[Federal Register Volume 67, Number 206 (Thursday, October 24, 2002)]
[Notices]
[Pages 65388-65394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27120]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46686; File No. SR-NYSE-2002-51]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Regarding Listing and Trading of Exchange Traded 
Funds Based on Dow Jones STOXX 50 SM and Dow Jones EURO 
STOXX 50SM Indexes.

October 18, 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 October 18, 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 and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade, under Section 703.16 of 
the Listed Company Manual (the ``LCM'') and the Exchange's Rule 1100 et 
seq., shares of the Fresco Dow Jones STOXX 50 Fund and Fresco Dow Jones 
EURO STOXX 50 Fund (each, a ``Fund'' and together, the ``Funds''). The 
Funds are each a separate series of Fresco Index Shares Funds (the 
``Trust'') \3\ UBS Global Asset Management (US) Inc. (``UBS Global 
AM''), an indirect wholly owned asset management subsidiary of UBS AG 
(``UBS''), acts as the advisor (the ``Advisor'') to the Funds. UBS 
Global Asset Management International Ltd. (``UBS Global AM Ltd.''), an 
indirect wholly owned asset management subsidiary of UBS, acts as the 
sub-advisor to the Funds. STOXX Limited, a joint venture among Deutsche 
Boerse AG, Dow Jones & Company, Inc., Euronext Paris SA and SWX Swiss 
Exchange (``STOXX''), provides and services the Dow Jones STOXX 50 and 
Dow Jones EURO STOXX 50 indexes (each an ``Index'' or ``Underlying 
Index'').
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    \3\ The Trust is registered under the Investment Company Act of 
1940, as amended (the ``1940 Act''). The Trust has filed with the 
Commission a Registration Statement on the Form N-1A under the 
Securities Act of 1933 as amended (the ``Securities Act'') and under 
the Investment Company Act of 1940 relating to the Fund (File Nos. 
333-92106 and 811-21145, respectively).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change 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. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to list and trade, under Section 703.16 of 
the Listed Company Manual (the ``LCM'') and the Exchange's Rule 1100 et 
seq., shares of the Fresco Dow Jones STOXX 50 Fund and Fresco Dow Jones 
EURO STOXX 50 Fund (each, a ``Fund'' and together, the ``Funds''). The 
Funds are each a separate series of Fresco Index Shares Funds (the 
``Trust'').\4\ UBS Global Asset Management (US) Inc. (``UBS Global 
AM''), an indirect wholly owned asset management subsidiary of UBS AG 
(``UBS''), acts as the advisor (the ``Advisor'') to the Funds. UBS 
Global Asset Management International Ltd. (``UBS Global AM Ltd.''), an 
indirect wholly owned asset management subsidiary of UBS, acts as the 
sub-advisor to the Funds. STOXX Limited, a joint venture among Deutsche 
Boerse AG, Dow Jones & Company, Inc., Euronext Paris SA and SWX Swiss 
Exchange (``STOXX''), provides and services the Dow Jones STOXX 50 and 
Dow Jones EURO STOXX 50 indexes (each an ``Index'' or ``Underlying 
Index''). STOXX Limited is not affiliated with the Trust, the Funds, 
UBS Global AM or the Exchange.
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    \4\ The Trust is registered under the Investment Company Act of 
1940, as amended (the ``1940 Act''). The Trust has filed with the 
Commission a Registration Statement on the Form N-1A under the 
Securities Act of 1933 as amended (the ``Securities Act'') and under 
the Investment Company Act of 1940 relating to the Fund (File Nos. 
333-92106 and 811-21145, respectively).
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Indexes \5\
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    \5\ The Exchange attached a detailed description of each of the 
Underlying Indexes for the Funds as Exhibit 2 to its Form 19b-4. 
This description includes, but is not limited to, information 
regarding index description, component selection criteria, country 
representation and Index maintenance. Descriptions of each Index, 
including any changes thereto, may be found on the STOXX Web site at 
http://www.stoxx.com.
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    The Dow Jones STOXX 50 Index represents the performance of the 50 
largest companies, across all components of the 18 Dow Jones STOXX 
600SM market sector indexes are a subset of the pan-European 
Dow Jones STOXXSM Total Market Index and contain the 600 
largest stocks traded on the major exchanges in Europe.
    The Dow Jones EURO STOXX Index represents the performance of the 50 
largest companies, across all components of the 18 Dow Jones EURO STOXX 
600SM market sector indexes. The Dow Jones EURO STOXX 
600SM market sector indexes are a subset of the Dow Jones 
EURO STOXXSM Total Market Index and contain the 600 largest 
stocks traded on the major exchanges in the Eurozone.\6\
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    \6\ The ``Eurozone'' includes the countries of the European 
Monetary Union. Telephone conference between Elena Daley, Office of 
General Counsel, NYSE, and Florence Harmon, Division of Market 
Regulation, Commission, on October 18, 2002.
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    The Dow Jones STOXX 50 and Dow Jones EURO STOXX 50 Indexes track 
the large-cap markets of the European and Eurozone regions. Both these 
Dow Jones STOXX blue-chip indexes are currently in use globally as the 
basis for investment products, such as derivatives and exchange-traded 
funds. Their components have a high degree of liquidity and represent 
the largest companies across all 18 market sectors defined by the Dow 
Jones Global Classification standard.
    Derived from the broader total market indexes for each of the two 
regions, Europe and the Eurozone, these two blue-chip indexes each 
represent about 60% of the market capitalization of their underlying 
benchmarks.
    The index universes for each of the Dow Jones STOXX 50 Index and 
the Dow Jones EURO STOXX 50 Index are defined, respectively, as all 
components of the 18 Dow Jones STOXX 600 market sector indexes and all 
components of the 18 Dow Jones EURO STOXX market

[[Page 65389]]

sector indexes. The Dow Jones STOXX 600 market sector indexes contain 
the 600 largest stocks traded on the major exchanges of 17 European 
countries. STOXX, Dow Jones STOXX 50, Dow Jones EURO STOXX 50 and Dow 
Jones STOXX 600 are each service markets of STOXX Limited.
    The Dow Jones EURO STOXX market sector indexes represent the 
Eurozone portion of the Dow Jones STOXX Total Market Index (``TMI''), 
which in turn covers 95% of the total market capitalization of the 
stocks traded on the major exchanges of 17 European countries.
    For each of the 18 Dow Jones STOXX 600 market sector indexes, the 
component stocks are ranked by free-float market capitalization. The 
largest stocks are added to the selection list until the coverage is 
close to, but still less than, 60% of the free float market 
capitalization of the corresponding Dow Jones STOXX TMI market sector 
index. If the next-ranked stock brings the coverage closer to 60% in 
absolute terms, then it is also added to the selection list. Any 
remaining stocks that are Dow Jones STOXX 50 Index components are added 
to the selection list. The stocks on the selection list are ranked by 
free-float market capitalization. In exceptional cases, the STOXX 
Limited Supervisory Board may make additions and deletions to the 
selection list. Within each of the 18 Dow Jones EURO STOXX market 
sector indexes, the component stocks are ranked by free-float 
capitalization. The largest stocks are added to the selection list 
until the coverage is close to, but still less than, 60% of the free-
float market capitalization of the corresponding Dow Jones EURO STOXX 
TMI market sector index. If the next-ranked stock brings the coverage 
closer to 60% in absolute terms, then it is also added to the selection 
list. Any remaining stocks that are current Dow Jones EURO STOXX 50 
Index components are added to the selection list. The stocks on the 
selection list are ranked by free-float market capitalization. In 
exceptional cases, the STOXX Limited Supervisory Board may make 
additions and deletions to the selection list.
    The 40 largest stocks on the selection list for each index are 
chosen as components. Any remaining current components of the index 
ranked between 41 and 60 are added as index components. If the 
component number is still below 50, then the largest stocks on the 
selection list are added until the index contains 50 stocks.
    The indexes are each weighted by free-float market capitalization. 
Each component's weight is capped at 10% of the index's total free-
float market capitalization. Each component's weight is capped at 10% 
of the index's total free-float market capitalization. Weights are 
reviewed quarterly. The creator and compiler of the Dow Jones STOXX 
\SM\ Indexes is STOXX Limited.
    The Funds of the Trust will use the Dow Jones STOXX Indexes 
pursuant to a sub-licensing agreement with an affiliate of UBS Global 
AM. Such affiliate has entered into an agreement with STOXX Limited and 
is authorized thereunder to sub-license the Indexes to the Funds. As of 
the date hereof, STOXX Limited is not affiliated with Trust, the Funds, 
UBS Global AM to the Exchange.

General Description of the Fund

    The Funds offer and issue shares (``Fund Shares'') at their net 
asset value (``NAV'') only in aggregations of a specified number of 
Fund Shares (referred to as a ``Creation Unit''), principally in 
exchange for a basket of equity securities included in the Underlying 
Index (the ``Deposit Securities''), together with a deposit of a 
specified cash payment (the ``Cash Component'').\7\ Fund Shares are 
redeemable only in Creation Units, principally, in exchange for 
portfolio securities and a specified cash payment. Creation Units are 
aggregations of 50,000 Fund Shares. The Trust reserves the right to 
offer a ``cash'' option for creations and redemptions of Fund Shares. 
All standard orders to create a Creation Unit must be received by UBS 
Global AM, as principal underwriter, no later than the close of the 
regular trading session on the NYSE (ordinarily 4 p.m. New York time) 
on the date such order is placed in order for creation of Creation 
Units to be effected based upon the NAV of Funds Shares as next 
determined on such date after receipt of the order in proper form. In 
the case of custom orders, the order must be received by UBS Global AM, 
as principal underwriter, no later than 11 New York time.\8\
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    \1\ The Cash Component is an amount equal to the difference 
between the net asset value of the Fund Shares (Per Creation Unit) 
and the market value of the Deposit Securities. If the Cash 
Component is a positive number (i.e., the NAV per Creation Unit 
Aggregation exceeds the market value of the Deposit Securities), the 
Cash Component shall be such positive amount. If the Cash Component 
is a negative number (i.e., the NAV per Creation Unit Aggregation is 
less than the market value of the Deposit Securities), the Cash 
Component shall be such negative amount and the creator will 
received cash in an amount equal to the Cash Component.
    \8\ A custom order may be placed by an Authorized Participant in 
the event that the Trust permits or requires the substitution of an 
amount of cash to be added to the Cash Component to replace any 
Deposit Security which may not be available in sufficient quantity 
for delivery or which may not be eligible for trading by such 
Authorized Participant or the investor for which it is acting. 
Telephone conference between Elena Daley, Office of General Counsel, 
NYSE, and Florence Harmon, Division of Market Regulation, 
Commission, on October 18, 2002.
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``Passive'' or Indexing Investment Approach

    The Funds seeks to replicate as closely as possible, before 
expenses, the price and yield of the Underlying Index.
    The Fund uses a ``passive'' or indexing approach in seeking to 
achieve the investment objectives of each Fund.

Replication

    Each Fund uses an ``indexing'' investment approach, attempting to 
replicate, before expenses, the price and yield of each Underlying 
Index. Each Fund generally will invest in all of the stocks comprising 
its Underlying Index in proportion to their weighings in the Underlying 
Index. However, each Fund may, in certain circumstances, purchase only 
a sample of stocks in its Underlying Index in proportions expected by 
the Advisor to replicate generally the performance of the Index as a 
whole, choose to overweight a stock in the Index, purchase securities 
not in the Index which the Advisor are appropriate to substitute for 
the securities contained in the Index, or utilize other available 
investment techniques in seeking to track the Index.
    Each Fund will invest at least 90% of its total assets in the 
stocks of the Underlying Index. Each Fund may invest its remaining 
assets in money market instruments, convertible securities, structured 
notes and in options and futures contracts. Each Fund also intends to 
maintain the required level of diversification so as to qualify as a 
regulated investment company under the Internal Revenue Code (the 
``Code''). Compliance with the diversification requirements of the Code 
could limit the investment flexibility of each Fund.

Correlation

    An index is a theoretical financial calculation while the ETF is an 
actual investment portfolio. The performance of each Fund and its 
Underlying Index will vary somewhat due to, among other things, 
operating expenses incurred by the Funds, transaction costs, market 
impact and timing variances. The Fund's Advisory seeks a correlation of 
95% or better between the Fund's performance and the price and yield 
performance of the Underlying Index. A figure of 100% would indicate 
perfect

[[Page 65390]]

correlation. Any correlation of less than 100% is called ``tracking 
error.''

Industry Concentration Policy

    The Funds will not concentrate their investments in an industry 
(i.e. hold 25% or more of its total assets in the stocks of a 
particular industry or group of industries), except that each Fund will 
concentrate to approximately the same extent that its Underlying Index 
concentrates in the stocks of such particular industry or group of 
industries.

Creations and Redemptions of Fund Shares

    The Fund Shares are ``created'' at their NAV by authorized 
participants, large investors and institutions, only in Creation Units 
consisting of 50,000 Shares. A ``creator'' deposits into each Fund the 
Deposit Securities and the Cash Component in exchange for 50,000 Fund 
Shares.
    Similarly, Fund Shares can only be redeemed in Creation Units of 
50,000 Fund Share, principally in-kind for a specified portfolio of 
stocks held by the relevant Fund (``Fund Securities'') plus cash in an 
amount equal to the difference between the NAV of the Fund Shares being 
redeemed and the value of the Fund Securities (the ``Cash Redemption 
Amount''). Except when aggregated in Creation Units, Fund Shares are 
not redeemable. The prices at which creations and redemptions occur are 
based on the next calculation of NAV after an order is received in 
proper form.
    Creations and redemptions must be made through a firm that is a 
Depository Trust Company participant and, that has executed an 
agreement with the Distributor and Transfer Agent with respect to 
creations and redemptions of Creation Unit (``Participant Agreement''). 
The Trust will impose transaction fees in connection with creation and 
redemption transactions.

Clearance and Settlement

    Deposit Securities must be delivered to an account maintained at 
the applicable local sub-custodian of the Trust on or before 2 p.m., 
New York time, on the Contractual Settlement Date.\9\ Participant must 
also make available on or before the Contractual Settlement Date, by 
means satisfactory to the Trust, immediately available or same day 
funds estimated by the Trust to be sufficient to pay the Cash Component 
next determined after acceptance of the order to purchase Fund Shares, 
together with the applicable creation transaction fee (as described in 
the Prospectus). Any excess funds will be returned following settlement 
of the issue of the Creation Unit.
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    \9\ The ``Contractual Settlement Date'' is the earlier of (i) 
the date upon which all of the required Deposit Securities, the Cash 
Component and any other cash amounts which may be due are delivered 
to the Trust and (ii) the latest day for settlement on the customary 
settlement cycle in the jurisdiction where any of the securities of 
the relevant Fund are customarily traded.
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    A Creation Unit will not be issued until the transfer of good title 
to the Trust of the portfolio of Deposit Securities and the payment of 
the Cash Component and the creation transaction fee have been 
completed. When the sub-custodian confirms to the custodian that the 
required securities included in the portfolio deposit (or, when 
permitted in the sole discretion of the Trust, the cash value thereof) 
have been delivered to the account of the relevant sub-custodian, the 
custodian shall notify UBS Global AM, as the principal underwriter, and 
the Trust will issue and cause the delivery of the Creation Unit via 
DTC.

Availability of Information Regarding Fund Shares and Underlying 
Indices

    The list of names and amount of each security constituting the 
current Deposit Securities, and the Cash Component effective as of the 
previous business day, per outstanding share of each Fund, is expected 
to be made available each business day immediately prior to the opening 
of business on the Exchange. The list of names and amounts of each 
security constituting the Fund Securities is also expected to be made 
available each business day. In addition, an amount representing the 
sum of the estimated Cash Component effective through and including the 
previous business day, plus the current value of the Deposit Securities 
in U.S. dollars, on a per share basis, is expected to be disseminated 
every 15 seconds during the Exchange's regular trading hours, through 
the facilities of the Consolidated Tape Association (``CTA'').
    The value of each Underlying Index will be updated intra-day on a 
real-time basis as individual component securities of the Underlying 
Index change in price. These intra-day values of the Underlying Indexes 
will be disseminated every 15 seconds throughout the trading day. In 
addition, there will be disseminated a value for each Underlying Index 
once each trading day, based on closing prices in the relevant exchange 
market.
    The net asset value of each Fund is calculated by the Funds' 
custodian and determined each business day, normally at the close of 
regular trading of the Exchange (ordinarily 4 p.m. New York time). In 
addition, the Trust maintains a web site that provides general 
information about the Funds, including the Funds' prospectus and daily 
trading volume and closing price for each Fund. The closing price of 
each Fund is also readily available from, as applicable, the relevant 
exchanges, automated quotation systems, or on-line information services 
such as Bloomberg or Reuters.

Dissemination of Indicative Portfolio Value

    In order to provide updated information relating to each Fund for 
use by investors, professionals and persons wishing to recreate or 
redeem Fund Shares, and since each Fund is based on an Index which 
includes non-U.S. components, there will be disseminated through the 
facilities of the CTA an updated indicative portfolio value (``Value'') 
for each Fund traded on the Exchange as calculated by a securities 
information provided (``Value Calculator''). The Value will be 
disseminated for each Fund on a per Share basis every 15 seconds during 
regular Exchange trading hours. The equity securities values included 
in the Value are the values of, and the Deposit Securities disseminated 
for that trading day. In addition to the value of the Deposit 
Securities for each Fund, a the Value includes the estimated Cash 
Component. The Value also reflects changes in currency exchange rates 
between the U.S. dollar and the applicable home foreign currency.
    The Value may not reflect the value of all securities included in 
the applicable Underlying Index. In addition, the Value does not 
necessarily reflect the precise composition of the current portfolio of 
securities held by each Fund at a particular point in time. The 
currency exchange rate used in the calculation of the Value may also 
differ from that used by the Fund's custodian in the calculation of 
each Fund's NAV. Therefore, the Value for each Fund on a per Share 
basis disseminated during the Exchange's trading hours should not be 
viewed as a real-time update of the NAV of each Fund, which is 
calculated only once a day. While the Value that will be disseminated 
immediately prior to the opening of business of the Exchange (currently 
9:30 a.m., EST) is expected to be generally very close to the previous 
day's NAV on a per Share basis, it is possible that each Fund's Value 
diverge from its NAV during any trading day. In such case, the Value 
will not precisely reflect the value of the relevant Fund portfolio.

[[Page 65391]]

    During the trading day, however, the Funds expect that the Value 
should closely approximately the value per Fund share of the portfolio 
of securities for the relevant Fund except under unusual circumstances 
(e.g., in the case of extensive rebalancing of multiple securities in a 
Fund at the same time by the Advisor). The circumstances that might 
cause the Value to be different from a Fund's NAV would not be 
different from circumstances causing any index fund or trust to diverge 
from its underlying benchmark index.
    The Exchange believes that dissemination of the Value based on the 
Deposit Securities provides additional information regarding the Funds 
that would not otherwise be available to the public and is useful to 
professionals and investors in connection with Fund Shares trading on 
the Exchange or the creation or redemption of Fund Shares.
    For foreign stocks that trade on principal foreign markets during 
hours that overlap regular trading hours on the Exchange, the Value 
Calculator will update the applicable Value every 15 seconds to reflect 
price changes in the applicable foreign market or markets, and convert 
such prices into U.S. dollars based on the current currency exchange 
rate. When the principal foreign market or markets are closed but the 
Exchange is open, the Value will be updated every 15 seconds to reflect 
changes in currency exchange rates after such markets close.

Other Characteristics of the Fund

    It is anticipated that a minimum of three Creation Units for each 
Fund will be outstanding at the commencement of trading on the 
Exchange. The number of Shares per Creation Unit is 50,000.
    Fund Shares will be registered in book-entry only form through the 
Depository Trust Company (``DTC''). Trading in Fund Shares on the 
Exchange will be effected normally until 4 p.m. each business day. The 
minimum trading increment for Fund Shares on the Exchange initially 
will be $0.01.
    Dividends from net investment income will be declared and paid at 
least annually by each Fund. Distributions of realized securities 
gains, if any, generally will be declared and paid at least once a 
year, but each Fund may make distributions on a more frequent basis to 
comply with distribution requirements of the Code. Each Fund may make 
the DTC book-entry Dividend Reinvestment Service available for use by 
beneficial owners of the Fund through DTC Participants for reinvestment 
of their cash proceeds.

Original and Annual Listing Fees

    The Exchange original listing fee applicable to the listing of each 
Fund will be $5,000. The annual continued listing fee for each Fund 
will be $2,000.

Stop and Stop Limit Orders

    Commentary .30 to Exchange Rule 13 provides that stop and stop 
limit orders in an Investment Company Unit shall be elected by a 
quotation, but specifies that if the electing bid on an offer is more 
than 0.10 points away from the last sale and is for the specialist's 
dealer account, the prior approval of a Floor Official is required for 
the election to be effective.

Trading Halts

    The Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in each Fund. Trading on the 
Exchange in the Fund Shares may be halted because of market conditions 
or for reasons that, in the view of the Exchange, making trading in the 
Fund Shares inadvisable. these may include (1) the extent to which 
trading is not occurring in the Deposit Security(s) or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition 
trading in Fund Shares is subject to trading halts caused by 
extraordinary market volatility pursuant to Exchange's ``circuit 
breaker'' rules.\10\
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    \10\ Rule 80B.
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Surveillance Procedures

    The Exchange's written surveillance procedures for Fund Shares will 
be similar to the procedures utilized for other Investment Company 
Units. the Exchange also intends to utilize its existing surveillance 
procedures to monitor trading in the Fund, including 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 (see the description of the Rule and its application below).

Rule 460.10

    Rule 460.10 generally precludes certain business relationships 
between an issuer and the specialist in the issuer's securities. 
Exceptions in the Rule permit specialists in Fund 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 effected on the same terms and conditions as 
any other investor, and only at the net asset value of the Fund Shares. 
A specialist may acquire a position in excess of 10% of the outstanding 
issue of the Fund 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.

Prospectus Delivery

    The Commission has granted the Trust an exemption from certain 
prospectus delivery requirements under section 24(d) of the Investment 
Company Act of 1940.\11\ Any product description used in reliance on a 
section 24(d) exemptive order will comply with all representations made 
therein and all conditions thereto. The Exchange, in an Information 
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 the Funds. 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.
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    \11\ See Investment Company Act Release No. 25738 (October 11, 
2002).
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Suitability

    Pursuant to Exchange Rule 405, before a member, member 
organization, allied member or employee of such member organization 
undertakes to recommend a transaction in Fund Shares, such member or 
member organization should make a determination that such Fund Shares 
are suitable for such customer. If any recommendation is made with 
respect to such Fund Shares, the person making the recommendation 
should have a reasonable basis for believing at the time of making the 
recommendation, that the customer has such knowledge and experience in 
financial matters that he or she may reasonably be expected to be 
capable of evaluating the risks and any special characteristics of the 
recommended transaction, and is financially able to bear the risks of 
the recommended transaction.

Information Circular to Members

    The Exchange will distribute an information circular to its members 
in connection with the trading in the Fund. The circular will discuss 
the special characteristics and risks of

[[Page 65392]]

trading this type of security. Specifically, the circular, among other 
things, will discuss what the Fund is, how it is created and redeemed, 
the requirement that members and member firms deliver a prospectus to 
investors purchasing Fund Shares prior to or concurrently with the 
confirmation of a transaction, applicable Exchange rules, dissemination 
information, trading information and the applicability of suitability 
rules.\12\
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    \12\ The information circular will also discuss exemptive relief 
granted by the Commission from certain rules under the Exchange Act. 
The applicable rules are: Rule 10a-1, Rule 10b-10, Rules 14e-5, 
Rules 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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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \13\ of the Act, in general, and furthers the 
objectives of section 6(b)(5),\14\ 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 investor and the public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 purpose 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).\15\ The 
Commission believes that the Exchange's proposal to trade the Funds 
will allow investors to achieve desired investment objectives through 
the purchase of an instrument linked to the Dow Jones STOXX 50 and Dow 
Jones EURO STOXX 50 indexes. These objectives include participating in 
or gaining exposure to these indexes while limiting somewhat downside 
risk and participating in foreign securities markets. In addition, 
trading of the Funds can produce added benefits to investors through 
the increased competition between other markets 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,\16\ and by increasing the 
availability of the Funds as investment tools. 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.\17\
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 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 the Funds can redeem them 
in creation unit size aggregations (of 50,000 Fund Shares) only plus 
cash in an amount equal to the difference between the NAV of the 
Fund Shares being redeemed and the value of the Fund Securities.
    \17\ 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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    As the Commission noted in greater detail in the order approving 
iShares (formally ``World Equity Benchmark Securities'' or ``WEBS'') 
for listing and trading on the American Stock Exchange LLC 
(``Amex''),\18\ the estimated cost of individual Fund Shares described 
herein should make it attractive to individual retail investors who 
wish to hold a security replicating the performance of a portfolio of 
stocks, including foreign stocks. The Commission also notes that such 
Funds should provide investors with several advantages over standard 
open-end investment companies; in particular, investors can trade the 
Funds continuously throughout the day in secondary markets at 
negotiated prices.\19\ In contrast, Investment Company Act of 1940 
(``Investment Company Act'') Rule 22c-1 \20\ limits holders and 
prospectus holders of open-end management investment company shares to 
purchasing or redeeming securities of the fund based on the next asset 
value of the securities held by the fund as designated by the board of 
directors. Thus, the Funds should allow investors to respond quickly to 
market changes through intra-day trading for opportunities, expand the 
opportunity for retail investors to engage in hedging strategies, and 
reduce transaction costs for trading a portfolio of stocks.
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    \18\ The Funds are similar in nature were formerly known as 
World Equity Benchmark Securities (``WEBS'') and were approved for 
listing and trading on the Amex in 1996. See Securities Exchange Act 
Release No. 36947 (March 8, 1996), 61 FR 10606 (March 14, 1996) 
(``Amex WEBS Approval Order''). The Commission hereby incorporates 
by reference the discussion and rationale for approving WEBS 
provided in the Amex WEBS Approval Order.
    \19\ The Commission believes that the Funds will not trade at a 
material discount or premium in relation to their NAV, because of 
potential arbitrage opportunities. See Amex WEBS Approval Order, 
supra note 16. The mere potential for arbitrage should keep the 
market price of Fund Shares comparable to their NAVs; therefore, 
arbitrage activity likely will not be significant. In addition, the 
Funds will redeem in-kind, thereby enabling the Fund to invest 
virtually all of its assets in securities comprising the Dow Jones 
STOXX 50 and Dow Jones EURO STOXX 50 indexes.
    \20\ 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 NAV next computed after receipt of an investor's 
request to purchase, redeem, or resell. The NAV of an open-end 
management investment company generally is computed once daily 
Monday to Friday as designated by the investment company's board of 
directors. The Commission granted WEBS an exemption from this 
provision to allow them to trade in the secondary market at 
negotiated prices. See Amex WEBS Approval Order, supra note 16.
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    The Commission notes that, although the respective values of the 
Funds are based on the value of the securities and cash held in the 
Funds, Fund Shares are not leveraged instruments. Fund Shares are 
essentially equity securities that represent an interest in a portfolio 
of stocks designed to reflect substantially the applicable Dow Jones 
STOXX 50 and Dow Jones EURO STOXX 50 indexes. Accordingly, it is 
appropriate to regulate the Funds in a manner similar to other equity 
securities. Nonetheless, the Commission believes that the unique nature 
of the Funds raises certain disclosure, trading, and other issues that 
need to be addressed. The remainder of this section addresses these 
issues, although they are discussed in greater detail in the Amex WEBS 
Approval Order, where the Commission initially approved WEBS for 
trading as a new product.

A. 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 Funds. All investors in the

[[Page 65393]]

Funds will receive a prospectus or a Product Description \21\ regarding 
the product. The prospectus or Product Description will address the 
special characteristics of the Funds, including a statement regarding 
their redeemability and method of creation, and that Fund Shares are 
not individually redeemable.
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    \21\ See Investment Company Release No. 25623 (June 25, 2002).
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    The Commission notes that the Exchange has represented that it will 
also distribute an information circular all NYSE members prior to the 
commencement of trading of the Funds 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 Funds, it 
should make a determination that it is in compliance with applicable 
rules of other self-regulatory organizations of which it is a member, 
including suitability rules. The circular will also address members' 
responsibility to deliver a prospectus or product description to all 
investors purchasing the Funds, as well as highlight the 
characteristics of the Funds, including that Fund Shares are only 
redeemable in Creation Unit size aggregation. \22\ The information 
circular will also discuss the Trust's option of redeeming the Funds 
solely for cash, which is unique to these products.
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    \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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B. Dissemination of the Fund Portfolio Information

    The Commission believes that investors will be provided with timely 
and useful information concerning the value of the Funds. The 
Commission notes that the information will be disseminated through 
facilities of the CTA and reflects the currently available information 
concerning the value of the assets comprising the deposit securities. 
The information will be 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, regardless of where the transaction is 
executed. In addition, because the value is expected to closely track 
the applicable Fund series, the Commission believes the Values will 
provide investors with adequate information to determine the intra-day 
value of a given Fund series. \23\ In the Amex WEBS Approval Order, the 
Commission noted that it expected Amex to monitor the disseminated 
Value, and if Amex determines that the Value does not closely track 
applicable WEBS/iShares series, it will arrange to disseminate an 
adequate alternative. Here, the Commission expects the NYSE to 
similarly monitor the disseminated Value of the Funds.
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    \23\ In addition, the Amex WEBS Approval Order states that the 
statement of additional information (``SAI'') to the preliminary 
prospectus states that each series will calculate its NAV per share 
at the close of the regular trading session for the Amex on each day 
that the Amex is open for business. NAV generally will be based on 
the last quoted sales price on the exchange where the security 
primarily is traded. See Amex WEBS Approval Order, supra note 16. 
Such NAV calculations will be similarly done for the Funds.
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C. Surveillance

    The Commission notes that NYSE has submitted surveillance 
procedures for the Funds 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.

D. 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. 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 Fund 
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 Funds, 
broker-dealers and other persons are cautioned in the prospectus 
and/or the Fund's SAI 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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E. Accelerated Approval

    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 and trading of the Fund Shares 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 interests.\26\ The Commission further finds that accelerated 
approval will enable the Exchange to begin listing and trading the Fund 
Shares on the Exchange immediately. The Commission therefore approves 
this proposal on an accelerated basis.
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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 20549-0609. 
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

[[Page 65394]]

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-2002-51 and should be submitted by 
November 14, 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. 02-27120 Filed 10-23-02; 8:45 am]
BILLING CODE 8010-01-M