[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Notices]
[Pages 51916-51919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20179]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46306; File No. SR-NYSE-2002-28]


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 Certain Exchange Traded Funds 
(``ETFs'')

August 2, 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 July 24, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
items I, II, and III 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 is approving 
the proposal 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 NYSE proposes to trade on an unlisted trading privileges 
(``UTP''): (a) Vanguard Total Stock Market VIPERs, (b) iShares Russell 
2000 Index Funds, (c) iShares Russell 2000 Value Index Funds and (d) 
iShares Russell 2000 Growth Index Funds (each an ``ETF'' and 
collectively ``ETFs''), each of which

[[Page 51917]]

is a type of Investment Company Unit (``ICU'').

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 NYSE 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 IV below and is set forth in Sections A, B, and C below.

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

1. Purpose
    The Exchange has adopted listing standards applicable to ICUs which 
the Exchange states are consistent with the listing criteria currently 
used by the American Stock Exchange LLC (``Amex'') and other exchanges, 
and trading standards pursuant to which the Exchange may trade ICUs on 
the Exchange on an UTP basis.\3\ The Exchange now proposes to trade the 
ETFs on a UTP basis. The ETFs have been listed and actively traded on 
the Amex \4\ and trade on other securities exchanges and in the over-
the-counter market. Each of the ETFs meets the ``generic'' listing 
criteria for ETFs set forth in Section 703.16 of the Manual and 
Exchange Rule 1100 (``generic listing criteria''), except that certain 
component stocks of each of the ETFs do not meet the volume 
requirement, as more fully described in Exhibit A of the Form 19b-4.\5\ 
The information below is intended to provide a brief description of 
each ETF.\6\
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    \3\ In 1996, the Commission approved Section 703.16 of the 
Exchange's Listed Company Manual (``Manual''), which sets forth the 
rules related to the listing of ICUs. See Securities Exchange Act 
Release No. 36923 (March 5, 1996), 61 FR 10410 (March 13, 1996). In 
2000, the Commission also approved the Exchange's generic listing 
standards for the listing and trading, or the trading pursuant to 
UTP, of ICUs under Section 703.16 of the Manual and Exchange Rule 
1100. See Securities Exchange Act Release No. 43679 (December 5, 
2000), 65 FR 77949 (December 13, 2000).
    \4\ Amex began trading the iShares Russell Funds in 2000 and the 
Vanguard Total Stock Market VIPERs in 2001. See www.iShares.com; 
www.vanguard.com.
    \5\ Section 703.16(b)(2)(b) of the Manual requires that ``the 
component stocks representing at least 90 percent of the weight of 
the index or portfolio must have a minimum monthly trading volume 
during each of the last six months of at least 250,000 shares.''
    \6\ The Exchange represents that much of the information in this 
filing was taken from the Prospectus of iShares Trust dated as of 
August 1, 2002, as supplemented, the Prospectus of The Vanguard 
Group dated as of April 26, 2002, as supplemented, and from the 
websites of the Amex (www.Amex.com), iShares (www.iShares.com) and 
Vanguard (www.vanguard.com). In addition, some information relating 
to the Vanguard Fund was taken from the Application for an Order 
under Section 6(c) of the Investment Company Act of 1940 for Certain 
Exemptions, Release No. IC-24680 (October 6, 2000). Fund information 
relating to Net Value Asset (``NAV''), returns, dividends, component 
stock holdings and the like are updated on a daily basis on the 
websites.
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    The Vanguard Total Stock Market VIPERs. The shares of the Vanguard 
Total Stock Market VIPERs (``Vanguard Fund'') are based on the Wilshire 
5000 Total Market Index (``Wilshire Index''), a domestic securities 
index. The Wilshire Index is market capitalization weighted. The 
Vanguard Index Funds, the issuer, is an open-ended management 
investment company operating nine separate investment portfolios or 
``index funds.'' The Wilshire Index consists of stocks traded on the 
NYSE and AMEX and quoted on NASDAQ. The Vanguard Fund uses a 
``passive,'' or indexing, approach to attempt to produce investment 
results that approximate the investment performance of the Wilshire 
Index. The Vanguard Fund will not hold all of the stocks that comprise 
the Wilshire Index, but will attempt to hold a representative sampling 
of the securities in the Wilshire Index that resembles the entire 
Wilshire Index. As of July 1, 2002, of those component stocks 
representing at least 90% of the weight of the Wilshire Index, four of 
the 1,774 component stocks of the Vanguard Fund did not meet the volume 
requirement of the generic listing criteria.\7\
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    \7\ See www.Amextrader.com. Telephone conversation between Janet 
M. Kissane, Office of General Counsel, NYSE, and Florence E. Harmon, 
Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, on August 2, 2002.
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    iShares Russell Funds. The shares of the iShares Russell 2000 Index 
Fund are based on the Russell 2000 Index. The shares of the iShares 
Russell 2000 Value Index Fund are based on the Russell 2000 Value 
Index, and the shares of the iShares Russell 2000 Growth Index Fund are 
based on the Russell 2000 Growth Index (the iShares Russell 2000 Index 
Fund, iShares Russell 2000 Value Index Fund and the iShares Russell 
2000 Growth Index Fund are collectively referred to as the ``iShares 
Russell Funds''). The Russell Indices are domestic securities indices. 
Each of the Russell Indices is market capitalization weighted. The 
iShares Trust, the issuer, is an open-ended management investment 
company operating 50 separate investment portfolios or ``index funds.'' 
The Russell Indices consist of stocks traded on the NYSE and AMEX and 
quoted on NASDAQ. Each of the iShares Russell Funds uses a ``passive,'' 
or indexing, approach to attempt to produce investment results that 
approximate the investment performance of the relevant Russell Index. 
The iShares Russell 2000 and Russell 2000 Value Index Funds will not 
hold all of the stocks that comprise the relevant Russell Index, but 
will attempt to hold a representative sampling of the securities in the 
relevant Russell Index that resembles the entire relevant Russell 
Index. The iShares Russell 2000 Growth Index Fund will invest in 
substantially all of the securities in the Russell 2000 Growth Index in 
approximately the same proportions as in the underlying Russell 2000 
Growth Index. As of June 28, 2002, of those component stocks 
representing at least 90% of the weight of the index: (a) 51 of 1,243 
component stocks of the iShares Russell 2000 Value Index Fund, (b) 32 
of 1,218 component stocks of the iShares Russell 2000 Growth Index 
Fund, and (c) 75 of 1,878 component stocks of the iShares Russell 2000 
Index Fund did not meet the volume requirement of the generic listing 
criteria.\8\
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    \8\ Telephone conversation between Janet M. Kissane, Office of 
General Counsel, NYSE, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on August 2, 2002.
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    As with all ETFs, the Exchange will distribute an information 
circular to its members in connection with the trading of the ETFs. The 
circular will discuss the special characteristics and risks of trading 
this type of security. Specifically, the circular, among other things, 
will discuss what the ETFs are, how they are created and redeemed, the 
requirement that members and member firms deliver a prospectus to 
investors purchasing shares of the ETFs prior to or concurrently with 
the confirmation of a transaction,\9\ applicable Exchange rules, 
dissemination information, trading information and the applicability of 
suitability rules. The

[[Page 51918]]

Exchange also intends to utilize its existing surveillance procedures 
to monitor trading in the ETFs, including surveilling specialist 
compliance with Exchange Rule 460.10, which contemplates specialists 
engaging in transactions with the ETF issuers under certain 
circumstances.\10\
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    \9\ The Commission has granted the iShares Russell Funds an 
exemption from Section 24(d) of the Investment Company Act of 1940. 
See Investment Company Act Release No. 25623 (June 25, 2002). The 
Commission granted the Vanguard Fund an exemption from Section 24(d) 
of the Investment Company Act of 1940. See Investment Company Act 
Release No. 24789 (December 12, 2000). Thus, the Exchange, in an 
Informational Circular to Exchange members and member organizations, 
will inform members and member organizations, prior to commencement 
of trading, of the prospectus or Product Description delivery 
requirements applicable to iShares Russell Funds or the Vanguard 
Fund. Any product description used in reliance on the Section 24(d) 
exemptive order will comply with all representations made and all 
conditions contained in the Application for the Order. Telephone 
conversation between Janet M. Kissane, Office of General Counsel, 
NYSE, and Florence E. Harmon, Senior Special Counsel, Division, 
Commission, on August 2, 2002.
    \10\ The Exchange represents that Exchange Rule 460.10 generally 
precludes certain business relationships between an issuer and the 
specialist in the issuer's securities. The Exchange further 
represents that Exceptions in the Rule permit specialists in ETF 
shares to enter into Creation Unit transactions through the 
Distributor to facilitate the maintenance of a fair and orderly 
market. A specialist Creation Unit transaction may only be affected 
on the same terms and conditions as any other investor, and only at 
the net asset value of the ETF shares. A specialist may acquire a 
position in excess of 10% of the outstanding issue of the ETF 
shares, provided, however, that a specialist registered in a 
security issued by an investment company may purchase and redeem the 
investment company unit or securities that can be subdivided or 
converted into such unit, from the investment company as appropriate 
to facilitate the maintenance of a fair and orderly market in the 
subject security.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is existent 
with Section 6(b) of the Act \11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \12\ in particular in that it 
is 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b)(5).\13\ The 
Commission believes that the Exchange's proposal to trade (a) Vanguard 
Fund, (b) iShares Russell 2000 Index Funds, (c) iShares Russell 2000 
Value Index Funds and (d) iShares Russell 2000 Growth Index Funds 
pursuant to the UTP will provide investors with a convenient way of 
participating in the securities markets and could produce added 
benefits to investors through the increased competition between other 
market centers trading the product. Specifically, the Commission 
believes that NYSE's proposal should help provide investors with 
increased flexibility in satisfying their investment needs, by allowing 
them to purchase and sell at negotiated prices throughout the trading 
day securities that replicate the performance of several portfolios of 
stock,\14\ and by increasing the availability of ETFs as an investment 
tool. Accordingly, as discussed below, the rule proposal is consistent 
with the requirements of Section 6(b)(5) that Exchange rules 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.\15\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ The Commission notes that unlike typical open-end 
investment companies, where investors have the right to redeem their 
fund shares on a daily basis, investors in ETFs can redeem them in 
creation unit size aggregations only.
    \15\ In approving this rule, the commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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A. Trading of the ETFs on NYSE Pursuant to UTP

    The Commission notes that, pursuant to Rule 12f-5 under the 
Act,\16\ prior to trading a particular class or type of security 
pursuant to UTP, NYSE must have listing standards comparable to those 
of the primary market on which the security is listed. The Commission 
finds that adequate rules and procedures exist to govern the trading of 
the ETFs on NYSE, pursuant to UTP. ETF shares will be deemed equity 
securities subject to NYSE's rules governing the trading of equity 
securities. Accordingly, the Exchange's existing general rules that 
currently apply to the trading of equity securities will also apply to 
the ETFs. In addition, Section 703.16 of the NYSE's Manual and Exchange 
Rule 1100 \17\ which contain specific listing and delisting criteria to 
accommodate the trading of Units, will apply to the trading of the 
ETFs.\18\ These criteria should help to ensure that a minimum level of 
liquidity will exist to allow for the maintenance of fair and orderly 
markets. The delisting criteria allow the Exchange to consider the 
suspension of trading and the delisting of a series of Units, including 
suspending trading in the ETFs traded on the Exchange pursuant to UTP, 
if an event were to occur that made further dealings in such securities 
inadvisable. This will give the Exchange flexibility to suspend trading 
in the ETFs if circumstances warrant such action. Accordingly, the 
Commission believes that NYSE's equity rules in general, and Section 
703.16 of the Manual and Exchange Rule 1100 in particular, provide 
adequate safeguards to prevent manipulative acts and practices and to 
protect investors and the public interest.\19\
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    \16\ 17 CFR 240.12f-5.
    \17\ The Commission approved generic rules for the listing and 
trading of ICUs on NYSE in 2000. See Securities Exchange Act Release 
No. 43679 (December 5, 2000), 65 FR 77949 (December 13, 2000).
    \18\ The Commission notes the listing and delisting criteria is 
similar to those adopted by Amex.
    \19\ The Commission also believes that the proposed rule change 
should help protect investors and the public interest, and help 
perfect the mechanisms of a national market system, in that it will 
allow for the trading of the ETFs on NYSE pursuant to UTP, making 
the ETFs more broadly available to the investing public.
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B. Disclosure

    The Commission believes that NYSE's proposal should provide for 
adequate disclosure to investors relating to the terms, 
characteristics, and risks of trading the ETFs. All investors in the 
ETFs, including those purchasing the ETFs on NYSE pursuant to UTP, will 
receive a prospectus or a Product Description \20\ regarding the 
product. The prospectus or Product Description will address the special 
characteristics of the ETFs, including a statement regarding their 
redeemability and method of creation, and that ETF shares are not 
individually redeemable.
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    \20\ See Investment Company Release No. 25623 (June 25, 2002); 
Investment Company Release No. 24789 (December 12, 2000).
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    The Commission notes that the Exchange has represented that it will 
also distribute an information circular to all NYSE members prior to 
the commencement of trading of the ETFs explaining the unique 
characteristics and risks of the Funds. The circular will note, for 
example, Exchange member responsibilities, including that, before an 
Exchange member undertakes to recommend a transaction in the ETFs, it 
should make a determination that it is in compliance with applicable 
rules of other self-regulatory organizations of

[[Page 51919]]

which it is a member, including suitability rules.\21\ The circular 
will also address members' responsibility to deliver a prospectus to 
all investors purchasing the ETF, as well as highlight the 
characteristics of the ETF, including that ETF shares are only 
redeemable in Creation Unit size aggregation.\22\
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    \21\ Telephone conversation between Janet M. Kissane, Office of 
General Counsel, NYSE, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on August 2, 2002.
    \22\ The Commission notes that the information circular should 
also discuss exemptive relief granted by the Commission from certain 
rules under the Act. The applicable rules are: Rule 10a-1, Rule 10b-
10; Rule 14e-5; Rule 10b-17; Rule 11d1-2; Rules 15c1-5 and 15c1-6; 
and Rules 101 and 102 of Regulation M under the Exchange Act.
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C. Dissemination of the Fund Portfolio Information

    The Commission believes that since Amex is disseminating an 
estimate of the Value (``Values'') of a share for the various ETFs, 
investors will be provided with timely and useful information 
concerning the value of the ETFs, on a per Fund basis. The Commission 
notes that the information is disseminated through facilities of the 
CTA and reflects the currently available information concerning the 
value of the assets comprising the deposit securities. The information 
is disseminated every fifteen seconds during the hours of 9:30 a.m. to 
4 p.m. Eastern Standard Time and will be available to all investors, 
irrespective of where the transaction is executed.\23\ In addition, 
because the value is expected to closely track the applicable ETF, the 
Commission believes the Values will provide investors with adequate 
information to determine the intra-day value of a given ETF.
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    \23\ Telephone conversation between Janet M. Kissane, Office of 
General Counsel, NYSE, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on August 2, 2002.
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D. Surveillance

    The Commission notes that NYSE has submitted surveillance 
procedures for the ETFs and believes that those procedures are adequate 
to address concerns associated with the listing and trading of such 
securities, including any concerns associated with specialists 
purchasing and redeeming Creation Units. The Exchange has represented 
that its surveillance procedures should allow it to identify situations 
where specialists purchase or redeem Creation Units to ensure 
compliance with NYSE Rule 460.10, which requires that such purchases or 
redemptions facilitate the maintenance of a fair and orderly market in 
the subject security.

E. Specialists

    The Commission finds that it is consistent with the Act to allow a 
specialist registered in a security issued by an Investment Company to 
purchase or redeem the listed security from the issuer as appropriate 
to facilitate the maintenance of a fair and orderly market in that 
security. The Commission believes that such market activities should 
enhance liquidity in such security and facilitate a specialist's market 
making responsibilities. In addition, because the specialist only will 
be able to purchase and redeem ETF shares on the same terms and 
conditions as any other investor (and only at the NAV), and Creation 
transactions must occur through the distributor and not directly with 
the issuer, the Commission believes that concerns regarding potential 
abuse are minimized. As noted above, the Exchange's surveillance 
procedures also should ensure that such purchases are only for the 
purpose of maintaining fair and orderly markets, and not for any other 
improper or speculative purposes. Finally, the Commission notes that 
its approval of this aspect of the Exchange's rule proposal does not 
address any other requirements or obligations under the Federal 
securities laws that may be applicable.\24\
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    \24\ The Commission notes that with respect to the ETFs, broker-
dealers and other persons are cautioned in the prospectus and/or the 
ETF's Statement of Additional Information that some activities on 
their part may, depending on the circumstances, result in their 
being deemed statutory underwriters and subject them to the 
prospectus delivery and liability provisions of the Securities Act 
of 1933.
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    After careful review, the Commission finds good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\25\ The Commission finds that this 
proposal is similar to several approved instruments currently listed 
and traded on the Exchange. Accordingly, the Commission finds that the 
listing of the ETFs on a UTP basis is consistent with the Act and will 
promote just and equitable principles of trade, foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, and, in general, protect investors and the public 
interest consistent with Section 6(b)(5) of the Act,\26\ to approve the 
proposal on the accelerated basis. The Commission further finds that 
accelerated approval will enable the Exchange to accommodate the 
timetable for trading ETFs on the Exchange.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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. 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 NYSE. All submissions should 
refer to the file number SR-NYSE-2002-28 and should be submitted by 
August 30, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20179 Filed 8-8-02; 8:45 am]
BILLING CODE 8010-01-P