[Federal Register Volume 66, Number 190 (Monday, October 1, 2001)]
[Notices]
[Pages 49990-49994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24474]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44826; File No. SR-Phlx-2001-75]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to the 
Listing and Trading of Trust Issued Receipts

September 20, 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 August 17, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change, and amended such 
proposed rule change on September 10, 2001,\3\ as described in Items I 
and II below, which Items have been prepared by the Phlx. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons and to 
approve the proposal and Amendment No. 1 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, the Phlx additionally proposes to amend 
Phlx Rule 803(j) to provide eligibility requirements for a component 
security that became part of a trust when the security was either: 
(a) Distributed by a company already included as a component 
security in the series of TIRs; or (b) received in exchange for the 
securities of a company previously included as a component security 
and that are no longer outstanding due to a merger, consolidation, 
corporate combination or other event. See letter from John Dayton, 
Assistant Secretary and Counsel, Phlx, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), SEC, dated 
September 7, 2001 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 under the Act,\4\ proposes to 
amend Phlx Rule 803(j) to adopt generic listing standards to allow for 
the listing and trading of trust issued receipts (``TIRs'') pursuant to 
Rule 19b-4(e) under the Act \5\ and to provide eligibility requirements 
for a component security that became part of a trust when the security 
was either: (a) Distributed by a company already included as a 
component security in the series of TIRs; or (b) received in exchange 
for the securities of a company previously included as a component 
security and

[[Page 49991]]

that are no longer outstanding due to a merger, consolidation, 
corporate combination or other event. Below is the text of the proposed 
rule change. Proposed new language is in italics.\6\
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    \4\ 17 CFR 240.19b-4.
    \5\ 17 CFR 240.19b-4(e).
    \6\ The Phlx made non-substantive changes by correcting the 
numbering of its Rule 803(j) and deleting a typographical error from 
its rule text. See telephone conversation on September 14, 2001 
between John Dayton, Assistant Secretary and Counsel, Phlx, and 
Cyndi Nguyen, Attorney, Division, SEC.
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* * * * *

Rule 803. Criteria for Listing--Tier I

    Rule 803(a)--(i) No Change.
    (j) Trust Issued Receipts.
    (1)-(11) No Change.
* * * * *

Commentary

    .01  The Exchange may approve a series of Trust Issued Receipts for 
listing and trading on the Exchange pursuant to Rule 19b-4(e) under the 
Securities Exchange Act of 1934 (``Exchange Act''), provided each of 
the component securities satisfies the following criteria:
    Eligibility Criteria for Component Securities Represented by a 
series of Trust Issued Receipts:
    (1) each component security must be registered under Section 12 of 
the Exchange Act;
    (ii) each component security must have a minimum public float of a 
least $150 million;
    (iii) each component security must be listed on a national 
securities exchange or traded through the facilities of Nasdaq and be a 
reported national market system security;
    (iv) each component security must have an average daily trading 
volume of at least 100,000 shares during the preceding sixty-day 
trading period;
    (v) each component security must have an average daily dollar value 
of shares traded during the preceding sixty-day trading period of at 
least $1 million; and 
    (vi) the most heavily weighted component security may not initially 
represent more than 20% of the overall value of the Trust Issued 
Receipt.
    .02  The eligibility requirements for component securities that are 
represented by a series of Trust Issued Receipts and that became part 
of the Trust Issued Receipt when the security was either: (a) 
distributed by a company already included as a component security in 
the series of Trust Issued Receipts; or (b) received in exchange for 
the securities of a company previously included as a component security 
that is no longer outstanding due to a merger, consolidation, corporate 
combination or other event, shall be as follows:
    (i) the component security must be listed on a national securities 
exchange or traded through the facilities of Nasdaq and a reported 
national market system security;
    (ii) the component security must be registered under section 12 of 
the Exchange Act; and;
    (iii) the component security must have a Standard & Poor's Sector 
Classification that is the same as the Standard & Poor's Classification 
represented by component securities included in the Trust Issued 
Receipt at the time of the distribution or exchange.

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

    In its filing with the Commission, the Phlx 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 Phlx 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 purpose of the proposed rule is to amend Phlx Rule 803(j) to 
provide generic standards that permit listing and trading, or trading 
pursuant to unlisted trading privileges (``UTP''), of TIRs pursuant to 
Rule 19b-4(e) under the Act.\7\ This procedure would allow the Phlx to 
begin trading qualifying products without the need for notice and 
comment and Commission approval under Section 19(b) of the Act,\8\ thus 
promoting competition and benefiting the public interest, and, at the 
same time, reducing the Exchange's regulatory burden.
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    \7\ Rule 19b-4(e) provides that the listing and trading of a new 
derivative securities product by a self-regulatory organization 
(``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 
includes the new derivative securities product and the SRO has a 
surveillance program for the product class. 17 CFR 240.19b-4(e).
    \8\ 15 U.S.C. 78s(b).
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    The Phlx believes that its proposal supplements its existing rules 
\9\ with generic listing criteria means, in part, to ensure that no 
security underlying a TIR will be readily susceptible to manipulation, 
while permitting sufficient flexibility in the construction of various 
TIRs to meet investors' needs. The Phlx further believes that the 
additional criteria are meant to ensure sufficient liquidity for 
investors seeking to purchase and deposit the underlying securities 
with the trustee to create a new TIR.
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    \9\ Existing Phlx rules provide that TIRs will be listed and 
traded, or traded pursuant to UTP, subject to application of the 
following criteria: (a) Initial Listing--For each trust, the 
Exchange will establish a minimum number of TIRs required to be 
outstanding at the time of commencement of trading on the Exchange; 
(b) Continued Listing--Following the initial twelve month period 
after formation of a trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in or 
removal from listing of a trust upon which a series of TIRs is based 
under any of the following circumstances: (i) if the trust has more 
than 60 days remaining until termination and there are fewer than 50 
record and/or beneficial holders of TIRs for 30 or more consecutive 
trading days; (ii) if the trust has fewer than 50,000 receipts 
issued and outstanding; (iii) if the market value of all TIRs issued 
and outstanding is less than $1,000,000; or (iv) if such other event 
shall occur or condition exists which, in the opinion of the 
Exchange, makes further dealings on the Exchange inadvisable. See 
Phlx Rule 803(j).
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    Thus, under the proposal, the Phlx could list or trade, pursuant to 
Rule 19b-4(e), any TIR product that meets the following additional 
criteria: (1) Each component security in the TIR must be registered 
under Section 12 of the Act; \10\ (2) each component security 
underlying the TIR must have a minimum public float of at least $150 
million: (3) each component security underlying the TIR must be listed 
on a national securities exchange or traded through the facilities of 
Nasdaq as a reported national market system security; (4) each 
component security underlying the TIR must have and average daily 
trading volume of at least 100,000 shares during the preceding sixty-
day trading period; and (5) component security underlying the TIR must 
have an average daily dollar value of shares traded during the 
preceding sixty-day trading period of at least $1 million. In addition, 
no underlying security may initially represent more than 20% of the 
overall value of the TIR.
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    \10\ 15 U.S.C. 781.
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    Furthermore, the Phlx will comply with the recordkkeeping 
requirements of Rule 19b-4(e), and will file Form 19b-4(e) for each TIR 
listed, or admitted to trading pursuant to UTP, under the rule within 
five business days of commencement of trading.\11\
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    \11\ 17 CFR 240.19b-4(e).
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    Finally, the rules relating to the distribution of securities by 
issuers whose securities are included in a TIR have been recently 
revised to provide that: (1) If a company whose securities

[[Page 49992]]

are included in a series to TIRs distributes a security, the 
distributed security will remain in the trust as a component security 
if it is listed for trading on a national securities exchange or 
through the facilities of Nasdaq and its Standard & Poor's Sector 
Classification is the same as the Sector Classification represented by 
the other component securities in the trust at the time of the 
distribution; and (2) if the securities of a company that are included 
in a series of TIRs are no longer outstanding as a result of a merger, 
consolidation, corporate combination or other event, any securities 
received in exchange for those securities will remain in the trust as 
component securities if they are listed for trading on a national 
securities exchange or through the facilities of Nasdaq and their 
Standard & Poor's Sector Classification is the same as the Sector 
Classification represented by the other component securities in the 
trust at the time of the merger, consolidation, corporate combination 
or other event.
    As a result of this change, a security that is automatically 
deposited into the trust as a result of a distribution or a corporate 
event may remain in the trust even though it does not meet all of the 
initial eligibility requirements set forth in Commentary 0.01 to Phlx 
Rule 803(j). For example, securities distributed by an issuer or 
exchanged in a merger generally do not have measurable price and 
trading histories, and may not have a minimum public float of $150 
million. There is a requirement to review the securities that are 
represented by TIRs on an ongoing basis to determine whether component 
securities continue to meet the initial eligibility requirements. 
Accordingly, the Exchange also proposes to amend Phlx Rule 803(j) to 
provide eligibility requirements for a component security that became 
part of a trust when the security was either: (1) Distributed by a 
company already included as a component security in the series of TIRs; 
or (2) received in exchange for the securities of a company previously 
included as a component security and that are no longer outstanding due 
to a merger, consolidation, corporate combination of other event. The 
eligibility requirements for such component securities are as follows:
     Such component security must be listed on national 
securities exchange or traded through the facilities of Nasdaq and a 
reported national market system security;
     Such component security must be registered under Section 
12 of the Exchange Act; and
     Such component security must have a Standard & Poor's 
Sector Classification that is the same as the Standard & Poor's Sector 
Classification represented by component securities already included in 
the TIR at the time of the distribution or exchange.\12\
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    \12\ See Amendment No. 1, supra, note 3.
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    The Exchange believes that it is appropriate in these limited 
situations to provide alternate eligibility criteria for component 
securities. To reduce the number of distributions of securities from 
the TIR which cause inconvenience and increased transaction and 
administrative costs for investors, it is useful to allow certain 
securities that are received as part of a distribution from a company 
or as the result of a merger, consolidation, corporate combination or 
other event to remain in the TIR. The proposed eligibility requirements 
ensure that component securities included in a TIR as a result of a 
distribution or exchange event are widely held (having been distributed 
to all of the shareholders holding the original component security), 
traded through the facilities of an exchange of Nasdaq and registered 
under Section 12 of the Act.\13\
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    \13\ 15 U.S.C. 781.
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2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \14\ in general, and furthers 
the objectives of Section 6(b)(5) \15\ in particular, in that it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest by allowing the Exchange to list and trade, or trade 
pursuant to UTP, TIRs which meet the criteria in the proposed rule, 
thus creating another marketplace for such products which should 
promote additional competition in such products. Furthermore, the 
Exchange believes Amendment No. 1 should enhance competition by 
enabling the Phlx to better compete with other markets trading TIRs.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change, as 
amended, will result in 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 solicited or received with respect to the 
proposed rule change.

II. 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 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 
Phlx. All submissions should refer to file number SR-Phlx-2001-75 and 
should be submitted by October 22, 2001.

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

    After careful review, 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) of the Act.\16\ Specifically, the Commission finds that 
the proposal to provide generic standards to permit listing and trading 
of TIRs pursuant to Rule 19b-4(e) will further 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. By establishing generic standards, the proposal should 
reduce the Phlx's regulatory burden, as well as benefit the public 
interest, by enabling the Phlx to bring qualifying products to the 
market more quickly. Accordingly, the Commission finds that the Phlx's 
proposal and Amendment No. 1 will prevent fraudulent and manipulative

[[Page 49993]]

acts and practices, 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, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, in general, protect investors and the public interest 
consistent with Section 6(b)(5) of the Act.\17\
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ In approving this proposed rule change, 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) of the Act 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 includes the new derivative securities product and the SRO 
has a surveillance program for the product class.\18\
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    \18\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98).
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    As described above, the Commission has previously approved Phlx 
rules that permit the listing and trading of individual TIRs on the 
Exchange or pursuant to UTP.\19\ In approving these securities for 
trading, the Commission considered their structure, their usefulness to 
investors and the markets, and the Exchange's rules and surveillance 
programs that govern their trading. The Commission concluded then that 
securities approved for listing under those rules would allow investors 
to: (1) Respond quickly to changes in the overall securities markets 
generally and for the industry represented by a particular trust; (2) 
trade, at a price disseminated on a continuous basis, a single security 
representing a portfolio of securities that the investor owns 
beneficially; (3) engage in hedging strategies similar to those used by 
institutional investors; (4) reduce transaction costs for trading a 
portfolio of securities; and (5) retain beneficial ownership of the 
securities underlying the TIR. The Commission believes, for the reasons 
set forth below, that additional TIRs that satisfy the proposed generic 
standards and, therefore, can be listed under Rule 19b-4(e) without 
prior Commission approval, should produce the same benefits to the Phlx 
and to investors.
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    \19\ See Securities Exchange Act Release No. 43773 (December 27, 
2000), 66 FR 838 (January 4, 2001) (SR-Phlx-00-31).
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    The Commission further believes that adopting generic listing 
standards for these securities and applying Rule 19b-4(e) should 
fulfill the intended objective of that rule by allowing those TIR 
products that satisfy the generic standards to start trading, without 
the need for notice and comment and Commission approval. The Phlx's 
ability to rely on Rule 19b-4(e) 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 standard through 
regular inspection oversight.
    The Commission finds that the Phlx's proposal contains adequate 
rules and procedures to govern the listing and trading of TIRs pursuant 
to Rule 19b-4(e) on the Phlx, or pursuant to UTP. As the Commission 
noted in its previous review and approval of Phlx Rule 803(j), all TIR 
products listed under the generic standards will be subject to the full 
panoply of the Phlx rules and procedures that now govern both the 
trading of TIRs and the trading of equity securities on the Phlx, 
including, among others, rules and procedures governing the priority, 
parity and precedence of orders, responsibilities of the specialist, 
account opening and customer suitability requirements, and the election 
of a stop or limit order.\20\
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    \1\ Id.
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    The Commission further finds that: (1) By requiring that the 
underlying securities in a TIR are registered under section 12 of the 
Act and listed on a national securities exchange or Nasdaq and (2) by 
establishing minimum values for the number of outstanding receipts, 
average daily trading volume, average daily dollar volume, and public 
float, the Exchange's proposed listing criteria will help to ensure 
that a minimum level of liquidity will exist to allow for the 
maintenance of fair and orderly markets for those TIR products listed 
and traded pursuant to Rule 19b-4(e). The Commission believes that the 
listing criteria will help to ensure that no security underlying a TIR 
will be readily susceptible to manipulation, while permitting 
sufficient flexibility in the construction of various TIRs to meet 
investor's needs. The Commission further believes that these criteria 
should serve to ensure that the underlying securities of such TIR are 
well capitalized and actively traded, which will help to ensure that 
U.S. securities markets are not adversely affected by the listing and 
trading of new TIRs under Rule 19b-4(e). Accordingly, the Commission 
finds that this criteria is consistent with section 6(b)(5) of the Act, 
because they serve to prevent fraudulent or manipulative acts, promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest.\21\
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    \21\ 15 U.S.C. 78f(b)(5).
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    Additionally, as the Commission noted in its previous review and 
approval of Phlx Rule 803(j), the Exchange's delisting criteria allows 
it to consider the suspension of trading and the delisting of a TIR if 
an event occurs that makes further dealings in such securities 
inadvisable. This will give the Phlx flexibility to delist TIRs if 
circumstances warrant. The proposal also relies on procedures to halt 
trading in TIRs in certain enumerated circumstances that were approved 
previously by the Commission.\22\
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    \22\ See supra note 19.
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    The Commission notes that, in connection with its previous review 
and approval of Phlx Rule 803(j), it approved the Exchange's minimum 
price increments, its surveillance procedures, and its disclosure and 
prospectus delivery requirements for TIRs.\23\ In accord with these 
previous findings, the Commission believes that these rules, which will 
govern the trading of TIR products listed pursuant to Rule 19b-4(e), 
will provide adequate safeguards to prevent manipulative acts and 
practices and to protect investors and the public interest. Further, 
the Commission believes that the proposal will ensure that investors 
have information that will allow them to be adequately apprised of the 
terms, characteristics, and risk of trading TIRs.
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    \23\ Id.
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    Furthermore, the Phlx will file Form 19b-4(e) with the Commission 
within five business days of commencement of trading a TIR under the 
generic standards, and will comply with all Rule 19b-4(e) recordkeeping 
requirements.
    The Commission believes that the Phlx's proposed rule governing the 
listing and trading of TIRs pursuant to Rule 19b-4(e) provides adequate 
safeguards to prevent manipulative acts and practices and to protect 
investors

[[Page 49994]]

and the public interest, consistent with section 6(b)(5) of the 
Act.\24\
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    \24\ 15 U.S.C. 78f(b)(5).
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    Finally, the Commission believes that the Amendment No. 1 to 
provide an alternate eligibility criteria for component securities 
received as part of a distribution or as a result of a merger, 
consolidation, corporate combination or other event to remain in the 
trust should enhance competition by enabling the Phlx to better compete 
with other markets trading TIRs and notes that the Commission has 
previously approved similar listing standards modifications for the 
American Stock Exchange, Inc.\25\
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    \25\ See Securities Exchange Act Release No. 44309 (May 16, 
2001), 66 FR 28587 (May 23, 2001) (SR-Amex-2001-04).
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    Accordingly, the Commission finds that there is good cause, 
consistent with Section 6(b)(5) of the Act,\26\ to approve the 
proposal, as amended, on an accelerated basis prior to the thirtieth 
day after the date of publication of the notice of filing thereof in 
the Federal Register pursuant to Section 19(b)(2) of the Act.\27\
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    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change, as amended, (SR-Phlx-2001-75), 
is hereby approved on an accelerated basis.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\29\

    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-24474 Filed 9-28-01; 8:45 am]
BILLING CODE 8010-01-M