[Federal Register Volume 67, Number 74 (Wednesday, April 17, 2002)]
[Notices]
[Pages 18965-18970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9309]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45718; File No. SR-NYSE-2002-07]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the New York Stock Exchange, Inc. Relating to 
the Listing and Trading Standards of Trust Issued Receipts

April 9, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 16, 2002, the New York Stock Exchange, 
Inc. (``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On March 28, 2002, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On April 9, 2002, 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 Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission (March 27, 2002) (``Amendment No. 1''). 
Amendment No. 1 replaces the original filing in its entirety, and 
makes clarifications and technical corrections to the proposed rule 
text.
    \4\ See Letter from James F. Duffy, Senior Vice President and 
Associate General Counsel, NYSE, to Nancy J. Sanow, Assistant 
Director, Division, Commission (April 9, 2002) (``Amendment No. 
2''). Amendment No. 2 clarifies that the proposed rule change 
applies to a Trust Issued Receipt, not specific proprietary 
products, and clarifies rule text and the purpose of Rule 19b-4(e).

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[[Page 18966]]

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

    The Exchange proposes to adopt listing standards for the listing 
and trading, or the trading pursuant to unlisted trading privileges 
(``UTP''), of Trust Issued Receipts (``TIRs'') under NYSE Rules 1200 
through 1202, and 703.20 of the NYSE's Listed Company Manual. The 
Exchange also proposes to amend its rules to incorporate the listing 
and trading of TIRs.\5\ In addition, the Exchange proposes to adopt 
generic listing standards that permit the listing and trading, or 
trading pursuant to UTP of TIRs, pursuant to Rule 19b-4(e) of the 
Act.\6\ The text of the proposed rule change is available at the Office 
of the Secretary, NYSE, and at the Commission.
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    \5\ See Exchange Rules 13, 36, 98, 104, 105(l), 460, Allocation 
Policy and pre-opening and Market-On-Close (``MOC'') and Limit-at-
the-Close (``LOC'') procedures.
    \6\ 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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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. 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 adopt rules to provide standards that 
permit the listing and trading, or the trading pursuant to UTP, of 
TIRs, including generic listing standards of TIRs, pursuant to Rule 
19b-4(e) of the Act. The Exchange proposes to adopt listing standards 
applicable to TIRs consistent with the listing criteria currently used 
by the American Stock Exchange LLC (``Amex'') and other exchanges, in 
order to trade TIRs on the Exchange, and/or on a UTP basis. Thus, the 
Exchange proposes to adopt standards that permit the listing and 
trading, or trading pursuant to UTP, of TIRs, under Section 19(b)(2) of 
the Act.\7\ In addition, the Exchange proposes to adopt generic listing 
and trading standards for the listing and trading, or trading pursuant 
to UTP, of TIRs, under Rule 19b-4(e) of the Act.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 17 CFR 240.19b-4(e).
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Trust Issued Receipts Generally

    TIRs are negotiable receipts that are issued by a trust 
representing securities of issuers that have been deposited and are 
held on behalf of the holders of the TIRs. TIRs are designed to allow 
investors to hold interests in a variety of companies throughout a 
particular industry in a single, exchange-listed and traded instrument 
that represents beneficial ownership in the deposited securities. 
Holders may cancel their TIRs at any time to receive the deposited 
securities.
    Beneficial owners of TIRs will have the same rights, privileges and 
obligations as they would have if they beneficially owned the deposited 
securities outside of the TIR program. Holders of TIRs have the right 
to instruct the trustee to vote the deposited securities evidenced by 
the receipts. They will receive reports, proxies, and other information 
distributed by the issuers of the deposited securities to their 
security holders and will receive dividends and other distributions 
declared and paid by the issuers of the deposited securities to the 
trustee.
    TIRs are not leveraged instruments, and therefore do not possess 
any of the attributes of stock index options. The Exchange believes 
that the level of risk involved in the purchase and sale of TIRs is 
almost identical to the risk involved in the purchase or sale of the 
common stocks represented by the receipt.
    TIRs will be issued by a trust created pursuant to a depository 
trust agreement. After the initial offering, the trust may issue 
additional receipts on a continuous basis when an investor deposits the 
requisite securities with the trust. An investor in TIRs will be 
permitted to withdraw his or her deposited securities upon delivery to 
the trustee of one or more round-lots of 100 TIRs. Orders for other 
than a round lot (or round lot multiples) will not be allowed. 
Conversely, an investor may deposit the necessary securities and 
receive the TIRs in return.

Criteria for Initial and Continued Listing

    The Exchange believes that the listing criteria proposed in its new 
rule are generally consistent with the listing criteria currently used 
by the Amex, the Chicago Stock Exchange, Inc. (the ``CHX''), the 
Chicago Board Options Exchange, Inc. (the ``CBOE'') and the Boston 
Stock Exchange, Inc. (the ``BSE'').\9\
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    \9\ See Securities Exchange Act Release No. 41892 (September 21, 
1999) 64 FR 52559 (September 29, 1999) (approving the listing and 
trading of TIRs and Internet HOLDRs on the Amex); Securities 
Exchange Act Release No. 42056 (October 22, 1999), 64 FR 58870 
(November 1, 1999) (approving the listing and trading of TIRs and 
Internet HOLDRs on the CHX pursuant to UTP); Securities Exchange Act 
Release No. 42347 (January 13, 2000), 65 FR 4451 (January 27, 2000) 
(approving the listing and trading of TIRs and Internet HOLDRs on 
the BSE pursuant to UTP); Securities Exchange Act Release No. 43134 
(August 10, 2000), 65 FR 50255 (August 17, 2000) (approving the 
listing standards for TIRs on the CBOE) and Securities Exchange Act 
Release No. 44908 (October 4, 2001), 66 FR 52161 (October 12, 2001) 
(approving the generic listing and trading of TIRs and HOLDRs on the 
CBOE).
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    If TIRs are to be listed on the NYSE, the Exchange will establish a 
minimum number of receipts that must be outstanding at the time trading 
commences on the Exchange, and such minimum number will be included in 
any required submission to the Commission. In connection with continued 
listing, the Exchange will consider the suspension of trading in, or 
removal from listing of, a series of TIRs when any of the following 
circumstances arise: (1) The trust has more than 60 days remaining 
until termination and there have been fewer than 50 record and/or 
beneficial holders of the TIRs for 30 or more consecutive trading 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 million; or (4) such other event occurs or condition exists 
which, in the opinion of the Exchange, makes further dealings on the 
Exchange inadvisable. These flexible criteria will allow the Exchange 
to avoid delisting TIRs (and possibly terminating the trust) due to 
relatively brief fluctuations in market conditions that may cause the 
number of holders to vary. However, these delisting criteria will not 
be applied for the initial 12-month period following formation of a 
trust and commencement of trading on the Exchange.
    In addition, if the number of companies represented by the 
deposited securities drops to fewer than nine, and each time the number 
of companies is reduced thereafter, the Exchange will consult with the 
staff of the Division of Market Regulation to confirm the

[[Page 18967]]

appropriateness of continued listing of TIRs.

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

    To accommodate the efficient listing and trading, or trading 
pursuant to UTP, of additional TIRs, the Exchange proposes to adopt 
generic listing and trading standards of TIRs pursuant to Rule 19b-
4(e).\10\ Rule 19b-4(e) provides that the listing and trading of a new 
derivative securities product by an SRO will not be deemed a proposed 
rule change, pursuant to paragraph (c)(1) of the Rule 19b-4,\11\ if the 
Commission has approved, pursuant to section 19(b) of the Act,\12\ the 
SRO's trading rules, procedures and listing requirements for the 
product class that include the new derivative securities product, and 
the SRO has a surveillance program for the product class.\13\ The 
Exchange believes that the Commission's approval of the proposed 
generic listing requirements for TIRs will allow the NYSE to begin 
trading qualifying products without the need for notice and comment and 
Commission approval under section 19(b) of the Act.\14\ 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 and thus 
enhances investors' opportunities.
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    \10\ Telephone conversation between Elena L. Daly, Assistant 
General Counsel, Office of General Counsel, NYSE, and Lisa N. Jones, 
Attorney, Division, Commission (April 2, 2002).
    \11\ 17 CFR 240.19b-4(c)(1).
    \12\ 15 U.S.C. 78s(b).
    \13\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \14\ 15 U.S.C. 78s(b).
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    The Commission has previously approved requests of the Amex, 
CHX,\15\ and the Pacific Exchange, Inc. (``PCX'') \16\ to provide 
generic standards to list and/or trade TIRs.\17\ The Exchange believes 
that its proposed listing requirements for TIRs are substantially 
similar to the generic listing requirements at the Amex, CHX, and the 
PCX.
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    \15\ See Securities Exchange Act Release No. 43396 (September 
29, 2000), 65 FR 60230 (October 10, 2000).
    \16\ See Securities Exchange Act Release No. 44182 (April 16, 
2001), 66 FR 21798 (May 1, 2001).
    \17\ Specifically, 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 represent more than 20% of the overall value of the 
receipt.
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Exchange Rules Applicable to the Trading of Trust Issued Receipts

    TIRs are considered ``securities'' pursuant to NYSE Rule 3 and are 
subject to all applicable trading rules. TIRs will be deemed ``eligible 
securities'' for purposes of the Intermarket Trading System (``ITS'') 
Plan and therefore will be subject to the trade-through provisions of 
NYSE Rule 15A. TIRs are also subject to NYSE rules and policies 
governing, among other things, equity margin, priority, parity and 
precedence of orders, market volatility related trading halts, and 
responsibilities of member firms.\18\
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    \18\ The Exchange notes that rules relating to odd lot 
executions will not apply, because TIRs are traded only in round 
lots or round lot multiples. Additionally, the Exchange understands 
that the Commission has provided an exemption from the short sale 
rule, Rule 10a-1 under the Act, 17 CFR 240.10a-1, for transactions 
in securities issued under the HOLDRs program. See Letter from James 
A. Brigagliano, Assistant Director, Division, Commission, to Claire 
P. McGrath, Vice President and Special Counsel Derivative 
Securities, Amex, dated (November 3, 1999), 1999 WL 692411 (SEC No-
Action Letter). Thus, the NYSE will issue a notice to its members 
detailing the terms of the exemption, and confirming that applicable 
NYSE rules relating to short sales do not apply.
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    The Exchange's surveillance procedures for TIRs will be similar to 
those used for investment company units and will incorporate and rely 
upon existing NYSE surveillance procedures governing equities.
    Prior to the commencement of trading in TIRs, the Exchange will 
distribute a circular to the membership highlighting the 
characteristics of TIRs, including that TIRs are not individually 
redeemable. In addition, the circular will advise members of the 
Exchange about policies relating to trading halts in TIRs. 
Specifically, the circular will note that the Exchange may consider 
factors such as the extent to which trading is not occurring in the 
underlying security(s); whether trading has been halted or suspended in 
the primary market(s) for any combination of underlying stocks 
accounting for 20% or more of the applicable current portfolio value; 
and whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.

Disclosure to Customers

    The Exchange will require its members to provide all purchasers of 
newly issued TIRs with a prospectus for that series of TIRs.

Trading of TIRs

    Upon approval of the NYSE's listing standards for TIRs, the 
Exchange intends to begin trading, on a UTP basis, some or all TIRs 
that are currently trading on other securities exchanges. The following 
paragraph contains information about TIRs generally.\19\
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    \19\ The Exchange notes that this information is based upon 
descriptions included in the various TIRs prospectuses and 
depositary trust agreements, the Amex submissions relating to its 
TIR listing proposal, and the Commission's order approving the Amex 
proposal. See note 6, supra.
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    Each of the companies represented by the securities in the 
portfolios underlying the existing TIRs are required to meet the 
following minimum criteria of proposed NYSE Rule 1202 and Supplementary 
Material .10 when they are listed on the NYSE, or traded pursuant to 
UTP. The generic listing standards require the following: (1) That each 
company's common stock must be registered under Section 12 of the 
Exchange Act; (2) the minimum public float of each company included in 
the portfolio was at least $150 million; (3) each security was either 
listed on a national securities exchange or traded through the 
facilities of Nasdaq and a reported national market system security; 
(4) the average daily trading volume for each security was at least 
100,000 shares during the preceding sixty-day trading period; and (5) 
the average daily dollar value of the shares traded during the 
preceding sixty-day trading period was at least $1 million. The initial 
weighting of each security in the portfolio was based on its market 
capitalization; however, any security that represented more than 20% of 
the overall value of the receipt on the date of the weighting was 
determined, was reduced to no more than 20% of the receipt value.

Trading Issues for TIRs

    A round lot of any of the above TIRs represents a holder's 
individual and undivided beneficial ownership interest in the whole 
number of securities represented by the receipt. The amount of 
deposited securities for each round lot of 100 TIRs will be determined 
at the beginning of the marketing period and will be disclosed in the 
prospectus to investors. Because TIRs may be acquired, held or 
transferred only in round lots of 100 receipts or round lot multiples, 
orders for other than a round lot (or round lot multiples) will not be 
allowed.
    The Exchange believes that TIRs will not trade at a material 
discount or

[[Page 18968]]

premium to the assets held by the issuing trust, because the arbitrage 
process should promote correlative pricing between the TIRs and the 
deposited securities. If the price of the TIR deviates enough from the 
portfolio of deposited securities to create a material discount or 
premium, an arbitrage opportunity would be created, allowing the 
arbitrageur to either: (1) Buy the TIRs at a discount, exchanging them 
for shares of the underlying securities and selling those shares at a 
profit; or (2) sell the TIRs short at a premium, buying the securities 
underlying the TIRs, depositing them in exchange for the TIRs, and 
delivering against the short position. In both instances, the 
arbitrageur locks in a profit and the markets move back into line.
    The Exchange represents that its rules and policies currently 
applicable to investment company units will also apply to TIRs. These 
include the Exchange's policies regarding mandatory dissemination of 
pre-opening price indications (other than ITS pre-opening 
notifications) in the case of significant order imbalances, and the 
Exchange's MOC and LOC procedures (which do not apply to investment 
company units and will also not apply to TIRs). Other such rules and 
policies include those relating to specialist allocation, capital and 
net liquid assets requirements for specialist member organizations, 
market making activity by a specialist, and control relationships 
involving a specialist.

Maintenance of TIRs Portfolio

    Except when a reconstitution event occurs, as described below, the 
securities represented by a TIR will not change. According to the 
prospectus of TIRs, under no circumstances will a new company be added 
to the group of issuers of the underlying securities, and weightings of 
component securities will not be adjusted after they are initially 
set.\20\
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    \20\ The Exchange represents that the number of each security 
represented in a receipt may change due to certain corporate events 
such as stock splits or reverse stock splits on the deposited 
securities, and the relative weightings among the deposited 
securities may change based on the current market price of the 
deposited securities. See proposed NYSE Rule 1202, Supplementary 
Material .20.
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Reconstitution Events of TIRs

    Trust agreements will provide for, and prospectuses for TIRs will 
describe, the automatic distribution of specified deposited securities 
in the trust's portfolio to the beneficial owners of TIRs in the 
circumstances referred to in such trust agreements and prospectuses as 
``reconstitution events.'' The reconstitution events occur under the 
following circumstances:
    (1) If the issuer of the underlying securities no longer has a 
class of common stock registered under Section 12 of the Act, then its 
securities will no longer be an underlying security and the trustee 
will distribute the securities of that company to the owners of the 
TIRs;
    (2) If the Commission finds that an issuer of underlying securities 
should be registered as an investment company under the Investment 
Company Act of 1940, and the trustee has actual knowledge of the 
Commission's finding, then the trustee will distribute the shares of 
that company to the owners of the TIRs;
    (3) If the underlying securities of an issuer cease to be 
outstanding as a result of a merger, consolidation or other corporate 
combination, the trustee will distribute the consideration paid by and 
received from the acquiring company to the beneficial owners of the 
TIRs, unless the acquiring company's securities are already included in 
the TIR as deposited securities, in which case such additional 
securities will be deposited into the trust; and
    (4) If an issuer's underlying securities are delisted from trading 
on a national securities exchange or Nasdaq and are not listed for 
trading on another national securities exchange or through Nasdaq 
within five business days from the date the deposited securities are 
delisted.
    As described in the prospectus, if a reconstitution event occurs, 
the trustee will deliver the deposited security to the investor as 
promptly as practicable after the date that the trustee has knowledge 
of the occurrence of a reconstitution event.

Issuance and Cancellation of TIRs

    The trust will issue and cancel--and an investor may obtain, hold, 
trade or surrender--TIRs only in round lots of 100 or in round lot 
multiples. Orders for other than a round lot or round lot multiples 
will not be allowed. While investors will be able to acquire, hold, 
transfer and surrender a round lot of 100 TIRs, the bid and asked 
prices will be quoted on a per receipt basis. The trust will issue 
additional receipts on a continuous basis when an investor deposits the 
required securities with the trust.
    An investor may obtain TIRs by either purchasing them on an 
exchange or by delivering to the trustee the underlying securities 
evidencing a round lot of TIRs. The trustee will charge an issuance and 
cancellation fee of up to $10.00 per 100 TIRs. Lower charges may be 
assigned for bulk issuances and cancellations. An investor may cancel 
TIRs and withdraw the deposited securities by delivering a round lot or 
round lot multiple of the TIRs to the trustee, during normal business 
hours. According to the prospectus, the trustee expects that, in most 
cases, it will deliver the deposited securities within one business day 
of the withdrawal request.

Termination of TIRs

    The trust shall terminate upon the earlier of: (1) The removal of 
the TIRs from listing on a national securities exchange or Nasdaq if 
they are not listed for trading on another national securities exchange 
or Nasdaq within five business days from the date the receipts are 
delisted; (2) the trustee resigns and no successor trustee is appointed 
within 60 days from the date the trustee provides notice to the initial 
depositor of its intent to resign; (3) 75% of the beneficial owners of 
outstanding TIRs (other than Merrill Lynch, Pierce, Fenner & Smith 
Incorporated) vote to dissolve and liquidate the trust; or (4) December 
31, 2039. If a termination event occurs, the trustee will distribute 
the underlying securities to the beneficial owners as promptly as 
practicable after the termination event.
2. Statutory Basis
    The Exchange believes that the basis under Act for this proposed 
rule change is the requirement under section 6(b)(5) of the Act,\21\ 
which provides that an exchange have rules that are designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
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    \21\ 15 U.S.C. 78f(b)(5).
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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 the Commission, and all written communications relating to 
the proposed rule change between the

[[Page 18969]]

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 NYSE. All 
submissions should refer to File No. SR-NYSE-2002-07 and should be 
submitted by May 8, 2002.

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 \22\ and the rules and regulations thereunder applicable to a 
national securities exchange. Specifically, the Commission finds, as it 
did with the Amex and other exchanges, that the proposal establishes 
listing standards for TIRs that will provide investors with a 
convenient and less expensive way of participating in the securities 
markets. The Exchange's proposal should advance the public interest by 
providing investors with increased flexibility in satisfying their 
investment needs by allowing them to purchase and sell a single 
security replicating the performance of a broad portfolio of stocks at 
negotiated prices throughout the business day. Accordingly, the 
Commission finds that the Exchange's proposal will facilitate 
transactions in securities, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\23\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    As noted in the Amex approval order, the Commission believes that 
TIRs will provide investors with an alternative to trading a broad 
range of securities on an individual basis, and will give investors the 
ability to trade TIRs representing a portfolio of securities 
continuously throughout the business day in secondary market 
transactions at negotiated prices. TIRs will 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 investors 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 TIRs.
    Although TIRs are not leveraged instruments, and therefore do not 
possess any of the attributes of stock index options, their prices will 
be derived and based upon the securities held in their respective 
trusts. Accordingly, the level of risk involved in the purchase or sale 
of trust issued receipts is similar to the risk involved in the 
purchase or sale of traditional common stock, with the exception that 
the pricing mechanism for trust issued receipts is based on a basket of 
securities.\24\
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    \24\ The Commission has concerns about continued trading of the 
TIRs whether listed or pursuant to UTP, if the number of component 
securities falls to reflect a cross section of the selected 
industry. Accordingly, the NYSE has represented that it would 
consult the Commission concerning continued trading, once the trust 
has fewer than nine component securities, and for each subsequent 
loss of a security thereafter.
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Trading of Trust Issued Receipts--Listing and UTP

    The Commission finds that the NYSE's proposal contains adequate 
rules and procedures to govern the trading of TIRs, whether by listing 
or pursuant to UTP. TIRs are equity securities that will be subject to 
the full panoply of NYSE rules governing the trading of equity 
securities on the NYSE,\25\ including, among others, rules 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.\26\
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    \25\ The Commission notes that the amendments to NYSE trading 
rules are substantially similar to changes approved for the trading 
of exchange-traded funds. See Securities Exchange Act Release No. 
44616 (July 30, 2001), 66 FR 40761 (August 3, 2001).
    \26\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because TIRs only can be traded in round-lots.
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    In addition, the NYSE has developed specific listing and delisting 
criteria for TIRs that will help to ensure that a minimum level of 
liquidity will exist for TIRs to allow for the maintenance of fair and 
orderly markets. The delisting criteria also allows the NYSE to 
consider the suspension of trading and the delisting of a TIR if an 
event occurred that made further dealings in such securities 
inadvisable. This will give the NYSE flexibility to delist TIRs if 
circumstances warrant such action. The NYSE's proposal also provides 
procedures to halt trading in TIRs in certain enumerated circumstances.
    Moreover, in approving this proposal, the Commission notes the 
Exchange's belief that TIRs will not trade at a material discount or 
premium in relation to the overall value of the trusts' assets because 
of potential arbitrage opportunities. The Exchange also represents that 
the potential for arbitrage should keep the market price of a TIR 
comparable to the overall value of the deposited securities.
    The Commission believes that such trading should enhance market 
liquidity, and should promote more accurate pricing, tighter 
quotations, and reduced price fluctuations. The Commission also 
believes that such trading should allow customers to receive the best 
possible execution of their transactions in TIRs.
    Finally, the NYSE will apply surveillance procedures for TIRs that 
will be similar to the procedures used for investment company units and 
will incorporate and rely upon existing NYSE surveillance procedures 
governing equities. The Commission believes that these surveillance 
procedures are adequate to address concerns associated with listing and 
trading TIRs, including any concerns associated with purchasing and 
redeeming round-lots of 100 receipts. Accordingly, the Commission 
believes that the rules governing the trading of TIRs provide adequate 
safeguards to prevent manipulative acts and practices and to protect 
investors and the public interest.

Disclosure and Dissemination of Information

    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 risk of trading TIRs. The 
prospectus will address the special characteristics of a particular TIR 
basket, including a statement regarding its redeemability and method of 
creation. The Commission notes that all investors in TIRs who purchase 
in the initial offering will receive a prospectus. In addition, anyone 
purchasing a TIR directly from the trust (by delivering the underlying 
securities to the trust) will also receive a prospectus. Finally, all 
NYSE member firms who purchase TIRs from the trust for resale to 
customers must deliver a prospectus to such customers.
    The Commission also notes that upon the initial listing of any 
TIRs, the Exchange will issue a circular to its members explaining the 
unique characteristics and risks of this type of

[[Page 18970]]

security. The circular also will note the Exchange members' prospectus 
delivery requirements, and highlight the characteristics of purchases 
in TIRs. The circular also will inform members of Exchange policies 
regarding trading halts in TIRs.

Trading TIRs Pursuant to Rule 19b-4(e)

    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 NYSE 
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 NYSE's proposal contains adequate 
rules and procedures to govern the listing and trading of TIRs pursuant 
to Rule 19b-4(e) on the NYSE, or pursuant to UTP. All TIR products 
listed under the generic standards will be subject to the full panoply 
of NYSE rules and procedures that now govern both the trading of TIRs 
and the trading of equity securities.
    As described above, the Commission has previously approved similar 
Amex, CHX, and PCX rules that permit the generic listing and trading of 
individual TIRs. 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 underlying the TIRs.
    The Commission notes that the NYSE's proposed generic listing 
standards are substantially similar to the Amex, CHX and PCX. The 
Commission therefore believes that TIRs that satisfy the NYSE's 
proposed generic listing standards should produce the same benefits to 
the NYSE and to investors.
    The NYSE has requested that the Commission find good cause for 
approving the proposed rule change, and Amendments Nos. 1 and 2 prior 
to the thirtieth day after the date of publication of notice in the 
Federal Register. The Commission believes that the Exchange's proposal 
to trade TIRs, pursuant to UTP, will provide investors with a 
convenient and less expensive way of participating in the securities 
markets. The Commission believes that the proposed rule change, as 
amended, could produce added benefits to investors through the 
increased competition between other market centers trading the product. 
Specifically, the Commission believes that by increasing the 
availability of TIRs as an investment tool, the NSYE's proposal should 
help provide investors with increased flexibility in satisfying their 
investment needs, by allowing them to purchase and sell a single 
security replicating the performance of a broad portfolio of stocks at 
negotiated prices throughout the business day.
    As noted above, the Commission has approved the listing and trading 
of TIRs at the Amex, under rules that are substantially similar to the 
NYSE rules.\27\ The trading requirements of TIRs at the NYSE will be 
substantially similar to the trading requirements of TIRs at the Amex. 
The Commission published those rules in the Federal Register for the 
full notice and comment period. No comments were received on the 
proposed rules, and the Commission found them consistent with the 
Act.\28\ The Commission does not believe that trading of this product 
raises novel regulatory issues that were not addressed in the previous 
filing. Accordingly, 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 in the Federal Register.
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    \27\ See note 6, supra.
    \28\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\29\ that the proposed rule change, as amended, (SR-NYSE-2002-07) 
is hereby approved on an accelerated basis.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9309 Filed 4-16-02; 8:45 am]
BILLING CODE 8010-01-P