[Federal Register Volume 65, Number 175 (Friday, September 8, 2000)]
[Notices]
[Pages 54578-54580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23029]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43234; File No. SR-BSE-00-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Boston Stock Exchange, Inc. To Provide Generic Listing 
Standards for Portfolio Depositary Receipts Pursuant to Rule 19b-4(e) 
Under the Securities Exchange Act of 1934

August 31, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder, notice is hereby given that on 
August 7, 2000, the Boston Stock Exchange, Inc. (``Exchange'' or 
``BSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which items have been prepared by the Exchange. On August 28, 
2000, the BSE filed Amendment No. 1 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approval the 
proposal as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ In Amendment No. 1, the BSE added sections to the proposed 
rule text on minimum price variation, surveillance procedures and 
the applicability of other rules. See Letter from Esther Radovsky, 
Listings Analyst, BSE, to Heather Traeger, Attorney, Division of 
Market Regulation, Commission, dated August 25, 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 seeks to amend Chapter XXIV of the BSE rules, 
Portfolio Depositary Receipts, to provide standards that permit listing 
and trading, or trading pursuant to unlisted trading privileges 
(``UTP''), of certain products pursuant to Rule 19b-4(e) under the Act.

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

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

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

1. Purpose
    The Exchange currently trades a number of securities pursuant to 
UTP under its listing standards for Portfolio Depositary Receipts 
(``PDRs'').\3\ These standards, found in BSE Chapter XXIV, are similar 
to those maintained by other exchanges.\4\ The Exchange's proposed 
amendments to Chapter XXIV would permit it to list and trade PDRs 
pursuant to Rule 19b-4(e) under the Act.\5\ The Exchange believes that 
application of Rule 19b-4(e) to these securities will further the 
intent of that Rule by allowing trading to begin in these securities, 
subject to the proposed generic standards, without the need for notice 
and comment and Commission approval. The Exchange believes that this 
new procedure has the potential to reduce the time frame for bringing 
these securities to market or for trading them pursuant to UTP.
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    \3\ See Securities Exchange Act Release No. 39660 (February 12, 
1998), 63 FR 9026 (February 28, 1998).
    \4\ See e.g., American Stock Exchange (``Amex'') Rule 1000, et 
seq. (Portfolio Depositary Receipts) and Chicago Stock Exchange 
(``CHX'') Article XXVIII, Rule 25 (Portfolio Depositary Receipts).
    \5\ Rule 19b-4(e) permits self-regulatory organizations 
(``SROs'') to list and trade new derivatives products that comply 
with existing SRO trading rules, procedures, surveillance programs 
and listing standards, without submitting a proposed rule change 
under Section 19(b) of the Act. 17 CFR 240.19b-4(e). See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998).
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    a. Generic Listing Criteria. The Exchange proposes to implement 
generic listing criteria to ensure that a substantial portion of the 
weight of a portfolio underlying PDRs is composed of securities with 
substantial market capitalization and trading volume. The proposed 
amendments to Chapter XXIV provide that the Exchange may approve for 
listing pursuant to Rule 19b-4(e) a series of PDRs if the components 
that, in the aggregate, account for at least 90% of the weight of the 
underlying portfolio have a minimum market value of at least $75 
million. In addition, the component stocks representing at least 90% of 
the weight of the 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 portfolio cannot together exceed 25% of the weight of the 
portfolio, and the five most heavily weighted component stocks cannot 
together exceed 65% of the weight of the portfolio. The portfolio must 
include a minimum of 13 stocks,\6\ and all securities in an underlying 
portfolio must be listed on a national securities exchange or The 
Nasdaq Stock Market (including The Nasdaq SmallCap Market). Finally, 
any series of PDRs traded pursuant to generic standards must meet these 
eligibility criteria as of the date of the initial deposit of 
securities and cash into the trust.
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    \6\ 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 the fund's total assets.
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    Under the proposed amendments to Chapter XXIV, the underlying 
portfolio

[[Page 54579]]

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 portfolio is maintained by a 
broker-dealer, the broker-dealer must erect a ``fire wall'' around the 
personnel who have access to information concerning changes and 
adjustments to the portfolio must be calculated by a third party who is 
not a broker-dealer. The current index value must be disseminated every 
15 seconds over the Consolidated Tape Association's Network B.\7\ 
Additionally, the Reporting Authority must disseminate for each series 
of PDRs an estimate, updated every 15 seconds, of the value of a share 
of each series. This estimate 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.
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    \7\ The BSE represents that it understands that the information 
described in this section will be disseminated by or through the 
primary exchange or another entity working with that exchange.
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    A minimum of 100,000 shares of a series of PDRs must be outstanding 
at the time trading begins. The Exchange believes that this minimum 
number is sufficient to establish a liquid Exchange market at the start 
of trading. The minimum trading variation for a series of PDRs must be 
\1/64\ of $1.00.
    The Exchange will use existing surveillance procedures for the PDRs 
that it trades pursuant to Rule 19b-4(e). In addition, the Exchange 
will comply with the recordkeeping requirements of Rule 19b-4(e), and 
will file Form 19b-4(e) for each series of PDRs within five business 
days of commencement of trading.\8\
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    \8\ 17 CFR 240.19b-4(e).
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    The provisions of Chapter XXIV will apply to all series of PDRs 
listed under Rule 19b-4(e). In addition, PDRs will be subject to 
Exchange procedures and rules, discussed below, comparable to those 
applied to existing PDRs.
    PDRs are subject to the Exchange's rule relating to trading halts 
due to extraordinary market volatility (Chapter II, Section 34A) and 
the Exchange's rule that provides discretion to Exchange officials to 
halt trading in specific securities under certain circumstances 
(Chapter II, Section 34B). In exercising the discretion described in 
Chapter II, Section 34B, appropriate Exchange officials may consider a 
variety of factors, including the extent to which trading is not 
occurring in a stock underlying the portfolio and whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    Further, the Exchange will issue a Bulletin to Members for each 
series to be listed pursuant to Rule 19b-4(e). The Bulletin will 
describe the characteristics of the securities and will inform members 
of any obligation to deliver a written product description or 
prospectus, as applicable, to purchasers of PDRs.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \9\ in general, and in particular, with 
section 6(b)(5) of the Act,\10\ 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 to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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. The BSE believes that the proposed 
rule change will encourage competition among markets by allowing more 
than one exchange to list and trade the products described in the 
proposed rule change pursuant to Rule 19b-4(e).

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 proposal, 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, 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 
BSE. All submissions should refer to File No. SR-BSE-00-10 and should 
be submitted by September 29, 2000.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, 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).\11\
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    \11\ 15 U.S.C. 78f(b)(5).
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    PDRs represent interests in a unit investment trust that holds 
securities that comprise an index or portfolio. Each trust is intended 
to provide investors with an instrument that closely tracks the 
underlying securities index or portfolio, that trades like a share of 
common stock, and that pays holders a periodic cash payment 
proportionate to the dividends paid on the underlying portfolio of 
securities, less certain expenses, as described in the applicable trust 
prospectus.
    As noted above, the Commission has previously approved Chapter XXIV 
of the BSE rules that permits the trading of PDRs. In approving these 
securities for trading, the Commission considered the structure of 
these securities, their usefulness to investors and to the markets, and 
the BSE rules that govern their trading. The Commission's approval of 
the proposed generic listing standards for these securities will allow 
series of PDRs that satisfy those standards to start trading under Rule 
19b-4(e), without the need for notice and comment and Commission 
approval. 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 Act, the 
SRO's trading rules, procedures and listing standards for the product 
class that include the new derivative securities product class, and the 
SRO has surveillance program for the product class.\12\ The Exchange's 
ability to rely on Rule 19b-4(e) for these products potentially reduces 
the time frame for bringing these securities to the market or for 
permitting the trading of

[[Page 54580]]

these securities pursuant to UTP, and thus enhances investors' 
opportunities. 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.\13\ The Commission notes that while the proposal will reduce 
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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    \12\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \13\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
has considered the proposed rule change's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission also finds that the proposal contains adequate rules 
and procedures to govern the trading of PDRs under Rule 19b-4(e). All 
series of PDRs listed under the generic standards will be subject to 
the full panoply of BSE rules and procedures that now govern the 
trading of existing PDRs on the Exchange or pursuant to UTP. 
Accordingly, any new series of PDRs listed and traded under Rule 19b-
4(e) 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, the 
election of a stop or limit order, and margin.
    In addition, the BSE has developed specific listing criteria for 
series of PDRs 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. The Commission believes that 
the proposed generic listing standards ensure that the securities 
composing the indexes and portfolios underlying the PDRs are well 
capitalized and actively traded. These capitalization and liquidity 
criteria serve to prevent fraudulent or manipulative acts and are 
therefore consistent with section 6(b)(5) of the Act.
    In addition, as previously noted, all series of PDRs listed or 
traded under the generic standards will be subject to the Exchange's 
existing continuing listing criteria. This requirement allows the BSE 
to consider the suspension of trading and the delisting of a series if 
an event occurs that makes further dealings in such securities 
inadvisable. The Commission believes that this will give the BSE 
flexibility to delist PDRs if circumstances warrant such action.
    The BSE will rely upon existing BSE surveillance procedures 
governing PDRs and equities for PDRs listed under the generic 
standards. The Commission believes that these surveillance procedures 
are adequate to address concerns associated with listing and trading 
PDRs 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.\14\ The Exchange further represents 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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    \14\ 15 U.S.C. 78f(b)(5).
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    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 a product such as PDRs is based. The proposal 
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.
    Finally, 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 
PDRs. Members and member organizations will be required to provide to 
all purchasers of PDRs a written description of the terms and 
characteristics of these securities, to include their product 
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 a 
customer.
    The Commission also notes that upon the initial listing, or trading 
pursuant to UTP, of any PDRs under the generic standards, the Exchange 
will issue a circular to its members explaining the unique 
characteristics and risks of this particular type of security. The 
circular also will note the Exchange members' prospectus or product 
description delivery requirements, and highlight the characteristics of 
purchases in a particular series of PDRs. The circular also will inform 
members of their responsibilities under Chapter XXIV of the 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 are consistent with section 6(b)(5) of the Act.\15\
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    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register pursuant to 
section 19(b)(2) of the Act. The Commission notes that the proposed 
rule change is based on the generic listing standards in Amex Rule 1000 
et seq. (PDRs) and CHX, Chapter XXVIII, Rule 25 (PDRs), which the 
Commission previously approved after soliciting public comment on the 
proposals pursuant to section 19(b)(1) of the Act.\16\ The Commission 
does not believe that the proposed rule change raises novel regulatory 
issues that were not addressed in the other filings. Accordingly, the 
Commission believes it is appropriate to permit investors to benefit 
from the flexibility afforded by these new instruments by trading them 
as soon as possible. Accordingly, the Commission finds that there is 
good cause, consistent with section 6(b)(5) of the Act,\17\ to approve 
the proposal, as amended, on an accelerated basis.
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    \16\ See Securities Exchange Act Release No. 42787 (May 15, 
2000), 65 FR 33598 (May 24, 2000) (Amex) and Securities Exchange Act 
Release No. 42975 (June 22, 2000), 65 FR 40712 (June 30, 2000) 
(CHX).
    \17\ 15 U.S.C. 78s(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-BSE-00-10), as amended, is 
approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23029 Filed 9-7-00; 8:45 am]
BILLING CODE 8010-01-M