[Federal Register Volume 68, Number 81 (Monday, April 28, 2003)]
[Notices]
[Pages 22434-22439]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10389]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47706; File No. SR-NASD-2003-33]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 by the National Association of Securities Dealers, Inc. Relating 
to Trading of Certain Holding Company Depositary Receipts

April 21, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 7, 2003, the National Association of 
Securities Dealers, Inc. (``NASD''), through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. On 
April 17, 2003, Nasdaq filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons, and 
to approve the amended proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated April 16, 2003 (``Amendment No. 1''). 
Amendment No. 1: (1) Makes clarifications and technical corrections 
to the proposed rule text and the purpose section of the filing; (2) 
discusses in the purpose section of the proposal Nasdaq's short sale 
exemption of certain HOLDRs, pursuant to NASD Rule 3350; (3) 
clarifies, by updating Exhibit 1, which HOLDRs specifically do not 
satisfy Nasdaq's generic listing and trading requirements pursuant 
to Rule 19b-4(e); and (4) provides additional detail on the 
component securities for each HOLDR, including share price, trading 
volume, and public float data in new Exhibit 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to adopt standards for the trading of certain Trust 
Isssued Receipts known as Holding Company Depositary Receipts 
(``HOLDRs'') on an over-the-counter basis.

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

[[Page 22435]]

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 III 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 trade, on an over-the counter basis, the 
following HOLDRs: (1) Broadband; (2) B2B Internet; (3) Europe 2001; (4) 
Internet; (5) Internet Architecture; (6) Internet Infrastructure; (7) 
Market 2000+; (8) Software; (9) Utilities; and (10) Wireless (each a 
``HOLDR'' and collectively, the ``HOLDRs'').\4\ The HOLDRs currently 
are listed and traded on the American Stock Exchange LLC (``Amex'') and 
trade on other national securities exchanges. The following paragraphs 
contain information applicable to all the HOLDRs generally.\5\
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    \4\ For further details on the component securities for each 
HOLDR, see Exhibit 3 to the proposed rule change, supra note 3.
    \5\ Nasdaq notes that this information is based upon 
descriptions included in the various Trust Issued Receipts 
prospectuses and depositary trust agreements, the Amex submissions 
relating to its Trust Issued Receipts listing proposal, and the 
Commission's order approving the Amex proposal.
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Trust Issued Receipts Generally
    HOLDRs, a type of Trust Issued Receipt, are negotiable receipts 
that are issued by a trust representing securities of issuers that have 
been deposited and are held on behalf of the holders of the Trust 
Issued Receipts. Trust Issued Receipts are designed to allow investors 
to hold securities from a variety of companies throughout a particular 
industry in a single, Nasdaq-or exchange-listed \6\ and traded 
instrument that represents their beneficial ownership in the underlying 
securities. Holders of Trust Issued Receipts maintain beneficial 
ownership of each of the underlying securities evidenced by Trust 
Issued Receipts. Holders may cancel their Trust Issued Receipts at any 
time to receive the underlying securities.
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    \6\ See Amendment No. 1, supra note.
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    Beneficial owners of the receipts will have the same rights, 
privileges and obligations as they would have if they beneficially 
owned the underlying securities outside of the Trust Issued Receipt 
program. Holders of the receipts have the right to instruct the trustee 
to vote the underlying securities evidenced by the receipts, will 
receive reports, proxies and other information distributed by the 
issuers of the underlying securities to their security holders, and 
will receive dividends and other distributions declared and paid by the 
issuers of the underlying securities to the trustee.
    Trust Issued Receipts are not leveraged instruments, and therefore 
do not possess any of the attributes of stock index options. Nasdaq 
believes that the level of risk involved in the purchase and sale of 
Trust Issued Receipts is almost identical to the risk involved in the 
purchase or sale of the common stocks represented by the receipt.
    Trust Issued Receipts will be issued by a trust created pursuant to 
a depositary trust agreement. After the initial offering, the trust may 
issue additional receipts on a continuous basis when an investor 
deposits the requisite securities with the trust. An investor in Trust 
Issued Receipts will be permitted to withdraw his or her underlying 
securities upon delivery to the trustee of one or more round-lots of 
100 Trust Issued Receipts and to deposit such securities to receive 
Trust Issued Receipts.
Nasdaq Rules Applicable to the Trading of HOLDRs
    Trust Issued Receipts, including HOLDRs, will be eligible to be 
traded through the Intermarket Trading System and will therefore be 
subject to the trade-through provisions of NASD Rule 5262. HOLDRs, as 
Trust Issued Receipts, are considered ``securities,'' and thus dealings 
in HOLDRs will be conducted pursuant to Nasdaq and the NASD's existing 
equity trading rules. Thus, Nasdaq's general dealing and settlement 
rules will apply, including its rules on clearance and settlement of 
securities transactions and its equity margin rules. Other generally 
applicable Nasdaq equity rules and procedures will also apply.\7\ In 
addition, regular equity trading hours of 9:30 a.m. and 4 p.m. will 
apply to transactions in HOLDRs. However, trading rules pertaining to 
the availability of odd-lot trading in Nasdaq equities will not apply 
to the trading of HOLDRs, since HOLDRs will only be traded in round-
lots. NASD's surveillance procedures for HOLDRs will be similar for 
those of Portfolio Depository Receipts and Index Fund Shares and will 
incorporate and rely upon existing NASD surveillance procedures 
governing equities. Furthermore, unless otherwise specified, the 
trading of HOLDRs generally will be exempt from the short sale rule set 
forth in NASD Rule 3350.\8\
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    \7\ E.g., pursuant to NASD Rule 4613(a)(1)(D), a minimum 
quotation increment of one penny will apply to transactions of Trust 
Issued Receipts on Nasdaq.
    \8\ Nasdaq has provided criteria that Trust Issued Receipts must 
satisfy to qualify for and maintain the short sale exemption. For 
further details, see proposed rule change SR-NASD-2003-32. As of 
April 11, 2003, the trading of all HOLDRs, except for the B2B 
Internet HOLDRs and the Internet HOLDRs, were exempt from the short 
sale rule set forth in NASD Rule 3350. Thus, only short sales of B2B 
Internet HOLDRs and Internet HOLDRs must occur on an ``up bid.''
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    Prior to the commencement of trading in HOLDRs, Nasdaq will issue a 
circular to members highlighting the characteristics of purchases in 
HOLDRs, including that HOLDRs are not individually redeemable. In 
addition, the circular will inform members of Nasdaq policies about 
trading halts in such securities. Specifically, the circular will note 
that trading of HOLDRs will be halted whenever Nasdaq trading in equity 
securities is halted as a result of activation of market-wide ``circuit 
breakers,'' which are tied to large decreases in the Dow Jones 
Industrial Average. Nasdaq may also halt trading in HOLDRs upon 
consideration of, among other factors: (1) The extent to which trading 
has ceased in the underlying security(s); (2) whether trading has been 
halted or suspended in the primary market(s) for any combination of 
underlying securities accounting for 20% or more of the applicable 
current index group value; and (3) the presence of other unusual 
conditions or circumstances deemed to be detrimental to the maintenance 
of a fair and orderly market. The trading in HOLDRs that has been the 
subject of a trading halt or suspension, may resume when Nasdaq 
determines that the conditions which led to the halt or suspension are 
no longer present or that the interests of a fair and orderly market 
are served by a resumption of trading.
Disclosure to Customers
    Nasdaq will require members to provide all purchasers of newly 
issued Trust Issued Receipts with a prospectus for that series of 
HOLDRs.
Trading Issues for Trust Issued Receipts (Including HOLDRs)
    A round-lot of any of the above Trust Issued Receipts represents a 
holder's individual and undivided beneficial ownership interest in the 
whole number of securities represented by the receipt. The amount of 
underlying securities for each round-lot of 100 Trust Issued Receipts 
will be determined at the beginning of the marketing period and will be 
disclosed in the prospectus to investors. Trust Issued Receipts may be

[[Page 22436]]

acquired, held or transferred only in round-lot amounts (or round-lot 
multiples) of 100 receipts. In order to ensure that transactions in 
Trust Issued Receipts are effected only in such amounts, no member may 
enter through the facilities of Nasdaq, for the account of a customer 
or for its own account, a quote or order for Trust Issued Receipts 
other than for a round-lot or round-lot multiple.
    Nasdaq believes that HOLDRs will not trade at a material discount 
or premium to the assets held by the issuing trust, because the 
arbitrage process should promote correlative pricing between the HOLDRs 
and the underlying securities. If the price of a HOLDR deviates enough 
from the portfolio of underlying securities to create a material 
discount or premium, an arbitrage opportunity is created allowing the 
arbitrageur to either buy the HOLDR at a discount, immediately cancel 
them in exchange for the underlying securities and sell the shares in 
the cash market at a profit, or sell the HOLDR short at a premium and 
buy the securities represented by the receipts to deposit in exchange 
for the HOLDR to deliver against the short position. In both instances, 
the arbitrageur locks in a profit and the markets move back into line.
Maintenance of the HOLDRs Portfolio
    Except when a reconstitution event occurs, as described below, the 
securities represented by a HOLDR will not change. According to the 
prospectus of Trust Issued Receipts, under no circumstances will a new 
company be added to the group of issuers of the underlying securities, 
and weightings of component securities will not be adjusted after they 
are initially set.\9\
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    \9\ Nasdaq represents that the number of each security 
represented in a receipt may change due to certain corporate events 
such as stock splits or reverse stock splits on underlying 
securities, and the relative weightings among the underlying 
securities may change based on the current market price of the 
underlying securities. See NASD Rule 4420(l)(4).
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Reconstitution Events of HOLDRs
    Trust agreements will provide for, and prospectuses for HOLDRs will 
describe, the automatic distribution of specified underlying securities 
in the trust's portfolio to the beneficial owners of HOLDRs in the 
circumstances referred to in such trust agreements and prospectuses as 
``reconstitution events.'' The reconstitution events occur under the 
following circumstances:
    (1) If the underlying securities of a company evidenced by a HOLDR 
no longer has a class of common stock registered under section 12 of 
the Act, then those securities will no longer be considered underlying 
securities and the trustee will distribute the securities of that 
company to the owners of HOLDRs;
    (2) If the Commission finds that a company with underlying 
securities evidenced by the HOLDRs is a company that should be 
registered as an investment company under the Investment Company Act of 
1940, and the trustee has actual knowledge of the Commission's finding, 
then the trustee will distribute the securities of that company to the 
owners of the HOLDRs;
    (3) If the underlying securities of a company evidenced by a HOLDR 
are no longer outstanding as a result of a merger, consolidation or 
other corporate combination the trustee will distribute the 
consideration paid by and received from the acquiring company to the 
beneficial owners of HOLDRs, unless the consideration is additional 
underlying securities (i.e., the acquiring company's securities are 
already included in the HOLDR as underlying securities), in which case 
such additional securities will be deposited into the trust; and
    (4) If an underlying issuer's underlying securities are delisted 
from trading on a primary national securities exchange or Nasdaq market 
and are not listed for trading on another national securities exchange 
or Nasdaq within five business days from the date the underlying 
securities are delisted.
    If the trustee removes a underlying security from the trust due to 
the occurrence of one of the reconstitution events described above, the 
trustee, in accordance with the depositary trust agreement, will 
deliver the underlying security to the investor as promptly as 
practicable after the date that the trustee has knowledge of the 
occurrence of a reconstitution event.
Issuance and Cancellation of HOLDRs
    The trust will issue and cancel, and an investor may obtain, hold, 
trade or surrender, HOLDRs only in a round-lot of 100 or in round-lot 
multiples. While investors will be able to acquire, hold, transfer and 
surrender a round-lot of 100 HOLDRs, the bid and asked prices will be 
quoted on a per receipt basis. The trust will issue additional receipts 
on a continuous basis when an investor deposits the required securities 
with the trust.
    An investor may obtain HOLDRs by either purchasing them on a 
national securities exchange or Nasdaq, or by delivering to the trust 
during its normal business hours the requisite securities evidencing a 
round-lot of HOLDRs. The trustee will charge an issuance fee of up to 
$10.00 per 100 HOLDRs. If a holder wants to cancel HOLDRs and withdraw 
the underlying securities, the holder may do so by surrendering the 
receipts to the trust during normal business hours. The trustee will 
charge a cancellation fee of up to $10.00 per 100 HOLDRs. Lower charges 
may be assigned for bulk issuances and cancellations. The holder will 
receive the underlying securities no later than the business day after 
the trustee receives the request.
Termination of HOLDRs
    The trust shall terminate upon the earlier of: (i) The removal of 
the HOLDRs from listing on a national securities exchange or Nasdaq if 
they are not listed for trading on another national securities exchange 
or Nasdaq within five business days from the date the receipts are 
delisted; (ii) the trustee resigns and no successor trustee is 
appointed within sixty days from the date the trustee provides notice 
to the initial depositor of its intent to resign; (iii) 75 percent of 
beneficial owners of outstanding HOLDRs (other than Merrill Lynch, 
Pierce, Fenner & Smith Incorporated) vote to dissolve and liquidate the 
trust; or (iv) December 31, 2039. If a termination event occurs, the 
trustee will distribute the underlying securities to the beneficial 
owners as promptly as practicable after the termination event.
Criteria for Initial and Continued Listing
    Except as otherwise noted in Exhibit 1, Nasdaq believes that the 
HOLDRs satisfy Nasdaq's continued listing and trading criteria as set 
forth in NASD Rule 4420(l), which is generally consistent with the 
continued listing and trading criteria currently used by the Amex, the 
New York Stock Exchange (``NYSE''),\10\ and the regional exchanges.
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    \10\ See Securities Exchange Act Release No. 41892 (September 
21, 1999), 64 FR 52559 (September 29, 1999) (approving listing and 
trading of Trust Issued Receipts and Internet HOLDRs on the Amex); 
Securities Exchange Act Release No. 45718 (April 9, 2002), 67 FR 
18965 (April 17, 2002) (approving the listing and trading of Trust 
Issued Receipts on the NYSE).
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    Because of the continuous issuance and cancellation of Trust Issued 
Receipts, Nasdaq believes that it is necessary to maintain appropriate 
flexibility in connection with listing and trading a specific trust. If 
Trust Issued Receipts are to be listed on Nasdaq under Rule 4420(l), 
Nasdaq will establish a minimum number of receipts that must be 
outstanding at commencement of Nasdaq trading, and such minimum number 
will be included

[[Page 22437]]

in any required submission to the Commission. Nasdaq anticipates 
requiring a minimum of 150,000 outstanding receipts before trading can 
commence.
    In connection with continued listing and trading, and because the 
number of holders can be subject to substantial fluctuations depending 
on market conditions, Nasdaq believes that it would be inappropriate 
and burdensome on Trust Issued Receipt holders if Nasdaq considers 
suspending trading in or delisting a series of receipts with the 
consequent termination of the trust, unless the number of holders 
remains severely depressed over an extended time period. Therefore, 
Nasdaq will consider suspending or delisting a trust from trading when, 
in its opinion, further dealing in such securities appears unwarranted 
under the following circumstances:
    (a) If the trust has more than sixty days remaining until 
termination and there have been fewer than fifty record and/or 
beneficial holders of the Trust Issued Receipts for the previous thirty 
or more consecutive trading days;
    (b) If the aggregate number of Trust Issued Receipts outstanding is 
less than 50,000;
    (c) If the aggregate market value of Trust Issued Receipts publicly 
held is less than $1 million; or
    (d) If such other event occurs or condition exists which, in the 
opinion of Nasdaq, makes further dealings on Nasdaq inadvisable.
    Nasdaq will not, however, be required to suspend or delist from 
trading, based on the above factors, any Trust Issued Receipts for a 
period of one year after the initial listing of such Trust Issued 
Receipts for trading on Nasdaq. In addition, if the number of companies 
represented by the underlying securities drops to less than nine, and 
each time thereafter the number of companies is reduced, Nasdaq will 
consult with the Commission to confirm the appropriateness of continued 
listing of the Trust Issued Receipts.
    Nasdaq Rule 4420(l) also contains specific ``generic'' listing 
criteria under which Nasdaq may commence trading Trust Issued Receipts 
pursuant to Rule 19b-4(e) under the Act. Those criteria are 
substantially similar to the criteria that have been applied to the 
initial listing of HOLDRs on the Amex. Specifically, each of the 
companies represented by the securities in the portfolios underlying 
the HOLDRs trusts (each of such companies referred to herein as a 
``component security'') were required to meet the following minimum 
criteria when they were selected: (1) Each component security common 
stock was registered under Section 12 of the Exchange Act; (2) the 
minimum public float of each component security was at least $150 
million; (3) each component security was either listed on a national 
securities exchange or be traded through the facilities of Nasdaq and a 
reported national market system security; (4) the average daily trading 
volume for each component security was at least 100,000 shares during 
the preceding sixty-day trading period; and (5) the average daily 
dollar value of the component security traded during the preceding 
sixty-day trading period was at least $1 million. The initial weighting 
of each component security in the portfolio was based on its market 
capitalization, however, if on the date such weighting was determined, 
a component security represented more than 20% of the overall value of 
the receipt, then the amount of such security was to be reduced to no 
more than 20% of the receipt value.\11\
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    \11\ These criteria are also the same as the ``generic'' listing 
criteria set forth in NYSE Rule 1202.
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    Based on the fact that each of the HOLDRs was initially listed on 
the Amex, Nasdaq assumes that each component security met the criteria 
described above. Presently, however, Nasdaq represents that each of the 
HOLDRs that Nasdaq proposes to trade on an over-the-counter basis has 
one or more component securities that fail to meet the minimum criteria 
set forth above. As a result, while the HOLDRs are substantially in 
compliance with the aforementioned minimum standards, the HOLDRs do not 
satisfy Nasdaq's generic standards for listing and trading Trust Issued 
Receipts pursuant to Rule 19b-4(e). Specifically, as of November 25, 
2002, Nasdaq represents that one or more component securities of each 
HOLDR do not meet the minimum public float requirement in clause (2) 
above, the average daily trading volume requirement in clause (4) 
above, and/or the average daily dollar value requirement in clause (5) 
above. These HOLDRs are more fully described in Exhibit 1 of the 
proposed rule change.\12\
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    \12\ See Amendment No. 1, supra note 3 (providing an updated 
Exhibit 1). The following component securities are at issue: (1) 
Broadband: TERN, CMTN, and NXTV; (2) B2B Internet: QRSI, ICGE, CMRC, 
SQST, VERT, NXPS, and IMGX; (3) Europe 2001: TRLY, ARMHY, SNRA, 
BKHM, AUTN, IONA, and MICC; (4) Internet: CNET and INKT; (5) 
Internet Architecture: ROXI; (6) Internet Infrastructure: BVSN, 
EPNY, PRSF, VITR, AKAM, KANA, INKT, INAP, and NAVI; (7) Market 
2000+: TM, BTY, and OOM; (8) Software: SAPE and NUAN; (9) Utilities: 
RRI; and (10) Wireless: AETH and NTRO.
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    Notwithstanding that fact, Nasdaq believes that its proposal to 
trade the HOLDRs on an over-the-counter basis is appropriate, and thus 
should be approved. The HOLDRs continue to be substantially in 
compliance with the minimum initial listing criteria listed above, and 
thus, are substantially similar to the products previously approved by 
the Commission. These HOLDRs also continue to be traded on the Amex, 
the NYSE and several regional exchanges. Nasdaq believes that 
permitting it to trade these HOLDRs on an over-the-counter basis will 
afford investors the advantage of an additional market to trade the 
HOLDRs, and avoid the unfair discrimination against Nasdaq that would 
otherwise result from precluding Nasdaq from trading these securities 
while the aforementioned markets continue to do so.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\13\ in general and with 
Section 15A(b)(6) of the Act,\14\ in particular, 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, the HOLDRs provide 
investors with a convenient and less expensive way of participating in 
the securities markets. In addition, the HOLDRs provide investors with 
increased flexibility in satisfying their investment needs by allowing 
them to purchase and sell a single security replicating a broad 
portfolio of stocks at negotiated prices throughout the business day.
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    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(6).
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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, as amended.

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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 22438]]

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 No. SR-NASD-2003-33 and should be 
submitted by May 19, 2003.

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

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 15A(b)(6) of the 
Act,\15\ and the rules and regulations thereunder applicable to a 
national securities association.\16\ Specifically, the Commission finds 
that this proposal, which establishes standards for trading the HOLDRs 
over-the-counter, will provide investors with a convenient and less 
expensive way of participating in the securities markets. Nasdaq's 
proposal should advance the public interest by providing investors with 
increased flexibility in satisfying their investment needs by allowing 
them to purchase and sell a single security replicating the performance 
of a broad portfolio of stocks at negotiated prices throughout the 
business day. Accordingly, the Commission finds that Nasdaq's proposal 
will facilitate transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, and 
is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.\17\
    As noted in the Amex approval order, the Commission believes that 
HOLDRs will provide investors with an alternative to trading a broad 
range of securities on an individual basis, and will give investors the 
ability to trade the HOLDRs representing a portfolio of securities 
continuously throughout the business day in secondary market 
transactions at negotiated prices. The HOLDRs will allow investors to: 
(1) Respond quickly to changes in the overall securities markets 
generally and for the industry represented by a particular trust; (2) 
trade, at a price disseminated on a continuous basis, a single security 
representing a portfolio of securities that the investor owns 
beneficially; (3) engage in hedging strategies similar to those used by 
institutional investors; (4) reduce transaction costs for trading a 
portfolio of securities; and (5) retain beneficial ownership of the 
securities underlying the HOLDRs.
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    \15\ 15 U.S.C. 78o-3(6).
    \16\ The Commission findings in this approval order are 
prospective only from the date of this order. Prior to Nasdaq's 
trading of Trust Issued Receipts, the Commission staff notified 
Nasdaq staff that these listing and trading rules and short sale 
rule change contained herein were necessary. The Commission is 
concerned that Nasdaq failed to seek Commission approval of such 
proposed rules and rule changes until well after Nasdaq began 
trading Trust Issued Receipts, despite prior notification by 
Commission staff to do so. The Commission expects Nasdaq to surveil 
the trading of these products for compliance with applicable rules, 
including NASD Rule 3350.
    \17\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    Although the HOLDRs are not leveraged instruments, and therefore do 
not possess any of the attributes of stock index options, their prices 
will be derived and based upon the securities held in their respective 
trusts. Accordingly, the level of risk involved in the purchase or sale 
of Trust Issued Receipts is similar to the risk involved in the 
purchase or sale of traditional common stock, with the exception that 
the pricing mechanism for Trust Issued Receipts is based on a basket of 
securities.\18\
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    \18\ The Commission has concerns about continued trading of 
Trust Issued Receipts whether listed or over-the-counter, if the 
number of component securities fails to reflect a cross section of 
the selected industry. Accordingly, Nasdaq has represented that it 
would consult the Commission concerning continued trading, once the 
trust has fewer than nine component securities, and for each 
subsequent loss of a security thereafter.
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Trading of the HOLDRs Over-the-Counter
    The Commission finds that Nasdaq's proposal contains adequate rules 
and procedures to govern the trading of the HOLDRs over-the-counter. 
HOLDRs are equity securities that will be subject to the full panoply 
of NASD and Nasdaq rules governing the trading of equity securities on 
Nasdaq, including, among others, rules governing the priority, parity 
and precedence of orders, responsibilities of the specialist, account 
opening and customer suitability requirements, and the election of a 
stop or limit order.\19\
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    \19\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because the Holders only can be traded in 
round-lots or round-lot multiples.
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    In addition, Nasdaq has developed specific listing and delisting 
criteria for the HOLDRs that will help to ensure that a minimum level 
of liquidity will exist for the HOLDRs to allow for the maintenance of 
fair and orderly markets. The delisting criteria also allow Nasdaq to 
consider the suspension of trading and the delisting of a HOLDR if an 
event occurred that made further dealings in such securities 
inadvisable. This will give Nasdaq flexibility to delist the HOLDRs if 
circumstances warrant such action. Nasdaq's proposal also provides 
procedures to halt trading in the HOLDRs in certain enumerated 
circumstances.
    Moreover, in approving this proposal, the Commission notes Nasdaq's 
belief that the HOLDRs will not trade at a material discount or premium 
in relation to the overall value of the trusts' assets because of 
potential arbitrage opportunities. Nasdaq also represents that the 
potential for arbitrage should keep the market price of a HOLDR 
comparable to the overall value of the underlying securities.
    Furthermore, the Commission believes that Nasdaq's proposal to 
trade the HOLDRs should enhance market liquidity, and should promote 
more accurate pricing, tighter quotations, and reduced price 
fluctuations. The Commission also believes that such trading should 
allow customers to receive the best possible execution of their 
transactions in the HOLDRs.
    Finally, Nasdaq will apply NASD surveillance procedures for the 
HOLDRs that will be similar to the procedures used for investment 
company units and will incorporate and rely upon existing NASD 
surveillance procedures governing equities. The Commission believes 
that these surveillance procedures are adequate to address concerns 
associated with the trading of the HOLDRS over-the-counter, including 
any concerns associated with purchasing and redeeming round-lots of 100 
receipts. Accordingly, the Commission believes that the rules governing 
the trading of the HOLDRs provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest.

[[Page 22439]]

Disclosure and Dissemination of Information
    The Commission believes that Nasdaq's proposal will ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading the 
HOLDRs. The prospectus will address the special characteristics of a 
particular HOLDR basket, including a statement regarding its 
redeemability and method of creation. The Commission notes that all 
investors in the HOLDRs who purchase in the initial offering will 
receive a prospectus. In addition, anyone purchasing a HOLDR directly 
from the trust (by delivering the underlying securities to the trust) 
will also receive a prospectus. Finally, all Nasdaq member firms that 
purchase the HOLDRs from the trust for resale to customers must deliver 
a prospectus to such customers.
    The Commission also notes that prior to the commencement of trading 
the HOLDRs, Nasdaq will issue a circular to its members explaining the 
unique characteristics and risks of this type of security. The circular 
also will note members' prospectus delivery requirements, and highlight 
the characteristics of purchases in HOLDRs, including that the HOLDRs 
are not individually redeemable. The circular also will inform members 
of Nasdaq policies regarding trading halts in HOLDRs.
    As described above, the Commission has previously approved similar 
Amex and NYSE rules that permit the listing and trading of individual 
Trust Issued Receipts, including the trading of Trust Issued Receipts 
over-the-counter. In approving these securities for trading, the 
Commission considered their structure, their usefulness to investors 
and the markets, and Nasdaq's rules and surveillance programs that 
govern their trading.
    The Commission notes that the HOLDRs that Nasdaq proposes to trade 
over-the-counter currently trade on other national securities 
exchanges. The Commission therefore believes that it is appropriate to 
approve these HOLDRs for trading over-the-counter on Nasdaq, as their 
trading should produce the same benefits to Nasdaq and to investors.
    Nasdaq has requested that the Commission find good cause for 
approving the proposed rule change, as amended, prior to the thirtieth 
day after the date of publication of notice in the Federal Register. 
The Commission believes that Nasdaq's proposal to trade the HOLDRs 
over-the-counter will provide investors with a convenient and less 
expensive way of participating in the securities markets. The 
Commission believes that the proposed rule change, as amended, could 
produce added benefits to investors through the increased competition 
between other market centers trading the product.
    Specifically, the Commission believes that by increasing the 
availability of the HOLDRs as an investment tool, Nasdaq's proposal 
should help provide investors with increased flexibility in satisfying 
their investment needs, by allowing them to purchase and sell a single 
security replicating the performance of a broad portfolio of stocks at 
negotiated prices throughout the business day.
    As noted above, the Commission has approved the listing and trading 
of HOLDRs at other exchanges, under rules that are substantially 
similar to Nasdaq's rules.\20\ The Commission published those rules in 
the Federal Register for the full notice and comment period. No 
comments were received on the proposed rules, and the Commission found 
them consistent with the Act.\21\ The HOLDRs at issue are currently 
trading on other securities exchanges pursuant to UTP. The Commission 
does not believe that trading of this product raises novel regulatory 
issues that were not addressed in the previous filings. Accordingly, 
the Commission finds good cause for approving the proposed rule change 
prior to the thirtieth day after the date of publication of notice in 
the Federal Register.
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    \20\ See note 7, supra.
    \21\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NASD-2003-33), as amended, 
is hereby approved on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-10389 Filed 4-25-03; 8:45 am]
BILLING CODE 8010-01-P