[Federal Register Volume 68, Number 81 (Monday, April 28, 2003)]
[Notices]
[Pages 22439-22445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10390]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47705; File No. SR-NASD-2003-32]


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 Listing and Trading Standards for Trust Issued Receipts

April 21, 2003.
    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 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) 
clarifies that a Trust Issued Receipt is a Nasdaq- or exchange-
listed and traded instrument; and (3) clarifies that the Commission 
may review and determine, pursuant to Section 19(b)(2) of the Act, 
whether continuation of Nasdaq's short sale exemption under Rule 
3350 is appropriate.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish listing standards under NASD Rule 
4420(l) for the listing and trading, or trading over-the-counter, of 
Trust Issued Receipts. Nasdaq also proposes to adopt generic listing 
standards that permit the listing and trading, or trading over-the-
counter, of Trust Issued Receipts pursuant to Rule 19b-4(e) of the 
Act.\4\ The text of

[[Page 22440]]

the proposed rule change is available at the Office of the Secretary, 
Nasdaq, and at the Commission.
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    \4\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the listing 
and trading of a new derivative securities product by a self-
regulatory organization (``SRO'') shall not be deemed a proposed 
rule change, pursuant to Rule 19b-4(c)(1) under the Act, if the 
Commission has approved, pursuant to section 19(b) of the Act, the 
SRO's trading rules, procedures and listings standards for the 
product class that include the new derivative securities product and 
the SRO has a surveillance program for the product class. See 17 CFR 
240.19b-4(e).
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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, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item 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 adopt rules to provide standards that permit the 
listing and trading, or the trading over-the-counter, of Trust Issued 
Receipts, including generic listing standards of Trust Issued Receipts 
pursuant to Rule 19b-4(e) of the Act. Nasdaq proposes to adopt listing 
and trading standards applicable to Trust Issued Receipts consistent 
with the criteria used by the American Stock Exchange LLC (``Amex''), 
the New York Stock Exchange (``NYSE''), and other exchanges to trade 
Trust Issued Receipts on Nasdaq and/or on an over-the-counter basis. 
Thus, Nasdaq proposes to adopt standards that permit the listing and 
trading, or the trading over-the-counter, of Trust Issued Receipts 
under Section 19(b)(2) of the Act.\5\ In addition, Nasdaq proposes to 
adopt ``generic'' listing and trading standards for the listing and 
trading, or trading on an over-the-counter basis, of Trust Issued 
Receipts under Rule 19b-4(e) of the Act.\6\
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ 17 CFR 240.19b-4(e).
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Trust Issued Receipts Generally
    Trust Issued Receipts 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 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.
    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.
Criteria for Initial and Continued Listing and/or Trading
    Nasdaq believes that the listing and trading criteria proposed in 
its new rule are generally consistent with the listing and trading 
criteria currently used by, among other exchanges, the Amex and the 
NYSE.\7\
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    \7\ See Securities Exchange Act Release No. 41892 (September 21, 
1999), 64 FR 52559 (September 29, 1999) (approving the 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 or traded on Nasdaq, Nasdaq will 
establish a minimum number of receipts that must be outstanding at 
commencement of Nasdaq trading, and such minimum number will be 
included 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 or trading of the Trust Issued Receipts.
Trading Trust Issued Receipts Pursuant to Rule 19b-4(e)
    To accommodate the efficient listing and trading, or trading on an 
over-the-counter basis, Nasdaq proposes to adopt generic listing and 
trading standards for

[[Page 22441]]

Trust Issued Receipts pursuant to Rule 19b-4(e). Rule 19b-4(e) provides 
that the listing and trading of a new derivative securities product by 
a self-regulatory organization (``SRO'') will not be deemed a proposed 
rule change, pursuant to paragraph (c)(1) of Rule 19b-4,\8\ if the 
Commission has approved, pursuant to section 19(b) of the Act,\9\ the 
SRO's trading rules, procedures and listing requirements for the 
product class that include the new derivative securities product, and 
the SRO has a surveillance program for the product class.\10\ Nasdaq 
believes that the Commission's approval of the proposed generic listing 
requirements for Trust Issued Receipts will allow Nasdaq to trade 
qualifying products without the need for notice and comment and 
Commission approval under Section 19(b) of the Act.\11\ Nasdaq's 
ability to rely on Rule 19b-4(e) for these products potentially reduces 
the time frame for bringing these securities to the market and thus 
enhances investors' opportunities.
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    \8\ 17 CFR 240.19b-4(c)(1).
    \9\ 15 U.S.C. 78s(b).
    \10\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \11\ 15 U.S.C. 78s(b).
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    The Commission has previously approved requests made by the Amex, 
the NYSE, and other exchanges to provide generic standards to list and/
or trade Trust Issued Receipts.\12\ Nasdaq believes that its proposed 
listing and trading requirements for Trust Issued Receipts are 
substantially similar to the generic listing and trading requirements 
of the Amex, the NYSE, and other exchanges.
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    \12\ Specifically, Nasdaq proposes to provide generic standards 
to list or trade, pursuant to Rule 19b-4(e), any Trust Issued 
Receipts that meet the following criteria: (1) Each component 
security must be registered under section 12 of the Exchange Act; 
(2) each component security must have a minimum public float of at 
least $150 million; (3) each component security must be listed on a 
national securities exchange or traded through the facilities of 
Nasdaq and a reported national market system security; (4) each 
component security must have an average daily trading volume of at 
least 100,000 shares during the preceding sixty-day trading period; 
(5) each component security must have an average daily dollar value 
of shares traded during the preceding sixty-day trading period of at 
least $1 million; and (6) the most heavily weighted component 
security may not initially represent more than 20% of the overall 
value of the Trust Issued Receipt.
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Nasdaq Rules Applicable to the Trading of Trust Issued Receipts
    Nasdaq represents that dealings in Trust Issued Receipts 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 would also apply.\13\ In addition, 
regular equity trading hours of 9:30 a.m. and 4 p.m. will apply to 
transactions in Trust Issued Receipts. However, trading rules 
pertaining to the availability of odd-lot trading in Nasdaq equities 
will not apply to the trading of Trust Issued Receipts, since they can 
only be traded in round-lots. NASD's surveillance procedures for Trust 
Issued Receipts 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.
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    \13\ 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.
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    Nasdaq proposes that the trading of Trust Issued Receipts that meet 
the following criteria at the time they are established will be exempt 
by Nasdaq from the short sale rule set forth in NASD Rule 3350: (1) The 
trust holds underlying securities issued by at least 20 companies; (2) 
each underlying security is actively traded within the meaning of the 
exception for actively-traded securities set forth in Rule 101(c)(1) of 
Regulation M; and (3) the initial weighting of the underlying 
securities issued by each issuer constitutes less than 20% of the total 
value of the Trust Issued Receipt.\14\ The exemption from Rule 3350 
will be eliminated for transactions in a particular Trust Issued 
Receipt if: (1) Any single security in the Trust Issued Receipt 
represents more than 51% of the total value of the receipt; (2) a 
reconstitution event results in a reduction in the number of companies 
to less than 20; or (3) an underlying security fails to be actively 
traded within the meaning of the exemption for actively-traded 
securities set forth in Rule 101(c)(1) of Regulation M. Prior to the 
occurrence of any of the above events, Nasdaq may consult with the 
Commission staff to determine the appropriateness of the exemption's 
continuation. At that time, the Commission, pursuant to Section 
19(b)(2),\15\ may determine that continuation of the Rule 3350 
exemption is appropriate notwithstanding the decrease in the number of 
or inactivity of one or more securities in the Trust Issued Receipt. 
Secondary market portfolio or individual sales of the underlying 
securities which may be made in connection with cancellations of Trust 
Issued Receipts are not exempt from Rule 3350. This rule will apply (or 
not apply) to such transactions as to any other portfolio or individual 
trade.
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    \14\ Nasdaq does not believe that the trading of Trust Issued 
Receipts that meet these criteria would be susceptible to the 
practices that Rule 3350 is designed to prevent. A primary purpose 
of Rule 3350 is to prevent the market price of a stock from being 
manipulated downward by unrestricted short selling. Nasdaq 
anticipates that the market value of a Trust Issued Receipt will 
rise or fall based on the changes in the value of the underlying 
securities, and that the price of the Trust Issued Receipt would not 
decline absent a decline in the value of the underlying securities. 
Thus, the secondary market price of a Trust Issued Receipt should 
not vary substantially from the current value of the underlying 
securities. In addition, any temporary disparities in the relative 
market values between a Trust Issued Receipt and the underlying 
securities would tend to be corrected immediately by arbitrage 
activity. Nasdaq notes that the Commission has agreed with this 
conclusion in the cases of SPDRs, MidCap SPDRs, Country Baskets, 
DIAMONDS and Select Sector SPDRs, all of which are securities whose 
prices are reflective of a portfolio of securities held in trust. 
See letter from Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission, to James F. Duffy, Senior Vice 
President and General Counsel, Amex (January 22, 1993) (regarding 
SPDRs); letter from Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission to James F. Duffy, Executive Vice 
President and General Counsel, Amex (April 21, 1995) (regarding 
MidCap SPDRs); letter from Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, to Michael Simon, 
Milbank, Tweed, Hadley & McCloy (March 22, 1996) (regarding Country 
Baskets); letter from Larry E. Bergmann, Senior Associate Director, 
Division of Market Regulation, Commission, to James F. Duffy, Amex 
(January 9, 1998) (regarding DIAMONDS); and letter from Larry E. 
Bergmann, Senior Associate Director, Division of Market Regulation, 
Commission, to Stuart M. Strauss, Gordon, Altman, Butowsky, Weitzen, 
Shalov & Wein (December 14, 1998) (regarding Select Sector SPDRs).
    \15\ See Amendment No. 1, supra note 3.
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    Prior to the commencement of trading in Trust Issued Receipts, 
Nasdaq will issue a circular to members highlighting the 
characteristics of purchases in Trust Issued Receipts including that 
Trust Issued Receipts 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 
Trust Issued Receipts will be halted whenever Nasdaq trading in equity 
securities generally 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 Trust Issued 
Receipts 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

[[Page 22442]]

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 Trust Issued Receipts 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
    With respect to investor disclosure, Nasdaq notes that all 
investors in Trust Issued Receipts who purchase in the initial offering 
will receive a prospectus. In addition, anyone purchasing a Trust 
Issued Receipt directly from the trust (by delivering the underlying 
securities to the trust) will also receive a prospectus. Finally, all 
members purchasing Trust Issued Receipts from the trust for resale to 
customers will deliver a prospectus to such customers.
The Trust Issued Receipts Portfolio
    For Nasdaq to approve Trust Issued Receipts for trading, whether by 
listing or trading over-the-counter pursuant to Rule 19b4-(e), the 
companies represented by the securities in the portfolio underlying the 
Trust Issued Receipts must meet the following minimum criteria:
    (1) Each company's common stock must be registered under section 12 
of the Act;
    (2) The minimum public float of each company included in the 
portfolio must be at least $150 million;
    (3) Each security must either be listed on a national securities 
exchange or be traded through the facilities of Nasdaq and be a 
reported national market system security;
    (4) The average daily trading volume for each security must be at 
least 100,000 shares during the preceding sixty-day trading period; and
    (5) The average daily dollar value of the shares traded during the 
preceding sixty-day trading period must be at least $1 million.
    The initial weighting of each security in the portfolio will be 
based on its market capitalization, however, if on the date such 
weighting is determined, a security would represent more than 20% of 
the overall value of the receipt, then the amount of such security will 
be reduced to no more than 20% of the receipt value. Once initially 
set, the securities represented by a receipt will not change, except in 
accordance with the reconstitution events described below.
Trading of Trust Issued Receipts
    A round-lot of 100 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 
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. The initial offering 
price for a Trust Issued Receipt will be established on the date the 
receipts are priced for sale to the public.
    Trust Issued Receipts 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. In addition, Trust Issued 
Receipts that meet specified conditions will not be subject to the 
short sale rule set forth in Rule 3350. Pursuant to NASD Rule 
4613(a)(1)(D), a minimum quotation increment of one penny will apply to 
transactions in Trust Issued Receipts.
    Nasdaq believes that Trust Issued Receipts will not trade at a 
material discount or premium to the assets held by the issuing trust. 
Nasdaq represents that the arbitrage process, which provides the 
opportunity to profit from differences in prices of the same or similar 
securities (e.g., the Trust Issued Receipts and the portfolio of 
underlying securities), increases the efficiency of the markets and 
serves to prevent potentially manipulative efforts should promote 
correlative pricing between the Trust Issued Receipts and the 
underlying securities. If the price of the Trust Issued Receipt 
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 Trust Issued Receipts 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 Trust Issued Receipts short at a premium and buy the securities 
represented by the receipts to deposit in exchange for the Trust Issued 
Receipts 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 Trust Issued Receipts Portfolio
    Except when a reconstitution event occurs, as described below, the 
securities represented by a Trust Issued Receipt will not change. 
Notwithstanding, the static nature of the portfolio, the number of each 
security represented in a receipt may change due to certain corporate 
events such as stock splits or reverse stock splits on the underlying 
securities or when a reconstitution event occurs. In addition, the 
relative weightings among the underlying securities will change based 
on the current market price of the underlying securities and upon the 
reconstitution events discussed below. Under no circumstances will a 
new security be added to the list of securities after a particular 
receipt program is established, nor will weightings of component 
securities be adjusted after they are initially set. If the portfolio 
of securities underlying the Trust Issued Receipts drops to fewer than 
nine, Nasdaq will consult with the Commission to confirm the 
appropriateness of continued listing of such Trust Issued Receipts.
Reconstitution Events
    Trust agreements will provide for, and prospectuses for Trust 
Issued Receipts will describe, the automatic distribution of specified 
underlying securities in the trust's portfolio to the beneficial owners 
of Trust Issued Receipts 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 Trust 
Issued Receipt 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 the Trust Issued Receipts;
    (2) If the Commission finds that a company with underlying 
securities evidenced by the Trust Issued Receipts 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 Trust Issued Receipts;
    (3) If the underlying securities of a company evidenced by a Trust 
Issued Receipt are no longer outstanding as a

[[Page 22443]]

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 Trust Issued Receipts, 
unless the consideration is additional underlying securities (i.e., the 
acquiring company's securities are already included in the Trust Issued 
Receipt 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 their primary exchange or market and are not listed for 
trading on another national securities exchange or through Nasdaq 
within five business days from the date the underlying securities are 
delisted.\16\
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    \16\ This provision is designed for the purpose of permitting an 
underlying security to move its listing between a national 
securities exchange or Nasdaq without requiring the automatic 
distribution of the underlying security to beneficial owners of the 
receipts. Should underlying securities be moved to a market other 
than a national securities exchange or Nasdaq, (e.g., the OTC 
Bulletin Board) such securities will be automatically distributed to 
the beneficial owners of the receipts.
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    If the trustee removes an 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 Trust Issued Receipts
    The trust will issue and cancel, and an investor may obtain, hold, 
trade or surrender, receipts only in a round-lot of 100 Trust Issued 
Receipts and round-lot multiples. While investors will be able to 
acquire, hold, transfer and surrender a round-lot of 100 Trust Issued 
Receipts, 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.
    A holder may obtain Trust Issued Receipts by either purchasing them 
on Nasdaq or an exchange by delivering to the trust during its normal 
business hours the requisite securities evidencing a round-lot of Trust 
Issued Receipts. The trustee will charge an issuance fee of up to 
$10.00 per 100 Trust Issued Receipts. If a holder wants to cancel Trust 
Issued Receipts 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 Trust Issued Receipts. 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 the Trust
    The trust shall terminate upon the earlier of: (i) The removal of 
the receipts from listing on Nasdaq or a national securities exchange 
if they are not listed for trading on Nasdaq or a national securities 
exchange 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 Trust Issued Receipts 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.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\17\ in general and with 
section 15A(b)(6) of the Act,\18\ 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, Trust Issued Receipts 
provide investors with an alternative to trading a broad range of 
securities on an individual basis, and give investors the ability to 
trade Trust Issued Receipts representing a portfolio of securities 
continuously throughout the business day in secondary market 
transactions at negotiated prices.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 15 U.S.C. 78o-3(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to file 
number SR-NASD-2003-32 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,\19\ and the rules and regulations thereunder applicable to a 
national securities association.\20\ Specifically, the Commission 
finds, as it did with the Amex and other exchanges, that the proposal 
establishes listing standards for Trust Issued Receipts that will 
provide investors with a convenient and less expensive way of 
participating in the securities markets. Nasdaq's

[[Page 22444]]

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.\21\
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    \19\ 15 U.S.C. 78o-3(6).
    \20\ 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.
    \21\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    As noted in the Amex approval order, the Commission believes that 
Trust Issued Receipts 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 Trust Issued Receipts representing 
a portfolio of securities continuously throughout the business day in 
secondary market transactions at negotiated prices. Trust Issued 
Receipts 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 investors 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 Trust Issued 
Receipts.
    Although Trust Issued Receipts 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.\22\
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    \22\ The Commission has concerns about continued trading of the 
Trust Issued Receipts whether listed or traded over-the-counter, if 
the number of underlying securities falls to reflect a cross section 
of the selected industry. Accordingly, the NASD has represented that 
it would consult the Commission concerning continued trading, once 
the trust has fewer than nine underlying securities, and for each 
subsequent loss of a security thereafter.
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Trading of Trust Issued Receipts--Listing and Trading Over-the-Counter
    The Commission finds that the Nasdaq's proposal contains adequate 
rules and procedures to govern the trading of Trust Issued Receipts, 
whether by listing or trading over-the-counter. Trust Issued Receipts 
are equity securities that will be subject to the full panoply of 
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.\23\
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    \23\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because Trust Issued Receipts only can be 
traded in round-lots.
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    In particular, the Commission notes that the trading of Trust 
Issued Receipts that meet the criteria mentioned above will be 
preliminarily exempt from the short sale rule set forth in NASD Rule 
3350. Nasdaq has also represented that if certain circumstances occur, 
the exemption from Rule 3350 will be eliminated. At that time, the 
Commission, pursuant to section 19(b)(2),\24\ may determine that 
continuation of the Rule 3350 exemption is appropriate notwithstanding 
the decrease in the number of or inactivity of one or more securities 
in the Trust Issued Receipt.
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    \24\ See Amendment No. 1, supra note 3.
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    In addition, Nasdaq has developed specific listing and delisting 
criteria for Trust Issued Receipts that will help to ensure that a 
minimum level of liquidity will exist for Trust Issued Receipts to 
allow for the maintenance of fair and orderly markets. The delisting 
criteria also allows Nasdaq to consider the suspension of trading and 
the delisting of a Trust Issued Receipt if an event occurred that made 
further dealings in such securities inadvisable. This will give Nasdaq 
flexibility to delist Trust Issued Receipts if circumstances warrant 
such action. Nasdaq's proposal also provides procedures to halt trading 
in Trust Issued Receipts in certain enumerated circumstances.
    Moreover, in approving this proposal, the Commission notes Nasdaq's 
belief that Trust Issued Receipts 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 
Trust Issued Receipts comparable to the overall value of the underlying 
securities.
    The Commission believes that such trading 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 Trust Issued Receipts.
    Finally, Nasdaq will apply NASD's surveillance procedures for Trust 
Issued Receipts 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 listing and trading Trust Issued Receipts, 
including any concerns associated with purchasing and redeeming round-
lots of 100 receipts. Accordingly, the Commission believes that the 
rules governing the trading of Trust Issued Receipts provide adequate 
safeguards to prevent manipulative acts and practices and to protect 
investors and the public interest.
Disclosure and Dissemination of Information
    The Commission believes that Nasdaq's proposal will ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risk of trading Trust 
Issued Receipts. The prospectus will address the special 
characteristics of a particular Trust Issued Receipt basket, including 
a statement regarding its redeemability and method of creation. The 
Commission notes that all investors in Trust Issued Receipts who 
purchase in the initial offering will receive a prospectus. In 
addition, anyone purchasing a Trust Issued Receipt directly from the 
trust (by delivering the underlying securities to the trust) will also 
receive a prospectus. Finally, all NASD members who purchase Trust 
Issued Receipts from the trust for resale to customers must deliver a 
prospectus to such customers.
    The Commission also notes that upon the initial listing of any 
Trust Issued Receipts, Nasdaq will issue a circular to members 
explaining the unique characteristics and risks of this type of 
security. The circular will note members' prospectus delivery 
requirements, and highlight the characteristics of purchases in Trust 
Issued Receipts. The circular also will inform members of policies 
regarding trading halts in Trust Issued Receipts.

[[Page 22445]]

Trading Trust Issued Receipts Pursuant to Rule 19b-4(e)
    The Commission further believes that adopting generic listing 
standards for these securities pursuant to Rule 19b-4(e) under the Act 
should fulfill the intended objective of the rule by giving Nasdaq the 
ability to potentially reduce the time frame for bringing these 
securities to the market, or for permitting the trading of these 
securities over-the-counter, and thus enhances investors' 
opportunities. The Commission notes that it maintains regulatory 
oversight over any products listed under the generic standards through 
regular inspection oversight.
    The Commission finds that Nasdaq's proposal contains adequate rules 
and procedures to govern the listing and trading of Trust Issued 
Receipts pursuant to Rule 19b-4(e) on Nasdaq, or over-the-counter. All 
Trust Issued Receipt products listed under the generic standards will 
be subject to the full panoply of NASD and Nasdaq rules and procedures 
that now govern both the trading of Trust Issued Receipts and the 
trading of equity securities.
    As described above, the Commission has previously approved similar 
Amex, NYSE, and other exchange rules that permit the generic listing 
and trading of individual Trust Issued Receipts. In approving these 
securities for trading, the Commission considered their structure, 
their usefulness to investors and the markets, and the SROs' rules and 
surveillance programs that govern their trading. The Commission 
concluded then, as it does now, that securities approved for listing 
under those rules would 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 transactions costs for trading a portfolio of securities; 
and (5) retain beneficial ownership of the securities underlying the 
Trust Issued Receipts.
    The Commission notes that Nasdaq's proposed generic listing 
standards are substantially similar to the Amex, NYSE, and other SROs. 
The Commission therefore believes that Trust Issued Receipts that 
satisfy Nasdaq's proposed generic listing standards 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 and Amendment No. 1 prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register. The Commission believes that the Nasdaq's proposal to trade 
Trust Issued Receipts, 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 Trust Issued Receipts 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 Trust Issued Receipts at the Amex, under rules that are 
substantially similar to the Amex, NYSE, and other exchange rules.\25\ 
The Commission published the Amex 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.\26\ Accordingly, the Commission finds 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.
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    \25\ See note 6, supra.
    \26\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (File No. SR-NASD-2003-32), as 
amended, be approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-10390 Filed 4-25-03; 8:45 am]
BILLING CODE 8010-01-P