[Federal Register Volume 66, Number 204 (Monday, October 22, 2001)]
[Notices]
[Pages 53457-53461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26486]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44928; File No. SR-BSE-2001-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Boston Stock Exchange, Inc. Relating to the 
Generic Listing and Trading Standards of Trust Issued Receipts Pursuant 
To Rule 19b-4(e) Under the Securities Exchange Act of 1934

October 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 August 10, 2001, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. On 
October 2, 2001, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On October 10, 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 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\ See Letter from Esther M. Radovsky, Staff Attorney, BSE, to 
Lisa N. Jones, Attorney, Division of Market Regulation 
(``Division''), Commission (October 2, 2001) (``Amendment No. 1''). 
Amendment No. 1 amends the proposed rule text to reflect that the 
underlying security is of the Trust Issued Receipt rather than the 
HOLDR product, and therefore replaces the original filing in its 
entirety.
    \4\ See Letter from Esther M. Radovsky, Staff Attorney, BSE, to 
Lisa N. Jones, Attorney, Division, Commission (October 9, 2001) 
(``Amendment No. 2''). Amendment No. 2 amends the proposed rule text 
to replace the term ``Underlying Securities'' with ``Component 
Securities,'' and corrects a typographical error.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend BSE Chapter XXIV-A, (``Trust Issued 
Receipts'' (hereinafter, ``TIRs'')), to provide generic standards that 
permit the listing and trading, or the trading pursuant to unlisted 
trading privileges (``UTP''), of TIRs pursuant to Rule 19b-4(e) under 
the Act. In addition, the Exchange proposes to adopt eligibility 
requirements for component securities that are represented by a series 
of TIRs pursuant to distribution or other corporate event. Below is the 
text of the proposed rule change. Proposed new language is italicized.
* * * * *

Chapter XXIV-A--Trust Issued Receipts

* * * Interpretation and Policies

    .02  The Exchange may approve a series of Trust Issued Receipts for 
listing pursuant to Rule 19b-4(e) under the Securities Exchange Act of 
1934 provided each of the component securities satisfies the following 
criteria:
    (a) Eligibility Criteria for Component Securities Represented by a 
Series of Trust Issued Receipts:
    (i) Each Component Security of the Trust Issued Receipt must be 
registered under Section 1 of the Exchange Act; 
    (ii) Each Component Security of the Trust Issued Receipt must have 
a minimum public float of at least $150 million;
    (iii) Each Component Security of the Trust Issued Receipt must be 
listed on a national securities exchange or traded through the 
facilities of Nasdaq and a reported national market system security;

[[Page 53458]]

    (iv) Each Component Security of the Trust Issued Receipt must have 
an average daily trading volume of at least 100,000 shares during the 
preceding sixty-day trading period;
    (v) Each Component Security of the Trust Issued Receipt 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 in the Trust 
Issued Receipt cannot initially represent more than 20% of the overall 
value of the Trust Issued Receipt.
    .03  The eligibility requirement for the 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:
    (a) 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;
    (b) the Component Security must be registered under Section 12 of 
the Exchange Act; and
    (c) the Component Security must have a Standard & Poor's Sector 
Classification that is the same as the Standard & Poor's Sector 
Classification represented by the 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, 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 proposes to amend its listing and trading standards 
for TIRs under BSE Chapter XXIV-A in two parts. First, the Exchange 
proposes to provide generic standards that permit the listing and 
trading, or trading pursuant to UTP, or TIRs, pursuant to Rule 19b-4(e) 
under the Act.\5\ Second, the Exchange proposes to adopt eligibility 
requirements for component securities, represented by a series of TIRs, 
that became part of such a series when the security was either: (a) 
distributed by a company whose securities are already included as an 
component security in the series of TIRs; or
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    \5\ 17 CFR 240.19b-4(e). 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 Rule 19b-4(c)(1) under the Act, if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures and listings standards for the 
product class that include the new derivative securities product and 
the SRO has a surveillance program for the product class. See 17 CFR 
240.19b-4(e).
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    (b) received in exchange for the securities of a company previously 
included as a component security that are no outstanding due to a 
merger, consolidation, corporate combination or other event.

Trading Trust Issued Receipts Pursuant to 19b-4(e).

    On January 13, 2000, the Exchange received approval to adopt BSE 
Chapter XXIV-A, et seq. to establish standards for the listing and 
trading, pursuant to UTP, of TIRs.\6\ To accommodate the efficient 
listing and trading, or trading pursuant to UTP, of additional TIRs, 
the Exchange proposes to add a new section to its Interpretation and 
Policies, BSE Chapter XXIV-A, to permit the generic listing and trading 
of TIRs pursuant to Rule 19b-4(e).
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    \6\ See Securities Exchange Act Release No. 42347, 65 FR 4451 
(January 27, 2000) (accelerated order approving SR-BSE-99-15).
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    The Commission has previously approved rules of other exchanges 
that permit the listing and trading of individual TIRs.\7\ In approving 
these securities for trading, the Commission considered the structure 
of these securities, their usefulness to investors and to the markets, 
and the Exchange rules and surveillance programs that govern their 
trading.
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    \7\ See, e.g. Securities Exchange Act Release Nos. 43396 
(September 29, 2000) 65 FR 60230 (October 10, 2000) (order granting 
accelerated approval of SR-Amex-00-10 and SR-CHX-00-16); 44182 
(April 16, 2001), 66 FR 21798 (May 1, 2001) (order granting 
accelerated approval of SR-PCX-2001-01).
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    The Exchange represents that BSE Chapter XXIV-A subjects TIRs to 
all of the Exchange's trading rules by expressly providing that the 
provisions of the Exchange's Constitution and all other rules and 
policies of the Board of Governors apply to the trading of TIRs on the 
Exchange.\8\ Furthermore, the Exchange represents that the initial and 
continued listing standards established for TIRs mandate that for each 
Trust,\9\ the Exchange will establish a minimum number of TIRs required 
to be outstanding at the time trading begins on the Exchange.\10\ BSE 
Chapter XXIV-A also requires that, following the initial twelve month 
period after trading begins, the Exchange will consider the suspension 
of trading in, or removal from listing of a TIR if: (1) The Trust has 
more than 60 days remaining until termination and there are fewer than 
50 record or beneficial holders of TIRs for 30 or more consecutive 
days; (2) the Trust has fewer than 50,000 receipts issued and 
outstanding; (3) the market value of all receipts issued and 
outstanding is less than $1,000,000; or (4) any other event occurs or 
conditions exists which, in the opinion of the Exchange, makes further 
dealings on the Exchange inadvisable.\11\
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    \8\ Exceptions exist where a trading rule is inconsistent with 
the Trust Issued Receipt listing standard or where the context 
otherwise requires. See BSE Chapter XXIV-A, Section 1(a).
    \9\ See BSE Chapter XXIV-A, Section 2(a) (defining the term, 
``Trust'').
    \10\ See BSE Chapter XXIV-A, Section 5(a).
    \11\ See BSE Chapter XXIV-A, Section 5(b).
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    Under the Interpretation and Policies section of BSE Chapter XXIV-
A, the Exchange proposes to provide generic standards to list or trade, 
pursuant to Rule 19b-4(e), any TIRs that meet the following criteria: 
(1) Each component security of the TIR must be registered under Section 
12 of the Act; (2) each component security of the TIR must have a 
minimum public float of at least $150 million; (3) each component 
security of the TIR must be listed on a national securities exchange or 
traded through the facilities of Nasdaq and a reported national market 
system security; (4) each component security of the TIR must have an 
average daily trading volume of at least 100,000 shares during the 
preceding sixty-day trading period; and (5) each component security of 
the TIR must have an average daily dollar value of shares traded during 
the preceding sixty-day trading period of at least $1 million. Finally, 
the Exchange proposes that no component security of the TIR may 
initially

[[Page 53459]]

represent more than 20% of the overall value of the receipt.
    The Exchange believes that these additional criteria to the listing 
and trading standards for TIRs will ensure that no component security 
in a TIR product will be readily susceptible to manipulation, while 
permitting sufficient flexibility in the construction of various TIRs 
to meet investors' needs. These criteria also will ensure sufficient 
liquidity for those investors seeking to purchase and deposit the 
component securities with the trustee to create a new TIR.
    The Exchange proposes to use existing surveillance procedures for 
the Trust Issued Receipts that it trades pursuant to Rule 19b-4(e). In 
addition, the Exchange will comply with the recordkeeping requirements 
of Rule 19b-4(e),\12\ and will file Form 19b-4(e) for each series of 
TIRs within five business days of commencement of trading.
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    \12\ 17 CFR 240.19b(c).
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    The Exchange proposes that TIRs are subject to the Exchange's rule 
relating to trading halts due to extraordinary market volatility (BSE 
Chapter II, Section 34A) and the Exchange's rule that provides 
discretion to Exchange officials to halt trading in specific securities 
under certain circumstances (BSE Chapter II, Section 34B). In 
exercising the discretion described in BSE 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 proposes that it will distribute an 
information circular to its members in connection with the trading of 
TIRs. It will discuss the special characteristics and risks of trading 
this type of security, including the fact that TIRs are not 
individually redeemable. Specifically, the circular, among other 
issues, will discuss what TIRs are, how they are created, the 
requirement that member and member firms deliver a prospectus to 
investors purchasing TIRs prior to or concurrently with the 
confirmation of a TIRs transaction, applicable BSE rules, dissemination 
information, trading information, and the applicability of suitability 
rules. In addition, the circular will inform members of specific BSE 
policies, such as trading halts and market conditions particular to 
such securities.

Eligibility Requirements for Component Securities Pursuant to 
Distribution or Other Corporate Event

    Recently, the American Stock Exchange LLC (``Amex'') revised its 
rules relating to the distributions of securities by component 
securities in a Trust.\13\ In sum, the Amex rules provide: (a) If a 
company whose securities are included in a series of TIRs distributes a 
security, the distributed security will remain in the Trust as a 
component security if it is listed for trading on a U.S. 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 (b) 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 a component security if it is listed for trading 
on a U.S. 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 merger, consolidation, corporate 
combination or other event.
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    \13\ See Securities Exchange Act Release No. 44309 (May 16, 
2001), 66 FR 28587 (May 23, 2001) (order granting accelerated 
approval of SR-Amex-2001-04).
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    As a result of this change, the Exchange proposes that a security, 
which 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 proposed Interpretation and Policies .02 of BSE Chapter XXIV-A. 
Specifically, the Exchange proposes under the Interpretation and 
Policies section of BSE Chapter XXIV-A, 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.
    The Exchange proposes that the eligibility requirements for such 
component securities are the following: (1) That such component 
security must be listed on national securities exchange or traded 
through the facilities of Nasdaq and a reported national market system 
security; (2) that such component security must be registered under 
Section 12 of the Exchange Act; and (3) that 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 TIRs at the time of the distribution 
or exchange.
    The Exchange believes that it is appropriate in these limited 
situations to provide alternate eligibility criteria for the component 
securities. To reduce the number of distributions of securities from 
the TIR, which may cause inconvenience and increased transaction and 
administrative costs for investors, the Exchange believes that 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 Exchange believes that 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 or Nasdaq and registered 
under Section 12 of the Act.\14\
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    \14\ 15 U.S.C. 781
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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 them 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-2001-05 and should be submitted by November 13, 2001.

[[Page 53460]]

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

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act \15\ and the rules and regulations thereunder applicable to a 
national securities exchange. Specifically, the Commission finds that 
the proposal to provide standards to permit listing and trading of 
trust issued receipts pursuant to Rule 19b-4(e) \16\ furthers the 
intent of the Rule by facilitating commencement of trading in these 
securities without the need for notice and comment and Commission 
approval.
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 17 CFR 240.19b-4(e).
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    By establishing generic listing standards, the proposal should 
reduce the BSE's regulatory burden, as well as benefit the public 
interest, by enabling the BSE to bring qualifying products to the 
market more quickly. Accordingly, the Commission finds that BSE's 
proposal should 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.\17\
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    \17\ 15 U.S.C. 78f(b)(5). In approving these rules, the 
Commission has considered their impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    As described above, the Commission has previously approved similar 
Amex, CHX, and PCX rules that permit the generic listing and trading of 
individual TIRs.\18\ In approving these securities for trading, the 
Commission considered their structure, their usefulness to investors 
and the markets, and the Exchanges' rules and surveillance programs 
that govern their trading. The Commission concluded then, as it does 
now, 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 transactions costs 
for trading a portfolio of securities; and (5) retain beneficial 
ownership of the securities component the TIRs.
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    \18\ See Securities Exchange Act Release Nos. 43396 (September 
29, 2000) 65 FR 60230 (October 10, 2000) (order granting accelerated 
approval of SR-Amex-00-10 and SR-CHX-00-16); 44182 (April 16, 2001), 
66 FR 21798 (May 1, 2001) (order granting accelerated approval of 
SR-PCX-2001-01).
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    The Commission notes that the BSE's proposed standards are 
substantially similar to the Amex, CHX and PCX standards. The 
Commission therefore believes that TIRs that satisfy the BSE's proposed 
standards should produce the same benefits to the BSE and to investors.
    The Commission further believes that adopting generic listing 
standards for these securities pursuant to Rule 19b-4(e) under the Act 
should fulfill the intended objective of the Rule by giving the BSE the 
ability to potentially reduce 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 it maintains regulatory oversight over any 
products listed under the generic standards through regular inspection 
oversight.
    The Commission finds that the BSE's proposal contains adequate 
rules and procedures to govern the listing and trading of TIRs pursuant 
to Rule 19b-4(e) on the BSE, or pursuant to UTP. All TIR products 
listed under the standards will be subject to the full panoply of BSE 
rules and procedures that now govern both the trading of TIRs and the 
trading of equity securities on the Amex, CHX, and the PCX 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.
    The Commission further finds that: (1) By requiring that the 
component securities in a TIR be 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 TIRs listed and 
traded pursuant to Rule 19b-4(e). The Commission believes that these 
listing criteria will help to ensure that no component security a TIR 
will be readily susceptible to manipulation, while permitting 
sufficient flexibility in the construction of various trust issued 
receipts to meet investors' needs. The Commission further believes that 
these criteria should serve to ensure that the component securities of 
such TIRs 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 these criteria are consistent with Section 
6(b)(5) of the Act,\19\ 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.
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    \19\ 15 U.S.C. 78f(b)(5).
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    Additionally, as the Commission noted in its previous review and 
approval of Amex, CHX and the PCX Rules, 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 Exchange flexibility to 
delist TIRs if circumstances warrant.
    The Commission notes that, in connection with its previous review 
and approval of Amex, CHX and PCX Rules, it approved similar applicable 
minimum price increments, surveillance procedures, and disclosure and 
prospectus delivery requirements for TIRs.\20\ In accordance with these 
previous findings, the Commission believes that the BSE's proposed 
rules 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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    \20\ See note 17, supra.
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    The BSE has noted that it will file Form 19b-4(e) with the 
Commission within five business days of commencement of trading a TIR 
under the listing standards and will comply with all Rule 19b-4(e) 
recordkeeping requirements.
    Finally, the Commission finds that the BSE's proposal to provide an 
alternative 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 will 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, facilitate transactions in 
securities, remove impediments to and perfect the mechanism of a free 
and open market

[[Page 53461]]

and a national market system, and, in general, protect investors and 
the public interest. As noted above, the Commission has previously 
approved Amex rules that provided similar eligibility requirements.\21\
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    \21\ See Securities Exchange Act Release No. 44309 (May 16, 
2001), 66 FR 28587 (May 23, 2001) (order granting accelerated 
approval of SR-Amex-2001-04).
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    Thus, the Commission finds good cause for approving the proposed 
rule change (SR-BSE-2001-05) prior to the thirtieth day after the date 
of publication of notice thereof in the Federal Register. The 
Commission notes that the BSE's proposed rule change is similar to 
rules previously approved by the Commission for Amex, CHX and the PCX. 
The Commission does not believe that the proposed rule change raises 
novel regulatory issues that were not addressed in the previous 
filings. Moreover, the Commission believes that approving the generic 
listing and trading of TIRs on the BSE will increase industry 
competitiveness by providing an additional venue for the trading of 
such issues, to the benefit of the investor. Accordingly, the 
Commission finds that there is good cause, consistent with Section 
6(b)(5) of the Act,\22\ to approve the proposal on an accelerated 
basis, and before expiration of the period for filing comments.
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    \22\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-BSE-2001-05) is hereby 
approved on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26486 Filed 10-19-01; 8:45 am]
BILLING CODE 8010-01-M