. The Exchange will 
also surveil specialist compliance with BSE Chapter XV, Section 11, 
``Restrictions on Transactions by Specialist,'' and proposed 
interpretation and policies .01 and .02 to Chapter XV, Section 11, 
which contemplate specialists engaging in transactions with the issuer 
of Index Fund Shares under certain circumstances.
d. Notice to Members
    Prior to the commencement of trading in Index Fund Shares, the 
Exchange will issue a circular to members highlighting the 
characteristics of purchases in Index Fund shares. The circular will 
discuss the special characteristics and risks of trading this type of 
security. Specifically, the circular, among other issues, will discuss 
what Index Fund Shares are, how they are created and redeemed, the 
requirement that members and member firms deliver a prospectus to 
investors purchasing Index Fund Shares prior to or concurrently with 
the confirmation of a transaction, applicable Exchange Rules, 
dissemination information, trading information, and the applicability 
of suitability rules.
    In addition, the circular will inform members of Exchange policies 
about trading halts in such securities. First, the circular will advise 
that trading will be halted in the event the market volatility trading 
halt parameters set forth in BSE Chapter II, Section 34B have been 
reached. Second, the circular will advise that, in addition to other 
factors that may be relevant, the Exchange may consider factors such as 
the extent to which trading is not occurring in a deposited security(s) 
and whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.
e. Disclosure
    The Exchange will require its members to provide all purchasers of 
newly issued Index Fund Shares with a Fund prospectus. Because the 
Units will be in continuous distribution, the prospectus delivery 
requirements of Section 5(b)(2) of the Securities Act of 1933 (the 
``1933 Act'') \12\ will apply to all investors in Index Fund Shares, 
including secondary market purchases on the Exchange in Index Fund 
Shares.
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    \12\ 15 U.S.C. 77e(b)(2).
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    With respect to series of Index Fund Shares that are the subject of 
an order by the SEC exempting such series from certain prospectus 
delivery requirements under Section 24(d) of the Investment Company Act 
of 1940 (``1940 Act''), \13\ the Exchange will inform members and 
member organizations regarding disclosure obligations with respect to a 
particular series of Index Fund Shares by means of an Information 
Circular prior to commencement of trading in such series.
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    \13\ 15 U.S.C. 80a-24(d).
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    For these exempted series, the Exchange requires that members and 
member organizations provide to all purchasers of a series of Index 
Fund Shares a written description of the terms and characteristics of 
such securities, in a form prepared by the open-end management 
investment company issuing such securities, not later than the time a 
confirmation of the first transaction in such series is delivered to 
such purchaser. In addition, members and member organizations shall 
include such a written description with any sales material relating to 
a series of Index Fund Shares that is provided to customers or the 
public. Any other written materials provided by a member or member 
organization to customers or the public making specific reference to a 
series of Index Fund Shares as an investment vehicle must include a 
statement in substantially the following form: ``A circular describing 
the terms and characteristics of [the series of Index Fund Shares] has 
been prepared by the [open-end management investment company name] and 
is available from your broker or the Exchange. It is recommended that 
you obtain and review such circular before purchasing [the series of 
Index Fund Shares]. In addition, upon request you may obtain from your 
broker a prospectus for [the series of Index Fund Shares].''
    A member or member organization carrying an omnibus account for a 
non-member broker-dealer is required to inform such non-member that 
execution of an order to purchase a series of Index Fund Shares for 
such omnibus account will be deemed to constitute agreement by the non-
member to make such written description available to its customers on 
the same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, a member or member organization shall 
also provide a prospectus for the particular series of Index Fund 
Shares.
f. Minimum Fractional Change
    The Index Fund Shares are currently traded on the Amex at a minimum 
of variation of \1/16\th or \1/64\th of $1.00. The Exchange proposes 
the minimum fractional change for Index Fund Shares on the Exchange 
will be \1/16\th, \1/32\nd or \1/64\th of $1.00 depending on the series 
of Index Fund Shares. Thus, the Exchange is proposing the same minimum 
fractional increments for the trading of Index Fund Shares on the BSE, 
until such time as decimal increments are approved. It is anticipated 
that some time after August, 2000, the industry minimum-price 
variations will be converted from fractions to decimals.
g. Description of iShares MSCI and Select Sector SPDRs
    Seventeen series of iShares MSCI based on Morgan Stanley Capital 
International foreign stock indices.\14\ and nine investment series of 
Select SPDRs offered by the Select Sector SPDR Trust are traded on the 
Amex.\15\ The Exchange is not seeking approval to list these iShares 
MSCI \16\ or Select Sector SPDRs \17\ at this time, but rather is 
requesting approval to trade these iShares MSCI and Select Sector SPDRs 
pursuant to UTP once these listing standards are approved.
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    \14\ See supra note 5.
    \15\ Further information regarding Select Sector SPDRs and 
iShares MSCI is available at the principal office of the Exchange, 
and at the Commission's Public Reference Room, as detailed in III, 
below.
    \16\ Specifically, the MSCI Australia, MSCI Austria, MSCI 
Belgium, MSCI Canada, MSCI France, MSCI Germany, MSCI Hong Kong, 
MSCI Italy, MSCI Japan, MSCI Malaysia, MSCI Mexico, MSCI 
Netherlands, MSCI Singapore, MSCI Spain, MSCI Sweden, MSCI 
Switzerland, and MSCI United Kingdom Indices.
    \17\ Specifically, the Basic Industries Select Sector SPDR, the 
Consumer Services Select Sector SPDR, the Consumer Staples Select 
Sector SPDR, the Cyclical/Transportation Select Sector SPDR, the 
Energy Select Sector SPDR, the Financial Select Sector SPDR, the 
Industrial Select Sector SPDR, the Technology Select Sector SPDR and 
The Utilities Select Sector SPDR.
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    Pursuant to Rule 12f-5 under the Act,\18\ to trade a particular 
class or type of security pursuant to UTP, the Exchange must have rules 
providing for transactions in such class or type of security. The Amex 
has enacted listing

[[Page 42046]]

standards for Index Fund Shares, and the BSE's proposed rule change is 
designed to create similar standards for Index Fund Shares listing and/
or trading on the BSE. As stated above, the Exchange proposes to only 
trade iShares MSCI and Select Sector SPDRs pursuant to UTP upon 
approval of this rule filing.
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    \18\ 17 CFR 240.12f-5.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act,\19\ in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating securities 
transactions, 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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    \19\ 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 change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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 
filings will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-BSE-00-05 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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b)(5).\20\ Specifically, 
the Commission finds that the BSE's proposal to establish generic 
standards to permit the trading of Index Fund Shares pursuant to Rule 
19b-4(e) furthers the intent of that rule by facilitating commencement 
of trading in these securities without the need for notice and comment 
and Commission approval under Section 19(b) of the Act. Thus, by 
establishing generic standards, the proposal should reduce the 
Exchange's regulatory burden, as well as benefit the public interest, 
by enabling the Exchange to bring qualifying products to the market 
more quickly. Accordingly, the Commission finds that the Exchange's 
proposal will promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and, in general, protect 
investors and the public interest consistent with Section 6(b)(5) of 
the Act.\21\
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    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    Rule 19b-4(e) provides that the listing and trading of a new 
derivative securities product by an SRO shall not be deemed a proposed 
rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if the 
Commission has approved, pursuant to Section 19(b) of the Exchange Act, 
the SRO's trading rules, procedures and listing standards for the 
product class that include the new derivative securities product and 
the SRO has a surveillance program for the product class.\22\ The 
Commission's approval of the proposed generic listing standards for 
Index Fund Shares will allow those series of Index Fund Shares that 
satisfy those standards to start trading under Rule 19b-4(e), without 
the need for notice and comment and Commission approval. The Exchange's 
ability to rely on Rule 19b-4(e) for these products potentially reduces 
the time frame for brining these securities to the market and thus 
enhances investors' opportunities. The Commission notes that while the 
proposal reduces the Exchange's regulatory burden, the Commission 
maintains regulatory oversight over any products listed under the 
generic standards through regular inspection oversight.
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    \22\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
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    The Commission previously concluded that Index Fund Shares and like 
products that it approved for trading under similar rules on other 
Exchanges would allow investors to: (1) respond quickly to market 
changes through intra-day trading opportunities; (2) engage in hedging 
strategies similar to those used by institutional investors; and (3) 
reduce transactions costs for trading a portfolio of securities.\23\ 
The Commission believes, for the reasons set forth below, that the 
product classes that satisfy the proposed standards for Index Fund 
Shares should produce the same benefits to the BSE and to investors.
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    \23\ See Securities Exchange Act Release No. 42975 (June 22, 
2000); Securities Exchange Act Release No. 42833 (May 26, 2000), 65 
FR 35679 (June 5, 2000); Securities Exchange Act Release No. 42787 
(May 15, 2000), 65 FR 33598 (May 24, 2000); Securities Exchange Act 
Release No. 36947) (March 8, 1996), 61 FR 10606 (March 14, 1996).
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    The Commission finds that the Exchange's proposal contains adequate 
rules and procedures to govern the trading of Index Fund Shares under 
Rule 19b-4(e). All series of Index Fund Shares listed under the 
proposed standards will be subject to the full panoply of BSE rules and 
procedures that now govern the trading of existing securities on the 
BSE.\24\ Accordingly, any new series of Index Fund Shares listed and 
traded on the Exchange, or pursuant to UTP, will be subject to BSE 
rules governing the trading of equity securities, including, among 
others, rules and procedures governing trading halts, disclosures to 
members, responsibilities of the specialist, account opening and 
customer suitability requirements, and margin. These criteria allow the 
BSE to consider the suspension of trading and the delisting of a series 
if an event occurred that made further dealings in such securities 
inadvisable. This will give the

[[Page 42047]]

BSE flexibility to delist Index Fund Shares if circumstances warrant 
such action.
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    \24\ The Commission notes that although Index Fund Shares 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 Funds. 
Accordingly, the level of risk involved in the purchase or sale of 
Index Fund Shares is similar to the risk involved in the purchase or 
sale of traditional common stock. Nevertheless, the Commission 
believes there are unique aspects to trading Index Fund Shares, 
which the Exchange has sufficiently and adequately addressed in this 
proposal.
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    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 Index Fund 
Shares. Members and member organizations will be required to provide to 
all purchasers of Index Fund Shares a written description of the terms 
and characteristics of these securities, to include their description 
in sales materials provided to customers or the public, to include a 
specific statement relating to the availability of the description in 
other types of materials distributed to customers or the public, and to 
provide a copy of the prospectus, when requested by the customer. The 
proposal also requires a member or member organization carrying an 
omnibus account for a non-member broker-dealer, to notify the non-
member that execution of an order to purchase Index Fund Shares 
constitutes an agreement by the non-member to provide the product 
description to its customers.
    The Commission also notes that upon the initial listing, or trading 
pursuant to UTP, of any Index Fund Shares, the Exchange will issue a 
circular to its members explaining the unique characteristics and risk 
of this particular type of security. The circular also will note the 
Exchange members' prospectus or product description delivery 
requirements, and inform members of their responsibilities under BSE 
Rules in connection with customer transactions in these securities. The 
Commission believes that these requirements ensure adequate disclosure 
to investors about the terms and characteristics of a particular 
series, and is consistent with Section 6(b)(5) of the Act.\25\
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    \25\ 15 U.S.C. 78f(b)(5).
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    In addition, the BSE has developed specific listing criteria for 
series of Index Fund Shares qualifying for Rule 19b-4(e) treatment that 
will help to ensure that a minimum level of liquidity will exist to 
allow for the maintenance of fair and orderly markets. Specifically, 
the proposed generic listing standards require that a minimum of 
100,000 shares of a series of Index Fund Shares be outstanding as of 
the start of trading. The Commission believes that this minimum number 
of securities is sufficient to establish a liquid Exchange market at 
the commencement of trading.
    The Commission believes that the proposed generic listing standards 
ensure that the securities composing the underlying indexes and 
portfolios are well capitalized and actively traded. These 
capitalization and liquity criteria serve to prevent fraudulent or 
manipulative acts, and are therefore consistent with Section 6(b)(5) of 
the Act.
    Furthermore, the Commission finds that the Exchange's proposal to 
trade Index Fund Shares in increments of    1/16th, 1/32nd, or 1/64th, 
of $1.00 is consistent with the Act.
    The Exchange also represents that the Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. The 
Commission believes that the information the Exchange proposes to have 
disseminated will provide investors with timely and useful information 
concerning the value of each series.
    The Commission also notes that certain concerns are raised when a 
broker-dealer is involved in both the development and maintenance of a 
stock index upon which products such as Index Fund Shares are based. 
The proposed requires that, in such circumstances, the broker dealer 
must have procedures in place to prevent the misuse of material, non-
public information regarding changes and adjustments to the index, and 
that the index value be calculated by a third party who is not a 
broker-dealer. The Commission believes that these requirements should 
help address concerns raised by a broker-dealer's involvement in the 
management of such an index.
    In its proposed generic listing standards, the BSE represents that 
it will rely upon its existing surveillance procedures for supervision 
of trading in Index Fund Shares listed or traded pursuant to Rule 19b-
4(e). The Commission believes that these surveillance procedures are 
adequate to address concerns associated with listing and trading Index 
Fund Shares, including those listed or traded under the generic 
standards. Accordingly, the Commission believes that the rules 
governing the trading of such securities provide adequate safeguards to 
prevent manipulative acts and practices and to protect investors and 
the public interest, consistent with Section 6(b)(5) of the Act.\26\ 
The Commission further notes that the Exchange has represented that it 
will file Form 19b-4(e) with the Commission within five business days 
of commencement of trading a series under the generic standards, and 
will comply with all Rule 19b-4(e) recordkeeping requirements.
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    \26\ 15 U.S.C. 78f(b)(5).
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    The BSE has stated that it intends to trade SPDRs and iShares MSCI 
\27\ pursuant to UTP once this proposal has been approved. The 
Commission believes that the Exchange's proposal to trade these series 
to Index Fund Shares 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 SPDRs and iShares MSCI as an investment tool, the BSE'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.
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    \27\ See supra note 5.
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    The Commission finds good cause for approving the proposed rule 
change (SR-BSE-00-05) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
notes that the trading requirements of Index Fund Shares at the BSE 
will be substantially similar to the trading requirements of Index Fund 
Shares at the Amex, Index Portfolio Shares at the Chicago Board Options 
Exchange, and Investment Company Units at the Chicago Stock Exchange, 
which the Commission approved in the past.\28\ The Commission also 
observes that the proposed rule change concerns issues that previously 
have been the subject of a full comment period pursuant to Section 
19(b) of the Act.\29\ The Commission does not believe that the proposed 
rule change raises novel regulatory issues that were not addressed in 
the previous filings. Accordingly, the Commission finds that there is 
good cause, consistent with Section 6(b)(5) of the Act,\30\ to approve 
the proposal on an accelerated basis.
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    \28\ See supra note 5.
    \29\ 15 U.S.C. 78s(b).
    \30\ 15 U.S.C. 78f(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-BSE-00-05), as amended, is 
hereby approved on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).


[[Page 42048]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-17148 Filed 7-6-00; 8:45 am]
BILLING CODE 8010-01-M