[Federal Register Volume 66, Number 139 (Thursday, July 19, 2001)]
[Notices]
[Pages 37716-37720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18068]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44551; File No. SR-PCX-2001-14]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Pacific Exchange, Inc. Relating to Generic 
Listing Standards Applicable to the Listing and Trading of Investment 
Company Units and Portfolio Depositary Receipts Pursuant to Rule 19b-
4(e) Under the Securities Exchange Act of 1934

July 12, 2001.
    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 1, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change, as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On June 19, 2001, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On July 12, 2001, the Exchange filed Amendment No. 2 to 
the proposed rule change.\4\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested persons 
and to approve the proposal, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Peter D. Bloom, Director, Regulatory 
Projects, Regulatory Policy, PCX, to Lisa N. Jones, Attorney, 
Division of Market Regulation (``Division''), Commission (June 18, 
2001) (``Amendment No. 1''). Amendment No. 1, among other things, 
revises the proposal to: (1) Modify the initial listing requirement 
of the minimum number of Units, that may be outstanding at 
commencemnt of trading to 100,000 Units, consistent with the other 
exchanges; (2) amend the proposed rule text language relating to 
minimum price variations for Investment Company Units (``Units'') 
and Portfolio Depositary Receipts (``PDRs''); and (3) amend proposed 
rule text and adds cross-references for clarification purposes.
    \4\ See Letter from Cindy Sink, Senior Attorney, Regulatory 
Policy, PCX, to Lisa N. Jones, Attorney, Division, Commission (July 
12, 2001) (``Amendment No. 2''). Amendment No. 2 corrects 
typographical errors to the proposed rule text.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its listing requirements for ICUs 
and PDRs to permit its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE'' or ``Corporation'') to list and trade, or trade pursuant to 
unlisted trading privileges ``UTP''), certain products of ICUs (PCXE 
Rule 5) or PDRs (PCXE Rule 8) pursuant to Rule 19b-4(e) under the 
Act.\5\ The Exchange also proposes a related amendment to PCXE's 
minimum price variation rule (PCXE Rule 7, Commentary .05).\6\ The text 
of the proposed rule change is available upon request from the Office 
of the Secretary, the Commission, or the PCX.
---------------------------------------------------------------------------

    \5\ 17 CFR 240.19b-4(e). 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). See Securities Exchange 
Act Release No. 40761 (December 8, 1998) 63 FR 70952 (December 22, 
1998).
    \6\ See note 3, supra.
---------------------------------------------------------------------------

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's current rules for the initial and continued listing 
of ICUs and PDRs are set forth in PCXE Rules 5.2(j)(3) \7\ and 
8.100,\8\ respectively.\9\ The exchange proposes to amend these rules 
by adopting generic listing requirements to provide standards that 
permit the trading, whether by listing or pursuant to unlisted trading 
privileges ( ``UTP'' ),\10\ of various ICUs and PDRs products pursuant 
to Rule 19b-4(e) under the Act.\11\ The Exchange believes that the 
Commission's approval of the proposed generic listing requirements for 
ICUs and PDRs will allow PCXE to begin trading qualifying products 
without the need for notice and comment and commission approval. The 
Exchange further believes that application of Rule 19b-4(e) to these 
securities potentially reduces the time frame for bringing these 
securities to the market and thus enhances investors' opportunities.
---------------------------------------------------------------------------

    \7\ The Exchange's definition of ``Unit'' for ICUs is contained 
in PCXE Rule 5.1(b)(5).
    \8\ the Exchange's definition of a ``PDR'' is contained in PCXE 
Rule 8.100(a).
    \9\ See Securities Exchange Act Release No. 39461 (December 17, 
1997), 62 FR 67674 (December 29, 1997) (approving SR-PCX-97-35 
relating to listing and trading criteria for PDRs) and Securities 
Exchange Act Release No. 41983 (October 6, 1999), 64 FR 56008 
(October 15, 1999) (approving SR-PCX-98-29 relating to listing and 
trading criteria for ICUs).
    \10\ See 17 CFR 240.12f-5.
    \11\ See note 4, supra.
---------------------------------------------------------------------------

    The Commission has previously approved requests by the American 
Stock Exchange LLC ( ``Amex'' ), Chicago Stock Exchange, Inc. ( ``CHX'' 
) and the Chicago Board Options Exchange, Inc. ( ``CBOE'' ) to provide 
generic standards to list and trade ICUs and PDRs.\12\ The Exchange 
believes that

[[Page 37717]]

the proposed generic listing requirements for ICUs and PDRs are 
substantially similar to the listing requirements at the Amex, CHX and 
CBOE.
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 42787 (May 15, 
2000), 65 FR 33598 (May 24, 2000) (approving SR-Amex-00-14 relating 
to the generic listing standards for PDRs and Index Fund Shares); 
Securities Exchange Act Release No. 42975 (June 22, 2000), 65 FR 
40712 (June 30, 2000) (approving SR-CHX-00-14 relating to generic 
listing standards for ICUs and PDRs); and Securities Exchange Act 
Release No. 44046 (March 7, 2001), 66 FR 15152 (March 15, 2001) 
(approving SR-CBOE-00-51 relating to generic listing standards for 
Index Portfolio Shares (``ISPs'') and Index Portfolio Receipts ( 
``IPRs'' )).
---------------------------------------------------------------------------

    Criteria for Initial and Continued Listing and Trading. The 
Exchange is proposing to implement generic listing requirements that 
are intended to ensure that a substantial portion of the weight of an 
index or portfolio underling ICUs or PDRs is composed of securities 
with substantial market capitalization and trading volume. The Exchange 
proposed to amend its current listing standards for a series of ICUs or 
PDRs, contained in PCXE Rules 5.2(j)(3) and 8.100, respectively, to 
provide standards that permit the listing and trading, or trading 
pursuant to UTP, of various ICUs or PDRs products, pursuant to Rule 
19b-4(e) under the listing requirements as described below.
    Upon the initial listing of a serious ICUs or PDRs, the Exchange 
proposes that the component stocks contained 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. The most 
heavily weighted component stock 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 must include a minimum of 13 
stocks,\13\ and 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). Furthermore, the Exchange 
proposes that any series of ICUs or PDRs traded pursuant to generic 
listing requirements must meet these eligibility criteria as the date 
of initial deposit of securities and cash into the trust or fund.
---------------------------------------------------------------------------

    \13\ 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 and 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.
---------------------------------------------------------------------------

    Under the proposed amendments to PCXE Rules 5.2(j)(3) (for ICUs) 
and 8.100 (for PDRs), the underlying index or portfolio must 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 8is 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 index or portfolio, and the index must be calculated 
by a third party who is not a broker-dealer.
    The hours during which ICUs transactions may be made on the 
Exchange are 6:30 a.m. (Pacific Time ( ``PT'' ) until 1:30 p.m. (PT) 
for each series of Units. The hours during which PDRs transactions may 
be made on the Exchange are 6:30 (PT) until 1:30 p.m. (PT) for each 
series of PDRs.
    The current index value must be disseminated every 15 seconds over 
the Consolidated Tape Association's Network, as well as an estimate of 
the net asset value per share of each series of ICUs or PDRs.\14\ 
Additionally, the Reporting Authority must disseminate for each series 
of ICUs or 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 or upon the 
index value.
---------------------------------------------------------------------------

    \14\ The PCX notes the information described in this section 
will be disseminated by or through the primary exchange or another 
entity working with that exchange.
---------------------------------------------------------------------------

    A series of ICUs or PDRs will be registered in book-entry form 
through the Depository Trust Company. A minimum of 100,000 shares of a 
series of ICUs or PDRs is required to be outstanding at the time 
trading begins. The Exchange represents that it believes that this 
minimum number is sufficient to establish a liquid Exchange market at 
the start of trading. The minimum price variation for quoting and entry 
of orders in a series of ICUs or PDRs will be $0.01.
    PCXE Rules Applicable to Trading of ICUs and PDRs. The Exchange 
proposes to trade ICUs and PDRs pursuant to the PCXE's existing equity 
trading rules. Specifically, all series of ICUs and PDRs listed under 
Rule 19b-4(e) will be subject to PCXE's general dealing and settlement 
rules, including its rules on clearance and settlement of securities 
transactions and its equity margin rules. Other generally applicable 
PCXE equity rules and procedures will also apply, including, among 
others, rules governing the Intermarket Trading System, priority of 
orders, operational and regulatory trading halts, and responsibilities 
of specialists.
    The Exchange will implement written surveillance procedures for the 
ICUs and PDRs that it trades pursuant to Rule 19b-4(e). The Exchange 
intends to use its existing surveillance technology and procedures 
adopted for PDRs \15\ to conduct surveillance of trading activity in 
series of ICUs or PDRs. The Exchange believes these procedures will 
effectively monitor the trading activity in ICU or PDR products so as 
to ensure full compliance with Exchange rules and the federal 
securities laws. In addition, the Exchange will comply with the 
recordkeeping requirements of Rule 19b-4(e),\16\ and will file Form 
19b-4(e) for each series of ICUs or PDRs within five business days of 
commencement of trading.
---------------------------------------------------------------------------

    \15\ PCXE currently trades, pursuant to unlisted trading 
privileges, PDRs based on the S&P 500 Index, the S&P MidCap 400 
Index, and the Nasdaq-100 Index.
    \16\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    Notice to Members and Member Organizations.\17\ The Exchange 
proposes to issue and distribute an information circular to its members 
and member organizations for each series of ICUs or PDRs to be listed 
pursuant to Rule 19b-4(e). The circular will describe the special 
characteristics of the securities and will inform members or member 
organizations of any obligation to deliver a written product 
description prospectus, as applicable, to purchasers of ICUs or PDRs. 
In addition, the circular will inform members or member organizations 
that all series of ICUs and PDRs listed under Rule 19b-4(e) will be 
subject to Exchange procedures and rules comparable to those applied to 
existing products.
---------------------------------------------------------------------------

    \17\ Under PCX Equities, Inc. rules, the terms ``ETP Holder,'' 
``Equity ASAP Holder'' and ``ETP Firm'' have status as a ``member'' 
of the PCX as that term is defined in Section 3 of the Act. 
Therefore, for purposes of this rule filing notice, the terms 
``member'' and ``member organization'' are synonymous with the terms 
ETP Holder, Equity ASAP Holder and ETP Firm, if applicable.
---------------------------------------------------------------------------

    Disclosure to Customers. The proposed rule amendment requires 
members and member organizations to provide purchasers of a series of 
ICUs with a product description of the terms and characteristics of 
such securities in a form approved by the Corporation or prepared by 
the open-end management investment company issuing the securities, not 
later than the time a confirmation of the first transaction in such 
series is delivered to the

[[Page 37718]]

purchaser.\18\ This requirement applies only if the particular series 
has been granted relief from the prospectus delivery requirements of 
Section 24(d) of the Investment Company Act of 1940,\19\ and are not 
otherwise subject to prospectus delivery requirements under the 
Securities Act of 1933. In addition, members and member organizations 
are required to include the product description with any sales 
materials relating to a series of ICUs that are provided to the public. 
Any other written materials provided to customers by a member or member 
organization referring to a series of ICUs must include a statement 
relating to the product description, in substantially the form set 
forth in the proposed amendment to PCXE Rule 5.2(j)(3).
---------------------------------------------------------------------------

    \18\ The Exchange notes that the current PCXE Rule 8.100 
relating to the listing and trading of PDRs already requires its ETP 
Holders, Equity ASAP Holders and ETP Firms to provide all purchasers 
of a series of PDRs a written description of the terms and 
characteristics of such securities, in a form approved by the 
Corporation. See PCXE Rule 8.100(c).
    \19\ 15 U.S.C. 80a-24(d).
---------------------------------------------------------------------------

    The Exchange also proposes to amend PCXE Rule 8.100(c) to clarify 
that the disclosure provisions of this subparagraph are only applicable 
to a series of PDRs if, among other things, that series is not subject 
to prospectus delivery requirements under the Securities Act of 
1933.\20\ In addition, the Exchange proposes to amend PCXE Rule 
8.100(c) to provide that the descriptive disclosure document required 
by this Rule must be in a form approved by the Exchange or prepared by 
the unit investment trust issuing the subject PDRs.\21\
---------------------------------------------------------------------------

    \20\ Id.
    \21\ PCXE Rule 8.100(c) currently states that the descriptive 
disclosure document required by this Rule must be in a form approved 
by the Corporation only.
---------------------------------------------------------------------------

    The proposal also provides that a member or member organization 
carrying an omnibus account for a non-ETP Holder, non-Equity ASAP 
Holder, or non-ETP Firm is required to inform such non-ETP Holder, non-
Equity ASAP Holder, or non-ETP Firm that execution of an order to 
purchase a series of ICUs for such account will be deemed to constitute 
agreement by the non-member to make such product description available 
to its customers on the same terms as are directly applicable to 
members and member organizations under the proposed amendment to PCXE 
Rule 5.2(j)(3). The proposal also requires that a member or member 
organization must provide a prospectus for a particular series of ICUs 
upon the customer's request.
    Definition of Reporting Authority. The Exchange proposes to adopt 
proposed PCXE Rule 5.1(b)(16) that defines the term ``Reporting 
Authority.'' This definition was adapted from PCXE Rule 8.100(a)(2) and 
is intended to ensure uniformity in the use of this term in the rules 
pertaining to both ICUs and PDRs.
    Moreover, under proposed PCXE Rule 5.2(j)(3)(D), specific 
limitations of liability are provided to protect the Exchange, index 
proprietors, calculators and vendors. The proposed rules also state 
that there are no express or implied warranties with respect to ICUs. 
The Exchange represents that these provisions are based on similar 
provisions already contained in the rules of the Exchange regarding 
PDRs.\22\
---------------------------------------------------------------------------

    \22\ See PCXE Rule 8.100(f).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \23\ of the Act, in general, and furthers the 
objectives of Section (b)(5),\24\ in particular, in that it is designed 
to promote just and equitable principles of trade, to enhance 
competition and to protect investors and the public interest.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange did not receive any written comments on the proposed 
rule change.

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, 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 in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the PCX. All submissions should refer to File No. 
SR-PCX-2001-14 and should be submitted by August 9, 2001.

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

    After careful consideration, 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) 
of the Act.\25\ Specifically, the Commission finds that the PCX 
proposal to establish generic listing standards to permit the listing 
and trading of ICUs and PDRs 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 
listing 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.\26\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(5).
    \26\ Id. In approving this rule, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In general, ICUs represent an interest in a registered investment 
company that holds securities based on, or representing an interest in, 
an index or portfolio of securities. The Exchange currently trades a 
number of securities pursuant to UTP under its ICU and PDR listing 
standards.\27\
---------------------------------------------------------------------------

    \27\ See note 11, supra. These listing standards are similar to 
those maintained by other exchanges. See, e.g., Amex Rules 1000 
(Portfolio Depositary Receipts) and 1000A (Index Fund Shares).

---------------------------------------------------------------------------

[[Page 37719]]

    PDRs, in contrast, represent interests in a unit investment trust 
that holds securities, which 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.
    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 and the SRO 
has a surveillance program for the product class.\28\
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
---------------------------------------------------------------------------

    As noted above, the Commission has previously approved PCX rules 
that permit the listing and trading of ICUs and 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 PCX rules that govern their trading. Moreover, the Exchange has 
separately filed proposed rule changes pursuant to Rule 19b-4 for each 
of the series of ICUs or PDRs currently trading on the Exchange.
    The Commission's approval of the proposed generic listing standards 
for these securities will allow those series of PDRs and ICUs 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 bringing these securities to the market or for 
permitting the trading of these securities pursuant to UTP, 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.
    The Commission previously concluded that PDRs and ICUs trading 
under the existing Exchange rules 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.\29\ The Commission believes, for the reasons set forth 
below, that the product classes that satisfy the proposed generic 
standards for PDRs and ICUs should produce the same benefits to 
investors.
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act Release No. 42787 (May 15, 
2000), 65 FR 33598 (May 24, 2000) (approving SR-Amex-00-14); 
Securities Exchange Act Release No. 42542 (March 17, 2000), 65 FR 
16437 (March 28, 2000) (noticing SR-Amex-00-14).
---------------------------------------------------------------------------

    The Commission also finds that the proposal contains adequate rules 
and procedures to govern the trading of PDRs and ICUs under Rule 19b-
4(e). All series of PDRs and ICUs listed under the generic standards 
will be subject to the full panoply of PCXE rules and procedures that 
now govern the trading of existing PDRs and ICUs on the Exchange or 
pursuant to UTP. Accordingly, any new series of PDRs and ICUs listed 
and traded under Rule 19b-4(e) will be subject to PCXE 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 Exchange has developed specific listing criteria 
for series of PDRs or ICUs 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 PDRs or ICUs is 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 indexes and portfolios 
underlying the ICUs and 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 and ICUs 
listed or traded under the generic standards will be subject to the 
Exchange's existing continuing listing criteria. This requirement 
allows the PCX 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 
PCX flexibility to delist PDRs or ICUs if circumstances warrant such 
action.
    Furthermore, the Commission finds that the Exchange's proposal to 
trade ICUs or PDRs in minimum price variations of $0.01 is consistent 
with the Act. The Commission believes that such trading should enhance 
market liquidity, and should promote more accurate pricing, tighter 
quotations, and reduced price fluctuations, all of which benefit the 
investor. The Commission also believes that such trading should allow 
customers to receive the best possible execution of their transactions 
in the PDRs or ICUs, thereby protecting customers and the public 
interest consistent with Section 6(b)(5) of the Act.\30\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the hours of trading proposed for both 
ICUs and PDRs transactions are reasonable. In addition, the Exchange 
represents that the Reporting Authority will disseminate for each 
series of PDRs or ICUs an estimate, updated every 15 seconds, of the 
value of a share of each series. The Exchange further represents that 
the information that is reported will be disseminated by or through the 
primary exchange or another entity working with that exchange, when the 
PCX trades one of these products pursuant to UTP. 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 Exchange has developed surveillance procedures for PDRs and 
ICUs listed under the generic standards that incorporate and rely upon 
existing PCX surveillance procedures governing PDRs, ICUs, and equities 
traded on PCXE. The Commission believes that these surveillance 
procedures are adequate to address concerns associated with listing and 
trading PDRs and ICUs 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.\31\ The Exchange 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

[[Page 37720]]

with all Rule 19b-4(e) recordkeeping requirements.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 or ICUs 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 and ICUs. Members and member organizations will be required to 
provide to all purchasers of ICUs or 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 proposal also requires a member or member organization 
carrying an omnibus account for a non-ETP Holder, non-Equity ASAP 
Holder, or non-ETP Firm, to notify the non-ETP Holder, non-Equity ASAP 
Holder, or non-ETP Firm that execution of an order to purchase an ICU 
or PDR 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 PDRs or ICUs 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 or ICUs. The circular also 
will inform members of these securities. The Commission believes that 
these requirements ensure adequate disclosure to investor about the 
terms and characteristics of a particular series and is consistent with 
section 6(b)(5) of the Act.\32\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 1000A et seq. (Index Fund Shares), which the 
Commission previously approved after soliciting public comment on the 
proposal pursuant to Section 19(b)(1) of the Act.\33\ The Commission 
does not believe that the proposed rule change raises novel regulatory 
issues that were not addressed in the Amex filing. 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,\34\ to approve 
the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \33\ See note 28 supra. The Commission notes that the PCX 
proposal is also based on the generic listing standards at the CHX 
and the CBOE. See note 11, supra.
    \34\ 15 U.S.C. 78s(b)(5).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (SR-PCX-2001-14) and Amendment 
Nos. 1 and 2 thereto, are hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-18068 Filed 7-18-01; 8:45 am]
BILLING CODE 8010-01-M