[Federal Register Volume 67, Number 97 (Monday, May 20, 2002)]
[Notices]
[Pages 35605-35614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12642]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45920; File No. SR-NASD-2002-45]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of Proposed Rule Change and 
Amendment Nos. 1 and 2 Thereto by the National Association of 
Securities Dealers, Inc. to Establish Listing Standards and Listing 
Fees for Portfolio Depository Receipts and Index Fund Shares

May 13, 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 3, 2002, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
Nasdaq. On May 6, 2002, Nasdaq filed Amendment No. 1 to the 
proposal.\3\ On May 13, 2002, Nasdaq filed Amendment No. 2 to the 
proposal.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons and is granting partial accelerated approval to the 
proposal.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated May 3, 2002 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq did the following: 
(1) Made corrections to its proposed rule text and proposal; (2) 
added discussion and stated its statutory basis for the proposed 
listing fees; (3) clarified that its regular trading hours for 
Portfolio Depository Receipts (``PDRs'') and Index Fund Shares 
(``Fund Shares'') will be from 9:30 a.m. to 4 p.m. or 4:15 p.m., as 
designated by Nasdaq; and (4) requested accelerated approval for the 
portion of the proposal relating to the listing and trading 
standards for PDRs and Fund Shares, and not for the portion on the 
proposed listing fees.
    \4\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated May 13, 2002 (``Amendment No. 2''). In Amendment No. 2, Nasdaq 
removed the term ``member organization'' throughout its proposed 
rule text and proposal.
    \5\ Nasdaq requested accelerated approval of all portions of the 
proposal except those that deal with its proposed new listing fees.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to establish listing standards and listing fees for 
PDRs and Fund Shares.
    Proposed new language is italicized; proposed deletions are in 
[brackets].
* * * * *

4420. Quantitative Designation Criteria

    In order to be designated for the Nasdaq National Market, an issuer 
shall be required to substantially meet the criteria set forth in 
paragraphs (a), (b), (c), (d), (e), (f), [or] (g), (h), (i), or (j) 
below. Initial Public Offerings substantially meeting such criteria are 
eligible for immediate inclusion in the Nasdaq National Market upon 
prior application and with the written consent of the managing 
underwriter that immediate inclusion is desired. All other 
qualification issues, exception special situations, are included on the 
next inclusion date established by Nasdaq.
    (a)-(h) No change.

(i) Portfolio Depository Receipts

    (1) Definitions. The following terms shall, unless the context 
otherwise requires, have the meanings herein specified:
    (A) Portfolio Depository Receipt. The term ``Portfolio Depository 
Receipt'' means a security:
    (i) that is based on a unit investment trust (``Trust'') which 
holds the securities which comprise an index or portfolio underlying a 
series of Portfolio Depository Receipts;
    (ii) that is issued by the Trust in a specified aggregate minimum 
number in return for a ``Portfolio Deposit'' consisting of specified 
numbers of shares of stock plus a cash amount;
    (iii) that, when aggregated in the same specified minimum number, 
may be redeemed from the Trust which will pay to the redeeming holder 
the stock and cash then comprising the ``Portfolio Deposit''; and
    (iv) that pays holders a periodic cash payment corresponding to the 
regular cash dividends or distributions declared with respect to the 
component securities of the stock index or portfolio of

[[Page 35606]]

securities underlying the Portfolio Depository Receipts, less certain 
expenses and other charges as set forth in the Trust prospectus.
    (B) Reporting Authority. The term ``Reporting Authority'' in 
respect to a particular series of Portfolio Depository Receipts means 
Nasdaq, a wholly-owned subsidiary of Nasdaq, an institution (including 
the Trustee for a series of Portfolio Depository Receipts), or a 
reporting service designated by Nasdaq or its subsidiary as the 
official source for calculating and reporting information relating to 
such series, including, but not limited to, any current index or 
portfolio value; the current value of the portfolio of securities 
required to be deposited to the Trust in connection with issuance of 
Portfolio Depository Receipts; the amount of any dividend equivalent 
payment or cash distribution to holders of Portfolio Depository 
Receipts, net asset value, and other information relating to the 
creation, redemption or trading of Portfolio Depository Receipts.
    Nothing in this paragraph shall imply that an institution or 
reporting service that is the source for calculating and reporting 
information relating to Portfolio Depository Receipts must be 
designated by Nasdaq; the term ``Reporting Authority'' shall not refer 
to an institution or reporting service not so designated.
    (2) The provisions of this Rule apply only to series of Portfolio 
Depository Receipts that are the subject of an order by the Securities 
and Exchange Commission exempting such series from certain prospectus 
delivery requirements under Section 24(d) of the Investment Company Act 
of 1940. Nasdaq will inform members regarding application of this Rule 
to a particular series of Portfolio Depository Receipts by means of an 
Information Circular prior to commencement of trading in such series.
    Nasdaq requires that members provide to all purchasers of a series 
of Portfolio Depository Receipts a written description of the terms and 
characteristics of such securities, not later than the time a 
confirmation of the first transaction in such series is delivered to 
such purchaser. In addition, members shall include such a written 
description with any sales material relating to a series of Portfolio 
Depository Receipts that is provided to customers or the public. Any 
other written materials provided by a member to customers or the public 
making specific reference to a series of Portfolio Depository Receipts 
as an investment vehicle must include a statement in substantially the 
following form: ``A circular describing the terms and characteristics 
of [the series of Portfolio Depository Receipts] has been prepared by 
[Trust name] and is available from your broker or Nasdaq. It is 
recommended that you obtain and review such circular before purchasing 
[the series of Portfolio Depository Receipts]. In addition, upon 
request you may obtain from your broker a prospectus for [the series of 
Portfolio Depository Receipts].''
    A member carrying an omnibus account for a non-member broker-dealer 
is required to inform such non-member that execution of an order to 
purchase a series of Portfolio Depository Receipts for such omnibus 
account will be deemed to constitute agreement by the non-member to 
make such written description available to its customers on the same 
terms as are directly applicable to members under this rule.
    Upon request of a customer, a member shall also provide a 
prospectus for the particular series of Portfolio Depository Receipts.
    (3) Nasdaq may approve a series of Portfolio Depositary Receipts 
for listing and trading pursuant to Rule 19b-4(e) under the Securities 
Exchange Act of 1934, provided each of the following criteria is 
satisfied:
    (A) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Portfolio Depository Receipts, the component 
stocks of an index or portfolio underlying such series of Portfolio 
Depository Receipts shall meet the following criteria:
    (i) Component stocks that in the aggregate account for at least 90% 
of the weight of the index or portfolio shall have a minimum market 
value of at least $75 million;
    (ii) The component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio;
    (iii) The most heavily weighted component stock cannot exceed 30% 
of the weight of the index or portfolio, and the five most heavily 
weighted component stocks cannot exceed 65% of the weight of the index 
or portfolio;
    (iv) The underlying index or portfolio must include a minimum of 13 
stocks; and
    (v) All securities in an underlying index or portfolio must be 
listed on a national securities exchange or The Nasdaq Stock Market 
(including The Nasdaq SmallCap Market).
    (B) Index Methodology and Calculation.
    (i) The index underlying a series of Portfolio Depository Receipts 
will be calculated based on either the market capitalization, modified 
market capitalization, price, equal-dollar or modified equal-dollar 
weighting methodology;
    (ii) If the index is maintained by a broker-dealer, the broker-
dealer shall erect a ``fire wall'' around the personnel who have access 
to information concerning changes and adjustments to the index and the 
index shall be calculated by a third party who is not a broker-dealer; 
and
    (iii) The current index value will be disseminated every 15 seconds 
over the Nasdaq Trade Dissemination System.
    (C) Disseminated Information. The Reporting Authority will 
disseminate for each series of Portfolio Depository Receipts an 
estimate, updated every 15 seconds, of the value of a share of each 
series. This may be based, for example, upon current information 
regarding the required deposit of securities and cash amount to permit 
creation of new shares of the series or upon the index value.
    (D) Initial Shares Outstanding. A minimum of 100,000 shares of a 
series of Portfolio Depository Receipts is required to be outstanding 
at start-up of trading.
    (E) Surveillance Procedures. NASD Regulation will implement written 
surveillance procedures for Portfolio Depository Receipts.
    (4) Trading will occur between 9:30 a.m. and either 4:00 p.m. or 
4:15 p.m. for each series of Portfolio Depository Receipts, as 
specified by Nasdaq.
    (5) Nasdaq may list and trade Portfolio Depository Receipts based 
on one or more stock indexes or securities portfolios. The Portfolio 
Depository Receipts based on each particular stock index or portfolio 
shall be designated as a separate series and shall be identified by a 
unique symbol. The stocks that are included in an index or portfolio on 
which Portfolio Depository Receipts are based shall be selected by 
Nasdaq or its agent, a wholly-owned subsidiary of Nasdaq, or by such 
other person as shall have a proprietary interest in and authorized use 
of such index or portfolio, and may be revised from time to time as may 
be deemed necessary or appropriate to maintain the quality and 
character of the index or portfolio.
    (6) A Trust upon which a series of Portfolio Depository Receipts is 
based will be listed and traded on Nasdaq subject to application of the 
following criteria:
    (A) Initial Listing--for each Trust, Nasdaq will establish a 
minimum number of Portfolio Depository Receipts required to be 
outstanding at the time of commencement of trading on Nasdaq.

[[Page 35607]]

    (B) Continued Listing--following the initial twelve month period 
following formation of a Trust and commencement of trading on Nasdaq, 
Nasdaq will consider the suspension of trading in or removal from 
listing of a Trust upon which a series of Portfolio Depository Receipts 
is based under any of the following circumstances:
    (i) if the Trust has more than 60 days remaining until termination 
and there are fewer than 50 record and/or beneficial holders of 
Portfolio Depository Receipts for 30 or more consecutive trading days; 
or
    (ii) if the value of the index or portfolio of securities on which 
the Trust is based is no longer calculated or available; or
    (iii) if such other event shall occur or condition exists which in 
the opinion of Nasdaq, makes further dealings on Nasdaq inadvisable.
    Upon termination of a Trust, Nasdaq requires that Portfolio 
Depository Receipts issued in connection with such Trust be removed 
from listing. A Trust may terminate in accordance with the provisions 
of the Trust prospectus, which may provide for termination if the value 
of securities in the Trust falls below a specified amount.
    (C) Term--the stated term of the Trust shall be as stated in the 
Trust prospectus. However, a Trust may be terminated under such earlier 
circumstances as may be specified in the Trust prospectus.
    (D) Voting--voting rights shall be as set forth in the Trust 
prospectus. The Trustee of a Trust may have the right to vote all of 
the voting securities of such Trust.
    (7) Neither Nasdaq, the Reporting Authority nor any agent of Nasdaq 
shall have any liability for damages, claims, losses or expenses caused 
by any errors, omissions, or delays in calculating or disseminating any 
current index or portfolio value, the current value of the portfolio of 
securities required to be deposited to the Trust; the amount of any 
dividend equivalent payment or cash distribution to holders of 
Portfolio Depository Receipts; net asset value; or other information 
relating to the creation, redemption or trading of Portfolio Depository 
Receipts, resulting from any negligent act or omission by Nasdaq, the 
Reporting Authority, or any agent of Nasdaq or any act, condition or 
cause beyond the reasonable control of Nasdaq, its agent, or the 
Reporting Authority, including, but not limited to, an act of God; 
fire; flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; or any error, omission or 
delay in the reports of transactions in one or more underlying 
securities.

(j) Index Fund Shares

    (1) Definitions. The following terms shall, unless the context 
otherwise requires, have the meanings herein specified:
    (A) Index Fund Share. The term ``Index Fund Share'' means a 
security:
    (i) that is issued by an open-end management investment company 
based on a portfolio of stocks that seeks to provide investment results 
that correspond generally to the price and yield performance of a 
specified foreign or domestic stock index;
    (ii) that is issued by such an open-end management investment 
company in a specified aggregate minimum number in return for a deposit 
of specified numbers of shares of stock and/or a cash amount with a 
value equal to the next determined net asset value; and
    (iii) that, when aggregated in the same specified minimum number, 
may be redeemed at a holder's request by such open-end investment 
company which will pay to the redeeming holder the stock and/or cash 
with a value equal to the next determined net asset value.
    (B) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Index Fund Shares means Nasdaq, a 
wholly-owned subsidiary of Nasdaq, or an institution or reporting 
service designated by Nasdaq or its subsidiary as the official source 
for calculating and reporting information relating to such series, 
including, but not limited to, any current index or portfolio value; 
the current value of the portfolio of any securities required to be 
deposited in connection with issuance of Index Fund Shares; the amount 
of any dividend equivalent payment or cash distribution to holders of 
Index Fund Shares, net asset value, and other information relating to 
the issuance, redemption or trading of Index Fund Shares.
    Nothing in this paragraph shall imply that an institution or 
reporting service that is the source for calculating and reporting 
information relating to Index Fund Shares must be designated by Nasdaq; 
the term ``Reporting Authority'' shall not refer to an institution or 
reporting service not so designated.
    (2) The provisions of this Rule apply only to series of Index Fund 
Shares that are the subject of an order by the Securities and Exchange 
Commission exempting such series from certain prospectus delivery 
requirements under Section 24(d) of the Investment Company Act of 1940. 
Nasdaq will inform members regarding application of this Rule to a 
particular series of Index Fund Shares by means of an Information 
Circular prior to commencement of trading in such series.
    Nasdaq requires that members provide to all purchasers of a series 
of Index Fund Shares a written description of the terms and 
characteristics of such securities, in a form prepared by the open-end 
management investment company issuing such securities, not later than 
the time a confirmation of the first transaction in such series is 
delivered to such purchaser. In addition, members shall include such a 
written description with any sales material relating to a series of 
Index Fund Shares that is provided to customers or the public. Any 
other written materials provided by a member to customers or the public 
making specific reference to a series of Index Fund Shares as an 
investment vehicle must include a statement in substantially the 
following form: ``A circular describing the terms and characteristics 
of [the series of Index Fund Shares] has been prepared by the [open-end 
management investment company name] and is available from your broker 
or The Nasdaq Stock Market. It is recommended that you obtain and 
review such circular before purchasing [the series of Index Fund 
Shares]. In addition, upon request you may obtain from your broker a 
prospectus for [the series of Index Fund Shares].''
    A member carrying an omnibus account for a non-member broker-dealer 
is required to inform such non-member that execution of an order to 
purchase a series of Index Fund Shares for such omnibus account will be 
deemed to constitute agreement by the non-member to make such written 
description available to its customers on the same terms as are 
directly applicable to members under this rule.
    Upon request of a customer, a member shall also provide a 
prospectus for the particular series of Index Fund Shares.
    (3) Nasdaq may approve a series of Index Fund Shares for listing 
and trading pursuant to Rule 19b-4(e) under the Securities Exchange Act 
of 1934, provided each of the following criteria is satisfied:
    (A) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Index Fund Shares, each component of an index or 
portfolio underlying a series of Index Fund Shares shall meet the 
following criteria:
    (i) Component stocks that in the aggregate account for at least 90% 
of the weight of the index or portfolio shall

[[Page 35608]]

have a minimum market value of at least $75 million;
    (ii) The component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio;
    (iii) The most heavily weighted component stock cannot exceed 30% 
of the weight of the index or portfolio, and the five most heavily 
weighted component stocks cannot exceed 65% of the weight of the index 
or portfolio;
    (iv) The underlying index or portfolio must include a minimum of 13 
stocks; and
    (v) All securities in an underlying index or portfolio must be 
listed on a national securities exchange or The Nasdaq Stock Market 
(including The Nasdaq SmallCap Market).
    (B) Index Methodology and Calculation
    (i) The index underlying a series of Index Fund Shares will be 
calculated based on either the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
methodology;
    (ii) If the index is maintained by a broker-dealer, the broker-
dealer shall erect a ``fire wall'' around the personnel who have access 
to information concerning changes and adjustments to the index and the 
index shall be calculated by a third party who is not a broker-dealer; 
and
    (iii) The current index value will be disseminated every 15 seconds 
over the Nasdaq Trade Dissemination System.
    (C) Disseminated Information. The Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. This may be 
based, for example, upon current information regarding the required 
deposit of securities and cash amount to permit creation of new shares 
of the series or upon the index value.
    (D) Initial Shares Outstanding. A minimum of 100,000 shares of a 
series of Index Fund Shares is required to be outstanding at start-up 
of trading.
    (E) Surveillance Procedures. NASD Regulation will implement written 
surveillance procedures for Index Fund Shares.
    (4) Trading will occur between 9:30 a.m. and either 4 p.m. or 4:15 
p.m. for each series of Index Fund Shares, as specified by Nasdaq.
    (5) Nasdaq may list and trade Index Fund Shares based on one or 
more foreign or domestic stock indexes or securities portfolios. Each 
issue of Index Fund Shares based on each particular stock index or 
portfolio shall be designated as a separate series and shall be 
identified by a unique symbol. The stocks that are included in an index 
or portfolio on which a series of Index Fund Shares are based shall be 
selected by such person, which may be Nasdaq or an agent or wholly-
owned subsidiary thereof, as shall have authorized use of such index or 
portfolio. Such index or portfolio may be revised from time to time as 
may be deemed necessary or appropriate to maintain the quality and 
character of the index or portfolio.
    (6) Each series of Index Fund Shares will be listed and traded on 
Nasdaq subject to application of the following criteria:
    (A) Initial Listing--for each series, Nasdaq will establish a 
minimum number of Index Fund Shares required to be outstanding at the 
time of commencement of trading on Nasdaq.
    (B) Continued Listing--following the initial twelve month period 
following commencement of trading on Nasdaq of a series of Index Fund 
Shares, Nasdaq will consider the suspension of trading in or removal 
from listing of such series under any of the following circumstances:
    (i) if there are fewer than 50 beneficial holders of the series of 
Index Fund Shares for 30 or more consecutive trading days; or
    (ii) if the value of the index or portfolio of securities on which 
the series of Index Fund Shares is based is no longer calculated or 
available; or
    (iii) if such other event shall occur or condition exists which in 
the opinion of Nasdaq, makes further dealings on Nasdaq inadvisable.
    Upon termination of an open-end management investment company, 
Nasdaq requires that Index Fund Shares issued in connection with such 
entity be removed from listing.
    (C) Voting--voting rights shall be as set forth in the applicable 
open-end management investment company prospectus.
    (7) Neither Nasdaq, the Reporting Authority, nor any agent of 
Nasdaq shall have any liability for damages, claims, losses or expenses 
caused by any errors, omissions, or delays in calculating or 
disseminating any current index or portfolio value, the current value 
of the portfolio of securities required to be deposited to the open-end 
management investment company in connection with issuance of Index Fund 
Shares; the amount of any dividend equivalent payment or cash 
distribution to holders of Index Fund Shares; net asset value; or other 
information relating to the purchase, redemption or trading of Index 
Fund Shares, resulting from any negligent act or omission by Nasdaq, 
the Reporting Authority or any agent of Nasdaq, or any act, condition 
or cause beyond the reasonable control of Nasdaq, its agent, or the 
Reporting Authority, including, but not limited to, an act of God; 
fire; flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; or any error, omission or 
delay in the reports of transactions in one or more underlying 
securities.

4540. Portfolio Depository Receipts and Index Fund Shares

(a) Entry Fee

    (1) When an issuer submits an application for listing a series of 
Portfolio Depository Receipts or Index Fund Shares in The Nasdaq 
National Market, it shall pay to The Nasdaq Stock Market, Inc. a 
listing fee of $5,000 (which shall include a $1,000 non-refundable 
processing fee).
    (2) The Board of Directors of The Nasdaq Stock Market, Inc. or its 
designee may, in its discretion, defer or waive all or any part of the 
entry fee prescribed herein.
    (3) If the application is withdrawn or is not approved, the entry 
fee (less the non-refundable processing fee) shall be refunded.

(b) Annual Fee

    (1) The issuer of a series of Portfolio Depository Receipts or 
Index Fund Shares listed on The Nasdaq National Market shall pay to The 
Nasdaq Stock Market, Inc. an annual fee calculated on total shares 
outstanding according to the following schedule:

Up to 1 million shares........................................    $6,500
1+ to 2 million shares........................................     7,000
2+ to 3 million shares........................................     7,500
3+ to 4 million shares........................................     8,000
4+ to 5 million shares........................................     8,500
5+ to 6 million shares........................................     9,000
6+ to 7 million shares........................................     9,500
7+ to 8 million shares........................................    10,000
8+ to 9 million shares........................................    10,500
9+ to 10 million shares.......................................    11,000
10+ to 11 million shares......................................    11,500
11+ to 12 million shares......................................    12,000
12+ to 13 million shares......................................    12,500
13+ to 14 million shares......................................    13,000
14+ to 15 million shares......................................    13,500
15+ to 16 million shares......................................    14,000
Over 16 million shares........................................    14,500
 

    (2) Total shares outstanding means the aggregate number of shares 
in all series of Portfolio Depository Receipts or Index Fund Shares to 
be included in The Nasdaq National Market as shown in the issuer's most 
recent periodic report required to be filed with the issuer's 
appropriate regulatory authority

[[Page 35609]]

or in more recent information held by Nasdaq.
    (3) The Board of Directors of The Nasdaq Stock Market, Inc. or its 
designee may, in its discretion, defer or waive all or any part of the 
annual fee prescribed herein.
* * * * *

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

    In its filing with the Commission, Nasdaq 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 IV below. Nasdaq 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
    Nasdaq proposes to adopt listing standards and listing fees for 
PDRs and Fund Shares. A description of the criteria is set forth below.
    a. Portfolio Depository Receipts. i. Listing Requirements. Nasdaq 
proposes to adopt criteria for listing and trading PDRs, which are 
securities that: (1) Are based on a unit investment trust (``Trust'') 
which holds the securities which comprise an index or portfolio 
underlying a series of PDRs; (2) are issued by the Trust in a specified 
aggregate minimum number in return for a ``Portfolio Deposit'' 
consisting of specified numbers of shares of stock plus a cash amount; 
(3) when aggregated in the same specified minimum number, may be 
redeemed from the Trust which will pay to the redeeming holder the 
stock and cash then comprising the ``Portfolio Deposit'; and (4) pay 
holders a periodic cash payment corresponding to the regular cash 
dividends or distributions declared with respect to the component 
securities of the stock index or portfolio of securities underlying the 
PDRs, less certain expenses and other charges as set forth in the Trust 
prospectus.
    In connection with initial listing, Nasdaq represents that it will 
establish, for each Trust, a minimum number of PDRs required to be 
outstanding at the time of commencement of trading on Nasdaq.
    With respect to continued listing, following the initial twelve 
month period after formation of a Trust and commencement of trading on 
Nasdaq, Nasdaq represents that it will consider the suspension of 
trading in or removal from listing of a Trust upon which a series of 
PDRs is based under any of the following circumstances: (1) If the 
Trust has more than 60 days remaining until termination and there are 
fewer than 50 record and/or beneficial holders of PDRs for 30 or more 
consecutive trading days; (2) if the value of the index or portfolio of 
securities on which the Trust is based is no longer calculated or 
available; or (3) if such other event shall occur or condition exists 
which in the opinion of Nasdaq, makes further dealings on Nasdaq 
inadvisable. Upon termination of a Trust, Nasdaq represents that it 
will require that PDRs issued in connection with such Trust be removed 
from listing. A Trust may terminate in accordance with the provisions 
of the Trust prospectus, which may provide for termination if the value 
of securities in the Trust falls below a specified amount.
    ii. Standards to Permit Trading of PDRs Pursuant to Rule 19b-4(e) 
under the Act. Nasdaq further proposes to adopt generic listing 
standards to permit the trading of PDRs pursuant to Rule 19b-4(e) under 
the Act.\6\ Rule 19b-4(e) under the Act permits self-regulatory 
organizations (``SROs'') to list and trade new derivative products that 
comply with existing SRO trading rules, procedures, surveillance 
programs and listing standards, without submitting a proposed rule 
change under Section 19(b) of the Act. Accordingly, Nasdaq proposes to 
adopt the following listing standards in order to list PDRs pursuant to 
Rule 19b-4(e) under the Act.
---------------------------------------------------------------------------

    \6\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    Upon initial listing of PDRs, component stocks must in the 
aggregate account for at least 90% of the weight of the index or 
portfolio shall have a minimum market value of at least $75 million. In 
addition, the component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio. Moreover, the most heavily weighted component stock cannot 
exceed 30% of the weight of the index or portfolio, and the five most 
heavily weighted component stocks cannot exceed 65% of the weight of 
the index or portfolio. The underlying index or portfolio must include 
a minimum of 13 stocks. Lastly, all securities in an underlying index 
or portfolio must be listed on a national securities exchange or The 
Nasdaq Stock Market (including The Nasdaq SmallCap Market).
    The index underlying a series of PDRs will be calculated based on 
either the market capitalization, modified market capitalization, 
price, equal-dollar or modified equal-dollar weighting methodology. In 
addition, if the index is maintained by a broker-dealer, the broker-
dealer shall erect a ``fire wall'' around the personnel who have access 
to information concerning changes and adjustments to the index and the 
index shall be calculated by a third party who is not a broker-dealer.
    The current index value will be disseminated every 15 seconds over 
the Nasdaq Trade Dissemination System. The Reporting Authority will 
disseminate for each series of PDRs an estimate, updated every 15 
seconds, of the value of a share of each series. This may be based, for 
example, upon current information regarding the required deposit of 
securities and cash amount to permit creation of new shares of the 
series or upon the index value.
    A minimum of 100,000 shares of a series of PDRs is required to be 
outstanding at the start-up of trading. Trading for each series of PDRs 
will occur between 9:30 a.m. and either 4 p.m. or 4:15 p.m., as 
specified by Nasdaq.\7\ Nevertheless, as with other listed securities, 
quotes and trades in PDRs may be reported using Nasdaq systems that 
operate in the extended-hours session from 4 p.m. to 6:30 p.m.\8\
---------------------------------------------------------------------------

    \7\ At initiation, Nasdaq represents that trading in PDRs will 
occur until 4 p.m. Nasdaq understands that most other markets that 
trade PDRs extend their regular trading session until 4:15 p.m., and 
Nasdaq plans to extend its regular trading session until 4:15 p.m. 
as soon as technically feasible. Telephone conversation between John 
D. Nachmann, Senior Attorney, Nasdaq, and Florence Harmon, Senior 
Special Counsel, Commission, on May 13, 2002.
    \8\ Trades after the end of the regular trading session will 
have a ``.T'' identifier, which will exclude them from the 
consolidated daily ``high,'' ``low,'' and ``close'' prices, but they 
would be included in the daily volume statistics. Telephone 
conversation between John D. Nachmann, Senior Attorney, Nasdaq, and 
Florence Harmon, Senior Special Counsel, Commission, on May 13, 
2002. See also Securities Exchange Act Release Nos. 42003 (October 
13, 1999), 64 FR 56554 (October 20, 1999); and 45503 (March 5, 
2002), 67 FR 10955 (March 11, 2002).
---------------------------------------------------------------------------

    iii. Disclosure. Nasdaq represents that it will require members to 
provide all purchasers of newly issued PDRs with a prospectus. Since 
the PDRs will be in continuous distribution, the prospectus delivery 
requirements of Section 5(b)(2) of the Securities Act of 1933 
(``Securities Act'') \9\ will apply to all investors in PDRs, including 
secondary market purchases on Nasdaq.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 77e(b)(2).

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

[[Page 35610]]

    With respect to a series of PDRs that are the subject of an order 
by the SEC exempting such series from certain prospectus delivery 
requirements under Section 24(d) of the Investment Company Act of 1940 
(``Investment Company Act''),\10\ Nasdaq represents that it will inform 
members regarding disclosure obligations with respect to a particular 
series of PDRs by means of an Information Circular prior to 
commencement of trading in such series.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 80a-24(d).
---------------------------------------------------------------------------

    For these exempted series, Nasdaq represents that it will require 
that members provide to all purchasers of a series of PDRs a written 
description of the terms and characteristics of such securities, not 
later than the time a confirmation of the first transaction in such 
series is delivered to such purchaser. In addition, members shall 
include such a written description with any sales material relating to 
a series of PDRs that is provided to customers or the public. Any other 
written materials provided by a member to customers or the public 
making specific reference to a series of PDRs as an investment vehicle 
must include a statement in substantially the following form: ``A 
circular describing the terms and characteristics of [the series of 
Portfolio Depository Receipts] has been prepared by [Trust name] and is 
available from your broker or Nasdaq. It is recommended that you obtain 
and review such circular before purchasing [the series of Portfolio 
Depository Receipts]. In addition, upon request you may obtain from 
your broker a prospectus for [the series of Portfolio Depository 
Receipts].''
    A member carrying an omnibus account for a non-member broker-dealer 
is required to inform such non-member that execution of an order to 
purchase a series of PDRs for such omnibus account will be deemed to 
constitute agreement by the non-member to make such written description 
available to its customers on the same terms as are directly applicable 
to members under this rule.
    Upon request of a customer, a member shall also provide a 
prospectus for the particular series of PDRs.
    iv. Trading of PDRs. Nasdaq represents that dealings in PDRs will 
be conducted pursuant to Nasdaq and the NASD's existing equity trading 
rules. Thus, Nasdaq's general dealing and settlement rules would apply, 
including its rules on clearance and settlement of securities 
transactions and its equity margin rules. Other generally applicable 
Nasdaq equity rules and procedures would also apply.\11\ In addition, 
NASD Regulation's surveillance procedures for PDRs will be the same as 
the current surveillance procedures governing equity securities, and 
will include additional monitoring on key pricing dates.
---------------------------------------------------------------------------

    \11\ Pursuant to NASD Rule 4613(a)(1)(D), a minimum quotation 
increment of one penny will apply to transactions of PDRs on The 
Nasdaq National Market.
---------------------------------------------------------------------------

    Prior to the commencement of trading in PDRs, Nasdaq represents 
that it will issue an Information Circular to members highlighting the 
characteristics of purchases in PDRs. The Information Circular will 
discuss, among other things, the special characteristics and risks of 
trading this type of security, inform members of any obligation to 
deliver a written product description or prospectus, as applicable, to 
purchasers of PDRs, and the applicability of the suitability rules. 
Specifically, members must have reasonable grounds for believing that a 
recommendation to a customer regarding the purchase, sale or exchange 
of any security is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and as to his financial situation and needs.\12\ Furthermore, 
as new products are introduced from time to time, Nasdaq believes that 
it is important that members make every effort to familiarize 
themselves with each customer's financial situation, trading 
experience, and ability to meet the risks involved with such products 
and to make every effort to make customers aware of the pertinent 
information regarding the products.
---------------------------------------------------------------------------

    \12\ See NASD Rule 2310 and NASD IM-2310-2. In addition, NASD 
Rule 2310(b) requires members to make reasonable efforts to obtain 
information concerning a customer's financial status, a customer's 
tax status, a customer's investment objectives, and such other 
information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.
---------------------------------------------------------------------------

    With respect to trading halts, Nasdaq represents that the trading 
of PDRs would be halted, along with trading of all other listed or 
traded stocks, in the event the ``circuit breaker'' thresholds are 
reached.\13\ Nasdaq represents that it will disclose the policies 
regarding trading halts in PDRs in the Information Circular. For a PDR 
based on an index, such policies would include 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 
index group value.
---------------------------------------------------------------------------

    \13\ See NASD IM-4120-4.
---------------------------------------------------------------------------

    b. Index Fund Shares. i. Listing Requirements. Nasdaq also proposes 
to adopt criteria for the listing and trading of Fund Shares, which are 
securities that: (1) Are issued by an open-end management investment 
company based on a portfolio of stocks that seeks to provide investment 
results that correspond generally to the price and yield performance of 
a specified foreign or domestic stock index; (2) are issued by such an 
open-end management investment company in a specified aggregate minimum 
number in return for a deposit of specified numbers of shares of stock 
and/or a cash amount with a value equal to the next determined net 
asset value; and (3) when aggregated in the same specified minimum 
number, may be redeemed at a holder's request by such open-end 
investment company which will pay to the redeeming holder the stock 
and/or cash with a value equal to the next determined net asset value.
    In connection with initial listing, Nasdaq represents that it will 
establish, for each series, a minimum number of Index Fund Shares 
required to be outstanding at the time of commencement of trading on 
Nasdaq.
    With respect to continued listing, following the initial twelve 
month period after commencement of trading on Nasdaq of a series of 
Index Fund Shares, Nasdaq represents that it will consider the 
suspension of trading in or removal from listing of such series under 
any of the following circumstances: (1) If there are fewer than 50 
beneficial holders of the series of Index Fund Shares for 30 or more 
consecutive trading days; (2) if the value of the index or portfolio of 
securities on which the series of Index Fund Shares is based is no 
longer calculated or available; or (3) if such other event shall occur 
or condition exists which in the opinion of Nasdaq, makes further 
dealings on Nasdaq inadvisable. Upon termination of an open-end 
management investment company, Nasdaq represents that it will require 
that Index Fund Shares issued in connection with such entity be removed 
from listing.
    ii. Standards to Permit Trading of Index Fund Shares Pursuant to 
Rule 19b-4(e) under the Act. Nasdaq also proposes to adopt generic 
listing standards to permit the trading of Fund Shares pursuant to Rule 
19b-4(e) under the Act. As previously mentioned, Rule 19b-4(e) under 
the Act permits SROs to list and trade new derivative products that 
comply with existing SRO trading rules, procedures, surveillance 
programs and listing standards, without submitting a proposed rule 
change under Section 19(b) of the Act. Accordingly, Nasdaq proposes to 
adopt the following listing standards in order

[[Page 35611]]

to list Fund Shares pursuant to Rule 19b-4(e) under the Act.
    Upon initial listing of Fund Shares, component stocks must in the 
aggregate account for at least 90% of the weight of the index or 
portfolio shall have a minimum market value of at least $75 million. In 
addition, the component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio. Moreover, the most heavily weighted component stock cannot 
exceed 30% of the weight of the index or portfolio, and the five most 
heavily weighted component stocks cannot exceed 65% of the weight of 
the index or portfolio. The underlying index or portfolio must include 
a minimum of 13 stocks. Lastly, all securities in an underlying index 
or portfolio must be listed on a national securities exchange or The 
Nasdaq Stock Market (including The Nasdaq SmallCap Market).
    The index underlying a series of Fund Shares will be calculated 
based on either the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
methodology. In addition, if the index is maintained by a broker-
dealer, the broker-dealer shall erect a ``fire wall'' around the 
personnel who have access to information concerning changes and 
adjustments to the index and the index shall be calculated by a third 
party who is not a broker-dealer.
    The current index value will be disseminated every 15 seconds over 
the Nasdaq Trade Dissemination System. The Reporting Authority will 
disseminate for each series of Fund Shares an estimate, updated every 
15 seconds, of the value of a share of each series. This may be based, 
for example, upon current information regarding the required deposit of 
securities and cash amount to permit creation of new shares of the 
series or upon the index value.
    A minimum of 100,000 shares of a series of Fund Shares is required 
to be outstanding at the start-up of trading. Trading for each series 
of Fund Shares will occur between 9:30 a.m. and either 4 p.m. or 4:15 
p.m., as specified by Nasdaq.\14\ Nevertheless, as with other listed 
securities, quotes and trades in Fund Shares may be reported using 
Nasdaq systems that operate in the extended-hours session from 4 p.m. 
to 6:30 p.m.\15\
---------------------------------------------------------------------------

    \14\ At initiation, Nasdaq represents that trading in Fund 
Shares will occur until 4 p.m. Nasdaq understands that most other 
markets that trade Fund Shares extend their regular trading session 
until 4:15 p.m., and Nasdaq plans to extend its regular trading 
session until 4:15 p.m. as soon as technically feasible. Telephone 
conversation between John D. Nachmann, Senior Attorney, Nasdaq, and 
Florence Harmon, Senior Special Counsel, Commission, on May 13, 
2002.
    \15\ Trades after the end of the regular trading session will 
have a ``.T'' identifier, which will exclude them from the 
consolidated daily ``high,'' ``low,'' and ``close'' prices, but they 
would be included in the daily volume statistics. Telephone 
conversation between John D. Nachmann, Senior Attorney, Nasdaq, and 
Florence Harmon, Senior Special Counsel, Commission, on May 13, 
2002. See also Securities Exchange Act Release Nos. 42003 (October 
13, 1999), 64 FR 56554 (October 20, 1999); and 45503 (March 5, 
2002), 67 FR 10955 (March 11, 2002).
---------------------------------------------------------------------------

    iii. Disclosure. Nasdaq represents that it will require members to 
provide all purchasers of newly issued Index Fund Shares with a 
prospectus. Since the Fund Units will be in continuous distribution, 
the prospectus delivery requirements of Section 5(b)(2) of the 
Securities Act\16\ will apply to all investors in Index Fund Shares, 
including secondary market purchases on Nasdaq.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 77e(b)(2).
---------------------------------------------------------------------------

    With respect to a series of Index Fund Shares that are the subject 
of an order by the SEC exempting such series from certain prospectus 
delivery requirements under Section 24(d) of the Investment Company 
Act,\17\ Nasdaq represents that it will inform members regarding 
disclosure obligations with respect to a particular series of Index 
Fund Shares by means of an Information Circular prior to commencement 
of trading in such series.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 80a-24(d).
---------------------------------------------------------------------------

    For these exempted series, Nasdaq represents that it will require 
that members provide to all purchasers of a series of Index Fund Shares 
a written description of the terms and characteristics of such 
securities, in a form prepared by the open-end management investment 
company issuing such securities, not later than the time a confirmation 
of the first transaction in such series is delivered to such purchaser. 
In addition, members shall include such a written description with any 
sales material relating to a series of Index Fund Shares that is 
provided to customers or the public. Any other written materials 
provided by a member to customers or the public making specific 
reference to a series of Index Fund Shares as an investment vehicle 
must include a statement in substantially the following form: ``A 
circular describing the terms and characteristics of [the series of 
Index Fund Shares] has been prepared by the [open-end management 
investment company name] and is available from your broker or The 
Nasdaq Stock Market. It is recommended that you obtain and review such 
circular before purchasing [the series of Index Fund Shares]. In 
addition, upon request you may obtain from your broker a prospectus for 
[the series of Index Fund Shares].''
    A member carrying an omnibus account for a non-member broker-dealer 
is required to inform such non-member that execution of an order to 
purchase a series of Index Fund Shares for such omnibus account will be 
deemed to constitute agreement by the non-member to make such written 
description available to its customers on the same terms as are 
directly applicable to members under this rule.
    Upon request of a customer, a member shall also provide a 
prospectus for the particular series of Index Fund Shares.
    iv. Trading of Fund Shares. Nasdaq represents that dealings in Fund 
Shares will be conducted pursuant to Nasdaq and the NASD's existing 
equity trading rules. Thus, Nasdaq's general dealing and settlement 
rules would apply, including its rules on clearance and settlement of 
securities transactions and its equity margin rules. Other generally 
applicable Nasdaq equity rules and procedures would also apply.\18\ In 
addition, NASD Regulation's surveillance procedures for Fund Shares 
will be the same as the current surveillance procedures governing 
equity securities, and will include additional monitoring on key 
pricing dates.
---------------------------------------------------------------------------

    \18\ Pursuant to NASD Rule 4613(a)(1)(D), a minimum quotation 
increment of one penny will apply to transactions of Fund Shares on 
The Nasdaq National Market.
---------------------------------------------------------------------------

    Prior to the commencement of trading in Fund Shares, Nasdaq 
represents that it will issue an Information Circular to members 
highlighting the characteristics of purchases in Fund Shares. The 
circular will discuss, among other things, the special characteristics 
and risks of trading this type of security, inform members of the 
requirement to deliver a prospectus to investors purchasing Fund Shares 
prior to or concurrently with the confirmation of a transaction, and 
the applicability of suitability rules. Specifically, members must have 
reasonable grounds for believing that a recommendation to a customer 
regarding the purchase, sale or exchange of any security is suitable 
for such customer upon the basis of the facts, if any, disclosed by 
such customer as to his other security holdings and as to his financial 
situation and needs.\19\

[[Page 35612]]

Furthermore, as new products are introduced from time to time, Nasdaq 
represents that it is important that members make every effort to 
familiarize themselves with each customer's financial situation, 
trading experience, and ability to meet the risks involved with such 
products and to make every effort to make customers aware of the 
pertinent information regarding the products.
---------------------------------------------------------------------------

    \19\ See NASD Rule 2310 and NASD IM-2310-2. In addition, NASD 
Rule 2310(b) requires members to make reasonable efforts to obtain 
information concerning a customer's financial status, a customer's 
tax status, a customer's investment objectives, and such other 
information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.
---------------------------------------------------------------------------

    With respect to trading halts, the trading of Fund Shares would be 
halted, along with trading of all other listed or traded stocks, in the 
event the ``circuit breaker'' thresholds are reached.\20\ Nasdaq 
represents that it will disclose the policies regarding trading halts 
in Fund Shares in the Information Circular. For a Fund Share based on 
an index, such policies would include 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 index group 
value.
---------------------------------------------------------------------------

    \20\ See NASD IM-4120-4.
---------------------------------------------------------------------------

    c. Listing Fees. In addition to listing standards, Nasdaq also 
proposes to adopt a new listing fee schedule for PDRs and Fund Shares. 
With respect to entry fees, each series of PDRs and Fund Shares will be 
assessed a $5,000 fee, which Nasdaq states is significantly lower than 
the current entry fees for traditional domestic and foreign equity 
issues listing on The Nasdaq National Market (``National Market''). 
Moreover, the proposed annual fees for PDRs and Fund Shares also will 
be significantly less than the current fees for traditional domestic 
and foreign equity issues listed on the National Market. Nasdaq 
represents that the entry and annual fees are designed to cover the 
costs associated with the listing of PDRs and Fund Shares on the 
National Market, while allowing Nasdaq to compete for the listing of 
these securities with national securities exchanges.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of the Act \21\ in 
that the proposed rule change is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. In particular, 
Nasdaq believes that PDRs and Fund Shares will allow investors to: (1) 
Respond quickly to market changes through intra-day trading 
opportunities; (2) engage in hedging strategies similar to those used 
by institutional investors; and (3) reduce transactions costs for 
trading a portfolio of securities.\22\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ See Securities Exchange Act Release No. 42988 (June 28, 
2000), 65 FR 42041 (July 7, 2000).
---------------------------------------------------------------------------

    Nasdaq further believes that the proposed rule change, as amended, 
is consistent with the provisions of Section 15A(b)(5) of the Act \23\ 
in that it provides for the equitable allocation of reasonable dues, 
fees, and other charges among issuers using the Nasdaq system. The 
proposed listing fees for PDRs and Fund Shares are less than the 
current fees for traditional domestic and foreign equity issues listed 
on the National Market as the regulatory and client services costs 
associated with PDRs and Fund shares are lower than those for 
traditional equity issues. Furthermore, Nasdaq represents that the 
proposed listing fees for PDRs and Fund Shares are designed to cover 
costs and allow Nasdaq to compete for the listing of these securities 
with national securities exchanges.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78o-3(b)(5). Nasdaq represents that it intended 
to refer to Section 15A(b)(5) of the Act instead of Section 
15A(b)(6) of the Act in Amendment No. 1 under ``Statutory Basis.'' 
Telephone conversation between John D. Nachmann, Senior Attorney, 
Nasdaq, and Sapna C. Patel, Attorney, Commission, on May 7, 2002.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    Nasdaq has requested that the Commission find good cause, pursuant 
to Section 19(b)(2) of the Act, \24\ for approving, prior to the 
thirtieth day after publication in the Federal Register, the portion of 
the rule proposal related to the listing and trading of PDRs and Fund 
Shares, as amended.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to file 
number SR-NASD-2002-45 and should be submitted by June 10, 2002.

V. Commission Findings and Order Granting Partial Accelerated 
Approval of the Proposed Rule Change

    Nasdaq has requested that the Commission approve the proposed rule 
change, as amended, on an accelerated basis, except the portions of the 
amended proposal related to its proposed listing fees. The Commission 
notes that it has previously approved the listing and trading of PDRs 
and Fund Shares on other exchanges.\25\
---------------------------------------------------------------------------

    \25\ See, e.g., Securities Exchange Act Release Nos. 31591 
(December 11, 1992), 57 FR 60253 (December 18, 1992) (listing and 
trading of PDRs on the American Stock Exchange LLC (``Amex'')); 
36947 (March 8, 1996), 61 FR 10606 (March 14, 1996) (listing and 
trading of Fund Shares on the Amex); 39660 (February 12, 1998), 63 
FR 9026 (February 23, 1998) (listing and trading of PDRs on the 
Boston Stock Exchange, Inc. (``BSE'')); 42988 (June 28, 2000), 65 FR 
42041 (July 7, 2000) (listing and trading of Fund Shares on the 
BSE); 39076 (September 15, 1997), 62 FR 49270 (September 19, 1997) 
(listing and trading of PDRs on the Chicago Stock Exchange, Inc.); 
39268 (October 22, 1997), 62 FR 56211 (October 29, 1997) (listing 
and trading of PDRs on the Cincinnati Stock Exchange, Inc. 
(``CSE'')); 43620 (November 27, 2000), 65 FR 75740 (December 4, 
2000) (listing and trading of Fund Shares on the CSE); and 43912 
(January 31, 2001), 66 FR 9401 (February 7, 2001) (listing and 
trading of Fund Shares on the Philadelphia Stock Exchange, Inc.).

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

[[Page 35613]]

    The Commission finds that the portion of the proposed rule change 
relating to the listing and trading of PDRs and Fund Shares, as 
amended, is consistent with the requirements of Section 15A(b)(6) of 
the Act \26\ and the rules and regulations thereunder applicable to a 
national securities association.\27\ The Commission believes that the 
listing and trading of PDRs and Fund Shares on Nasdaq will provide 
investors with a convenient and flexible way of participating in the 
securities markets. In particular, the Commission believes that the 
trading of PDRs and Fund Shares provides investors with increased 
flexibility in satisfying their investment needs by allowing them to 
purchase and sell a low-cost security replicating the performance of a 
broad portfolio of stocks at negotiated prices throughout the business 
day, and by increasing the availability of PDRs and Fund Shares as an 
investment tool. The Commission also believes that PDRs and Fund Shares 
will benefit investors by allowing them to trade securities based on 
unit investment trusts and open-end management companies in secondary 
market transactions. Accordingly, the Commission finds that the portion 
of Nasdaq's proposal relating to listing standards for PDRs and Fund 
Shares, as amended, 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.\28\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

A. Benefits of PDRs and Fund Shares

    The relatively low cost of individual PDRs and Fund Shares makes 
them attractive to individual retail investors who wish to hold a 
security replicating the performance of a portfolio of stocks. 
Moreover, the Commission believes that PDRs and Fund Shares provide 
investors with several other advantages. In particular, investors are 
able to trade PDRs and Fund Shares continuously throughout the business 
day in secondary market transactions at negotiated prices.\29\ In 
contrast, Investment Company Act Rule 22c-1 \30\ limits holders and 
prospective holders of open-end investment company shares to purchasing 
or redeeming securities of the fund based on the net asset value of the 
securities held by the fund as designated by the board of directors. 
Accordingly, PDRs and Fund Shares allow investors to: (1) Respond 
quickly to market changes through intra-day trading opportunities; (2) 
engage in hedging strategies not otherwise available to retail 
investors; and (3) reduce transaction costs for trading a portfolio of 
securities.
---------------------------------------------------------------------------

    \29\ Because of potential arbitrage opportunities, the 
Commission believes that PDRs and Fund Shares will not trade at a 
material discount or premium in relation to their net asset value. 
The mere potential for arbitrage should keep the market price of a 
PDR or a Fund Share comparable to its net asset value, and 
therefore, arbitrage activity likely will be minimal.
    \30\ 17 CFR 270.22c-1. Investment Company Act Rule 22c-1 
generally provides that a registered investment company issuing a 
redeemable security, its principal underwriter, and dealers in that 
security may sell, redeem, or repurchase the security only at a 
price based on the net asset value next computed after receipt of an 
investor's request to purchase, redeem, or resell. The net asset 
value of an open-end investment company generally is computed once 
daily Monday through Friday, usually after the market's close, as 
designated by the investment company's board of directors.
---------------------------------------------------------------------------

    The Commission believes that the listing and trading on Nasdaq of 
securities like PDRs and Fund Shares, which replicate the performance 
of a broad portfolio of stocks, can benefit the securities markets by, 
among other things, helping to reduce the volatility occasionally 
experienced in these markets.\31\
---------------------------------------------------------------------------

    \31\ See Division, SEC, The October 1987 Market Break (February 
1988) and Division, SEC, Market Analysis of October 13, and 16, 1989 
(December 1990).
---------------------------------------------------------------------------

    Although PDRs and Fund Shares are not leveraged instruments and 
will be regulated like equity instruments subject to Nasdaq's rules 
governing equity securities, the Commission believes that the unique 
nature of these products raises certain product design, disclosure, 
trading and other issues that must be adequately addressed. As 
discussed more fully below, the Commission believes that Nasdaq has 
adequately addressed these concerns.

C. Disclosure

    The Commission believes that the Exchange's proposal should ensure 
that investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading PDRs and 
Fund Shares. Investors purchasing PDRs and Fund Shares will be required 
to receive either a prospectus or, as discussed below, a product 
description of the PDRs and Fund Shares. If the PDR or Fund Share is 
not granted relief from prospectus delivery requirements of the 
Investment Company Act, then investors purchasing PDRs and Fund Shares 
will be required to receive a prospectus prior to or concurrently with 
the confirmation of the transaction. Because PDRs and Fund Shares will 
be in continuous distribution, the prospectus delivery requirements of 
Section 5(b)(2) of the Securities Act \32\ will apply both to initial 
investors, and to all investors purchasing such securities in secondary 
market transactions on Nasdaq or the over-the-counter market.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 77e(b)(2).
---------------------------------------------------------------------------

    If the particular series of PDRs or Fund Shares is subject to an 
order by the Commission exempting such series from the prospectus 
delivery requirements under Section 24(d) of the Investment Company 
Act,\33\ Nasdaq members will provide a written description regarding 
the product to all PDR and Fund Share investors.
    Thus, if the proposed PDRs and Fund Shares are granted relief from 
the prospectus delivery requirements of the Investment Company Act, 
they will be subject to proposed Nasdaq listing standards NASD Rules 
4420(i)(2) and 4420(j)(2), which provide for the delivery of a product 
description for series of PDRs and Fund Shares that have been granted 
relief from the prospectus delivery requirements of the Investment 
Company Act. Under the proposed NASD Rule 4420(i)(2) and NASD Rule 
4420(j)(2) listing standards, the delivery requirement will extend to a 
member carrying an omnibus account for a non-member broker-dealer, who 
must notify the non-member to make a product description available to 
its customers on the same terms as are directly applicable to members. 
In addition, proposed NASD Rule 4420(i)(2) and NASD Rule 4420(j)(2) 
provide that a member must deliver a prospectus to a customer upon 
request.\34\
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    \33\ 15 U.S.C. 80a-24(d).
    \34\ This prospectus delivery requirement applies to member 
broker-dealers that use electronic communication networks.
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    The Commission also notes that Nasdaq will issue an Information 
Circular to members prior to the commencement of trading in PDRs or 
Fund Shares. Nasdaq represents that such Information Circular will 
highlight the general issues pertaining to the purchase of PDRs and 
Fund Shares and the specific characteristics of the PDRs or Fund Shares 
to be purchased. Nasdaq

[[Page 35614]]

represents that the Information Circular will discuss, among other 
things, the special characteristics and risks of trading this type of 
security, inform members of the obligation to deliver a prospectus or 
written description, as applicable, to purchasers of PDRs or Fund 
Shares, and the applicability of the suitability rules.

D. Listing and Trading of PDRs and Fund Shares

    The Commission finds that adequate rules and procedures exist to 
govern the listing and trading of PDRs and Fund Shares. Nasdaq 
represents that PDRs and Fund Shares will be subject to Nasdaq and the 
NASD's equity trading rules. PDRs and Fund Shares will be deemed equity 
securities subject to all Nasdaq and NASD rules governing the trading 
of equity securities, including, among others, rules governing the 
listing and de-listing of securities, trading halts, notices to 
members, responsibilities of the specialist and customer suitability 
requirements.
    Nasdaq represents that transactions for each series of PDRs and 
Fund Shares will occur between 9:30 a.m. and either 4 p.m. or 4:15 
p.m., as specified by Nasdaq.\35\ Nevertheless, as with other listed 
securities, quotes and trades in PDRs and Fund Shares may be reported 
using Nasdaq systems that operate in the extended-hours session from 4 
p.m. to 6:30 p.m.\36\ The Commission notes that these trading hours are 
consistent with those on other exchanges.
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    \35\ At initiation, Nasdaq represents that trading in PDRs and 
Fund Shares will occur until 4 p.m. Nasdaq understands that most 
other markets that trade PDRs and Fund Shares extend their regular 
trading session until 4:15 p.m., and Nasdaq plans to extend its 
regular trading session until 4:15 p.m. as soon as technically 
feasible. Telephone conversation between John D. Nachmann, Senior 
Attorney, Nasdaq, and Florence Harmon, Senior Special Counsel, 
Commission, on May 13, 2002.
    \36\ Trades after the end of the regular trading session will 
have a ``.T'' identifier, which will exclude them from the 
consolidated daily ``high,'' ``low,'' and ``close'' prices, but they 
would be included in the daily volume statistics. Telephone 
conversation between John D. Nachmann, Senior Attorney, Nasdaq, and 
Florence Harmon, Senior Special Counsel, Commission, on May 13, 
2002. See also Securities Exchange Act Release Nos. 42003 (October 
13, 1999), 64 FR 56554 (October 20, 1999); and 45503 (March 5, 
2002), 67 FR 10955 (March 11, 2002).
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    In addition, the Commission notes that a Reporting Authority will 
disseminate an estimate, updated every 15 seconds, of the value of a 
share of each series of PDRs and Fund Shares on Nasdaq's behalf. Nasdaq 
represents that such current value will be disseminated every 15 
seconds over the Nasdaq Trade Dissemination System.

E. Surveillance

    The Commission notes that Nasdaq has submitted surveillance 
procedures for the trading of PDRs and Fund Shares. The Commission 
believes that those procedures, which incorporate and rely upon 
existing NASD Regulation surveillance procedures governing equity 
securities, are adequate under the Act. Finally, the Commission 
believes that the surveillance procedures developed by the NASD are 
adequate to address concerns associated with the listing and trading of 
PDRs and Fund Shares, including any concerns associated with purchasing 
and redeeming Creation Units.
    The Commission also notes that concerns are raised when a broker-
dealer is involved in the development and maintenance of a stock index 
upon which products such as PDRs and Fund Shares are based. In that 
case, the broker-dealer and its affiliate should have procedures 
designed specifically to address the improper sharing of information. 
The Commission notes that if a broker-dealer is involved in developing 
or maintaining a stock index, the index must be calculated by a third 
party who is not a broker-dealer. The Commission believes that such 
information barrier procedures will address the unauthorized transfer 
and misuse of material, non-public information.
    The Commission further notes that PDRs and Fund Shares are not 
leveraged instruments and thus do not require any monitoring procedures 
in connection with leveraging.

F. Scope of the Commission's Order

    The Commission is approving Nasdaq's proposed listing standards for 
PDRs and Fund Shares. The Commission specifically notes that, 
notwithstanding approval of the listing standards for PDRs and Fund 
Shares, other similarly structured instruments and products, including 
other ETFs, will require review by the Commission pursuant to Section 
19(b) of the Act \37\ prior to being traded on Nasdaq.
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    \37\ 15 U.S.C. 78s(b)(2).
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G. Accelerated Approval

    The Commission finds good cause for partially approving the listing 
standards portion of the proposed rule change and Amendment Nos. 1 and 
2 thereto prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. The Commission 
believes that the eligibility of PDRs and Fund Shares for listing and 
trading on Nasdaq will provide investors with increased investment 
choice, and that partial accelerated approval of the proposal relating 
to the listing and trading of PDRs and Fund Shares will allow investors 
to take advantage of such increased choice promptly. In addition, the 
Commission notes that it has previously approved the listing and 
trading of PDRs and Fund Shares.\38\
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    \38\ See supra note 25.
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    In Amendment No. 1 to the proposed rule change, Nasdaq did the 
following: (1) Made corrections to its proposed rule text and proposal; 
(2) added discussion and stated its statutory basis for the proposed 
listing fees; (3) clarified that its regular trading hours for PDRs and 
Fund Shares will be from 9:30 a.m. to 4 p.m. or 4:15 p.m., as 
designated by Nasdaq; and (4) requested accelerated approval for the 
portion of the proposal relating to the listing and trading standards 
for PDRs and Fund Shares, and not for the portion on the proposed 
listing fees. In Amendment No. 2, Nasdaq removed the term ``member 
organization'' throughout its proposed rule text and proposal.
    Accordingly, the Commission believes that there is good cause, 
consistent with Sections 15A(b)(6) and 19(b)(2) of the Act,\39\ for 
granting partial accelerated approval to the proposed rule change 
relating to listing standards for PDRs and Fund Shares, as amended.\40\
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    \39\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
    \40\ The proposed listing fees are not being approved, and are 
only being noticed for comment by the Commission for review under 
Section 19(b)(2) of the Act, 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the portion of the proposed rule change (SR-NASD-2002-45) relating 
to the listing and trading of PDRs and Fund Shares, as amended, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-12642 Filed 5-17-02; 8:45 am]
BILLING CODE 8010-01-P