[Federal Register Volume 67, Number 74 (Wednesday, April 17, 2002)]
[Notices]
[Pages 18970-18975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9314]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45729; File No. SR-NYSE-2002-15]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the New York 
Stock Exchange, Inc. Relating to the Trading of Certain Holding Company 
Depositary Receipts

April 10, 2002.
    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 April 10, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons, and to approve the 
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt standards for the trading pursuant 
to unlisted trading privileges (``UTP''), of certain Trust Issued 
Receipts (``TIRs''), known as Holding Company Depositary Receipts 
(``HOLDRS'').\3\ The text of the proposed rule change is available at 
the Office of the Secretary, NYSE, and at the Commission.
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    \3\ On April 9, 2002, the Commission approved the Exchange's 
listing standards for the listing and trading, or the trading 
pursuant to UTP, of TIRs under NYSE Rules 1200 through 1202, and 
Paragraph 703.20 of the NYSE's Listed Company Manual. The Commission 
also approved amendments to the Exchange's Rules 13, 36, 98, 104, 
105(1), 460, the Allocation Policy and pre-opening and MOC/LOC 
policies to incorporate therein referenced to TIRs. Finally, the 
Commission approved the Exchange's 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. See Securities Exchange Act 
Release No. 45719 (April 9, 2002).

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[[Page 18971]]

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 trade pursuant to UTP the following 
HOLDRs: (1) Broadband; (2) B2B Internet, (3) Europe 2001, (4) Internet 
Infrastructure, (5) Market 2000, (6) Wireless, and (7) Telecom (each a 
``HOLDR'' and collectively, the ``HOLDRs''). The HOLDRs currently are 
listed and traded on the Amex and trade on other securities exchanges, 
and in the over-the-counter market. The following paragraphs contain 
information applicable to all the HOLDRs generally.\4\
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    \4\ The Exchange notes that this information is based upon 
descriptions included in the various TIRs prospectuses and 
depositary trust agreements, the American Stock Exchange LLC 
(``Amex'') submissions relating to its TIR listing proposal, and the 
Commission's order approving the Amex proposal.
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Trust Issued Receipts Generally
    HOLDRs, a type of 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.
Exchange Rules Applicable to the Trading of HOLDRs
    TIRs, including the HOLDRs, are considered ``securities'' pursuant 
to NYSE Rule 3 and are subject to all applicable trading rules. The 
HOLDRs 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. The HOLDRs, as 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.\5\
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    \5\ 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 of Market Regulation 
(``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 HOLDRs 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 HOLDRs, the Exchange will 
distribute a circular to the membership highlighting the 
characteristics of HOLDRs, including that HOLDRs are not individually 
redeemable. In addition, the circular will advise members of the 
Exchange about policies relating to trading halts in HOLDRs. 
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 HOLDRs.
Trading Issues for TIRs (including HOLDRs)
    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 HOLDRs will not trade at a material 
discount or premium to the assets held by the issuing trust, because 
the arbitrage process should promote correlative pricing between the 
HOLDRs and the deposited securities. If the price of the HOLDR 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 HOLDRs at a discount, 
exchanging them for shares of the underlying securities and selling 
those shares at a profit; or (2) sell the HOLDRs short at a premium, 
buying the securities underlying the HOLDRs, depositing them in 
exchange for the HOLDRs, 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

[[Page 18972]]

apply to the HOLDRs. 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 the 
HOLDRs). 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 the HOLDRs Portfolio
    Except when a reconstitution event occurs, as described below, the 
securities represented by a HOLDR 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.\6\
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    \6\ 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 NYSE Rule 1202, Supplementary Material 
.20.
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Reconstitution Events of HOLDRs
    Trust agreements will provide for, and prospectuses for HOLDRs will 
describe, the automatic distribution of specified deposited securities 
in the trust's portfolio to the beneficial owners of HOLDRs 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 
HOLDRs;
    (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 HOLDRs;
    (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 
HOLDRs, unless the acquiring company's securities are already included 
in the HOLDRs 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 HOLDRs
    The trust will issue and cancel--and an investor may obtain, hold, 
trade or surrender--HOLDRs 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 HOLDRs, 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 HOLDRs by either purchasing them on an 
exchange or by delivering to the trustee the underlying securities 
evidencing a round lot of HOLDRs. The trustee will charge an issuance 
and cancellation fee of up to $10.00 per 100 HOLDRs. Lower charges may 
be assigned for bulk issuances and cancellations. An investor may 
cancel HOLDRs 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 HOLDRs
    The trust shall terminate upon the earlier of: (1) The removal of 
the HOLDRs 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 HOLDRs (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.
Criteria for Continued Listing
    Except as otherwise noted below, and in Exhibit A of NYSE 2002-15, 
the Exchange believes that the HOLDRs satisfy the Exchange's continued 
listing criteria in NYSE Rule 1202, which is generally consistent with 
the continued listing criteria currently used by the Amex, the Chicago 
Stock Exchange (the ``CHX''), the Chicago Board Options Exchange, Inc. 
(the ``CBOE'') and the Boston Stock Exchange (the ``BSE'').\7\
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    \7\ See Securities Exchange Act Release No. 41892 (September 21, 
1999) 64 FR 52559 (September 29, 1999) (approving listing and 
trading of Trust Issued Receipts and Internet HOLDRs on the Amex); 
Securities Exchange Act Release No. 42056 (October 22, 1999), 64 FR 
58870 (November 1, 1999) (approving listing and trading of Trust 
Issued Receipts and Internet HOLDRs on the CHX pursuant to UTP); 
Securities Exchange Act Release No. 42347 (January 18, 2000), 65 FR 
4451 (January 27, 2000) (approving listing and trading of Trust 
Issued Receipts 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 listing standards for Trust 
Issued Receipts on the CBOE) and Securities Exchange Act Release No. 
44908 (October 4, 2001), 66 FR 52161 (October 12, 2001) (approving 
listing and trading of Trust Issued Receipts and HOLDRs on the 
CBOE).
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    When listing TIRs under Rule 1202, 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 the TIRs (and possibly terminating the trust) due

[[Page 18973]]

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 component securities drops to fewer 
than nine, and each time the number of component securities is reduced 
thereafter, the Exchange will consult with the staff of the Division of 
Market Regulation to confirm the appropriateness of continued listing 
of the TIRs.
    NYSE Rule 1202 also contains specific ``generic'' listing criteria 
under which the Exchange may commence trading pursuant to Rule 19b-
4(e). Those criteria are substantially similar to the criteria that 
have been applied to the initial listing of HOLDRs on the Amex. 
Specifically, each of the companies represented by the securities in 
the portfolios underlying the HOLDRs trusts (each of such companies 
referred to herein as a ``component security'') were required to meet 
the following minimum criteria when they were selected: (1) Each 
component security common stock was registered under Section 12 of the 
Exchange Act; (2) the minimum public float of each component security 
was at least $150 million; (3) each component security was either 
listed on a national securities exchange or traded on Nasdaq and was a 
reported national market system security; (4) the average daily trading 
volume for each component security was at least 100,000 shares during 
the preceding sixty-day trading period; and (5) the average daily 
dollar value of the component security traded during the preceding 
sixty-day trading period was at least $1 million. The initial weighting 
of each component security in the portfolio was based on its market 
capitalization; however, if on the date such weighting was determined, 
a component security represented more than 20% of the overall value of 
the receipt, then the amount of such component security was to be 
reduced to no more than 20% of the receipt value.
    Based on the fact that each of the HOLDRs was initially listed on 
the Amex, the Exchange assumes that each component security met the 
criteria described above. Presently, however, the Exchange represents 
that each of the HOLDRs that the Exchange proposes to trade on a UTP 
basis has one or more component securities that fail to meet the 
minimum criteria set forth above. As a result, while the HOLDRs are 
substantially in compliance with the aforementioned minimum standards, 
the HOLDRs do not satisfy the Exchange's generic standards for listing 
and trading TIRs pursuant to Rule 19b-4(e). Specifically, one or more 
component securities of each HOLDR do not meet the minimum public float 
requirement in clause (2) above and/or the average daily dollar value 
requirement in clause (5) above, as more specifically described in 
Exhibit A attached to NYSE 2002-15.\8\
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    \8\ The following component securities are at issue: (1) 
Broadband: CMTN and NXTV; (2) B2B Internet: IMGX, PPRO, SCNT, SOST, 
VERT, and NXPS; (3) Europe 2001: AUTN, BKHM, JAZZ, KQIP, and SNRA; 
(4) Internet Infrastructure: INAP, NAVI, and VITR; (5) Market 2000: 
OOM; (6) Wireless: NTRO; and (7) Telecom: MCLDQ. For further details 
of each component security, see SR-NYSE-2002-15, Exhibit A.
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    Notwithstanding that fact, the Exchange believes that its proposal 
to trade the HOLDRs on a UTP basis is appropriate, and thus should be 
approved. The HOLDRs continue to be substantially in compliance with 
the minimum initial listing criteria listed above, and thus, are 
substantially similar to products previously approved by the 
Commission. These HOLDRs also continue to be traded on the Amex, on 
several regional exchanges and in the over-the-counter market. 
Permitting the Exchange to trade these HOLDRs on a UTP basis will 
afford investors the advantage of an additional market on which to 
trade the HOLDRs, and avoid the unfair discrimination against the 
Exchange that would otherwise result from precluding the Exchange from 
trading these securities while the aforementioned markets continue to 
do so.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under section 6(b)(5) of the 
Act,\9\ 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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    \9\ 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 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-2002-15 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 \10\ and the rules and regulations thereunder applicable to a 
national securities exchange. Specifically, the Commission finds that 
this proposal, which establishes standards for trading the HOLDRs, 
pursuant to UTP, 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.\11\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 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 
HOLDRs 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 the HOLDRs representing a portfolio of securities 
continuously throughout the business day in secondary market

[[Page 18974]]

transactions at negotiated prices. The HOLDRs 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 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 HOLDRs.
    Although the HOLDRs 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 TIRs is similar to the risk involved in the purchase or sale of 
traditional common stock, with the exception that the pricing mechanism 
for TIRs is based on a basket of securities.\12\
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    \12\ The Commission has concerns about continued trading of TIRs 
whether listed or pursuant to UTP, if the number of component 
securities fails 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 the HOLDRs pursuant to UTP
    The Commission finds that the NYSE's proposal contains adequate 
rules and procedures to govern the trading of the HOLDRs pursuant to 
UTP. The HOLDRs are equity securities that will be subject to the full 
panoply of NYSE rules governing the trading of equity securities on the 
NYSE,\13\ 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.\14\ TIRs, including these HOLDRs, trade in the 
expanded blue room, shared only by exchange traded funds 
(``ETFs'').\15\
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    \13\ 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).
    \14\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because the Holders only can be traded in 
round-lots or round-lot multiples.
    \15\ Telephone conversation between James F. Duffy, Senior Vice 
President and Associate General Counsel, Office of the General 
Counsel, NYSE, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission (April 10, 2002). If TIRs and ETFs were to 
trade on a floor that was not physically separated from the trading 
of the underlying component securities, the Commission notes that 
the NYSE would have to file a proposed rule change pursuant to 
Section 19(b) of the Act. 15 U.S.C. 78s(b).
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    In addition, the NYSE has developed specific listing and delisting 
criteria for the HOLDRs that will help to ensure that a minimum level 
of liquidity will exist for the HOLDRs to allow for the maintenance of 
fair and orderly markets. The delisting criteria also allow the NYSE to 
consider the suspension of trading and the delisting of a HOLDR if an 
event occurred that made further dealings in such securities 
inadvisable. This will give the NYSE flexibility to delist the HOLDRs 
if circumstances warrant such action. The NYSE's proposal also provides 
procedures to halt trading in the HOLDRs in certain enumerated 
circumstances.
    Moreover, in approving this proposal, the Commission notes the 
Exchange's belief that the HOLDRs 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 HOLDR comparable to the overall value of the deposited 
securities.
    Furthermore, the Commission believes that the Exchange's proposal 
to trade the HOLDRs 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 the HOLDRs.
    Finally, the NYSE will apply surveillance procedures for the HOLDRs 
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 the trading of the HOLDRS pursuant to UTP, including any concerns 
associated with purchasing and redeeming round-lots of 100 receipts. 
Accordingly, the Commission believes that the rules governing the 
trading of the HOLDRs 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 risks of trading the 
HOLDRs. The prospectus will address the special characteristics of a 
particular HOLDR basket, including a statement regarding its 
redeemability and method of creation. The Commission notes that all 
investors in the HOLDRs who purchase in the initial offering will 
receive a prospectus. In addition, anyone purchasing a HOLDR directly 
from the trust (by delivering the underlying securities to the trust) 
will also receive a prospectus. Finally, all NYSE member firms that 
purchase the HOLDRs from the trust for resale to customers must deliver 
a prospectus to such customers.
    The Commission also notes that prior to the commencement of trading 
the HOLDRs, the Exchange will issue a circular to its members 
explaining the unique characteristics and risks of this type of 
security. The circular also will note the Exchange members' prospectus 
delivery requirements, and highlight the characteristics of purchases 
in HOLDRs, including that the HOLDRs are not individually redeemable. 
The circular also will inform members of Exchange policies regarding 
trading halts in HOLDRs.
    As described above, the Commission has previously approved similar 
Amex, CHX, and Pacific Exchange, Inc. rules that permit the listing and 
trading of individual TIRs, including the trading of TIRs pursuant to 
UTP. 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 notes that the HOLDRs that NYSE proposes to trade 
pursuant to UTP currently trade on other securities exchanges. The 
Commission therefore believes that it is appropriate to approve these 
HOLDRs for trading pursuant to UTP on the NYSE, as their trading 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 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 the HOLDRs 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

[[Page 18975]]

increased competition between other market centers trading the product. 
Specifically, the Commission believes that by increasing the 
availability of the HOLDRs 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 HOLDRs at other securities exchanges, under rules that are 
substantially similar to the NYSE rules.\16\ 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.\17\ The HOLDRs at issue 
are currently trading on other securities exchanges pursuant to UTP. 
The Commission does not believe that trading of this product raises 
novel regulatory issues that were not addressed in the previous 
filings. Accordingly, the Commission finds good cause for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice in the Federal Register.
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    \16\ See note 7, supra.
    \17\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-2002-15) is hereby 
approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9314 Filed 4-16-02; 8:45 am]
BILLING CODE 8010-01-P