[Federal Register Volume 69, Number 100 (Monday, May 24, 2004)]
[Notices]
[Pages 29581-29589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11652]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49719; File No. SR-Amex-2004-16]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to a Proposed Rule Change and Amendment
No. 1 Thereto by the American Stock Exchange LLC Relating to Funds of
the Vanguard Stock Index Funds
May 17, 2004.
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 February 25, 2004, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change (the ``Amex filing'') as
described in Items I and II below, which Items have been prepared by
the Exchange. On April 22, 2004, the Exchange 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.
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\1\ 15 U.S.C 78s(b)(1)
\2\ 17 CFR 240.19b-4.
\3\ See letter from Marija Willen, Associate General Counsel,
Amex, to Nancy Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated April 21, 2004
(``Amendment No. 1''). Amendment No. 1 replaces the original filing
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to list and trade under Amex Rules 1000A et seq.
a class of shares, known as VIPER Shares, of certain index funds that
are series of the Vanguard World Funds. The funds seek to track the
following indices compiled by Morgan Stanley Capital International Inc.
(MSCI[reg])(``MSCI'') \4\: the MSCI U.S. Investable Market Energy
Index, the MSCI U.S. Investable Market Industrials Index and the MSCI
U.S. Investable Market Telecommunications Services Index.
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\4\ ``MSCI[reg]'' is a service mark of Morgan Stanley & Co.
Incorporated.
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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 Amex 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. The Amex 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Amex Rules 1000A et seq. provide standards for listing Index
Fund Shares, which are securities issued by an open-end management
investment company (open-end mutual fund) for exchange trading. These
securities are registered under the Investment Company Act of 1940
(``1940 Act'') as well as the Act. Index Fund Shares are defined in
Amex Rule 1000A as securities based on a portfolio of stocks or fixed
income securities that seek to
[[Page 29582]]
provide investment results that correspond generally to the price and
yield of a specified foreign or domestic stock index or fixed income
securities index.
The Exchange proposes to list and trade under Amex Rules 1000A et
seq. the following three securities issued by funds (each a ``Vanguard
Index Fund'' or ``Fund'') that would be separate investment portfolios
of the Vanguard World Funds (``Trust''): \5\
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\5\ The Trust has other funds that issue VIPER Shares. According
to the Amex, those issues of VIPER Shares met the requirements of
Amex Rule 1000A, Commentary .02, for listing pursuant to Rule 19b-
4(e) of the Act.
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(a) Vanguard Energy VIPERs, a share class of Vanguard Energy Index
Fund, which would seek to track the Morgan Stanley Capital
International (MSCI[reg]) (``MSCI'') U.S. Investable Market Energy
Index;
(b) Vanguard Industrials VIPERs, a share class of Vanguard
Industrials Index Fund, which would seek to track the MSCI U.S.
Investable Market Industrials Index; and
(c) Vanguard Telecommunications Services VIPERs, a share class of
Vanguard Telecommunications Services Index Fund, which would seek to
track the MSCI U.S. Investable Market Telecommunications Services
Index.
For descriptions of the underlying indices for the Funds, see
``Target Indices--Key Characteristics,'' below as well as Exhibits A to
C to the Amex filing, which are available at the principal office of
the Amex and at the Commission. Exhibits A to C include index
descriptions, component selection criteria, index maintenance and issue
changes, top components of each index, and portfolio composition and
characteristics. The index on which a particular Fund would be based is
referred to as a ``Target Index,'' and the securities included in such
index are referred to as ``Component Securities.'' The Vanguard Group,
Inc. (``Adviser'' or ``Vanguard'') would be the investment adviser to
each Fund.\6\ The Adviser would be registered under the Investment
Advisers Act of 1940.
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\6\ The Commission granted Vanguard's Application for an Order
under Sections 6(c) and 17(b) of the 1940 Act, for the purpose of
exempting the Funds referenced herein and other related entities
from various provisions of the 1940 Act and rules thereunder (File
No. 812-12912) (``Application'') in an order dated December 30, 2003
(Release No. IC-26317) (``Exemptive Order''). A summary of the
Application appears in Release No. IC-26282 (December 2, 2003), 68
FR 68430 (December 8, 2003). The December 30, 2003 order amends a
prior order granted by the Commission in December 2000 to Vanguard
Index Funds, et al. See Release Nos. IC-24680 (October 6, 2000), 65
FR 61005 (October 13, 2000) (notice); and IC-24789 (December 12,
2000), 65 FR 79439 (December 19, 2000) (order) (File No. 812-12094).
Information in this filing regarding the Funds is based on material
in the Application and in the Funds' registration statement.
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While the Adviser would manage each Fund, the Trust's Board of
Trustees (``Board'') would have overall responsibility for the Funds''
operations. The composition of the Board is, and would be, in
compliance with the requirements of Section 10 of the 1940 Act.
Pursuant to Rule 10A-3 of the Act,\7\ and Section 3 of the Sarbanes-
Oxley Act of 2002,\8\ the Exchange will prohibit the initial or
continued listing of any security of an issuer that is not in
compliance with the requirements set forth therein.\9\
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\7\ 17 CFR 240.10A-3.
\8\ See Section 3 of Pub. L. 107-204, 116 Stat. 745 (2002).
\9\ Telephone conversation between Marija Willen, Associate
General Counsel, Amex, and Ann E. Leddy, Special Counsel, Division,
Commission, on May 17, 2004.
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Vanguard Marketing Corporation (``Distributor''), a wholly-owned
subsidiary of Vanguard and a broker-dealer registered under the Act,
would be the principal underwriter and distributor of VIPER Shares of
the Funds.
According to the Amex, Vanguard Index Participation Equity
Receipts, or ``VIPER'' shares (``VIPER Shares''), are a class of
exchange-traded securities that represent an interest in the portfolio
of stocks held by a particular Fund. In addition to VIPER Shares, the
Funds would offer classes of shares that are not exchange-traded, which
are referred to as ``Conventional Shares.'' \10\
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\10\ As described in the Application, the Vanguard Index Funds'
organizational documents would permit the Vanguard Index Funds to
issue shares of different classes. Each of the Funds also would
offer one class of Conventional Shares, known as Admiral Shares.
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VIPER Shares would be registered in book-entry form only and the
Funds would not issue individual share certificates. The Depository
Trust Company (``DTC'') or its nominee would be the record or
registered owner of all outstanding VIPER Shares. Beneficial ownership
of VIPER Shares would be shown on the records of the DTC or DTC
Participants.
Target Indices and Investment Objectives. As noted in the
Application, each Fund seeks to track, as closely as possible, the
performance of its Target Index and it is expected that, in the future,
the Funds would have a tracking error of less than five percentage
points per annum.\11\ When practicable, the Funds would use the
replication method of indexing--in which each stock found in the Target
Index would be held in about the same proportion as represented in the
index itself--as their primary strategy. However, according to the
Amex, the Advisor has represented that the Funds would sample their
Target Indices--by holding stocks that, in the aggregate, would be
intended to approximate the full index in terms of key characteristics,
such as price/earnings ratio, earnings growth, and dividend yield ``--
regulatory constraints or other considerations were to prevent them
from replicating the indices. In particular, because the Funds would
not at present be able to replicate their Target Indices and still
comply with Internal Revenue Code (``IRC'') diversification standards
applicable to regulated investment companies, the Funds would use
sampling to modify their exposure to certain stocks in order to
maintain compliance with IRC diversification standards.\12\
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\11\ According to the Amex, the prospectuses for the Funds
disclose that each Fund would reserve the right to substitute a
different index for the Target Index the Fund currently tracks.
Substitution would be able to occur if the current index were to be
discontinued, the Fund's license with the sponsor of the current
index were to be terminated, or for any other reason determined in
good faith by the Board. In every such instance, the substitute
index would measure the same general market as the current index.
Fund shareholders would be notified in the event that a Fund's
current index were to be replaced and investors holding their shares
through a broker or other intermediary would receive the
notification from their intermediary.
\12\ In order for a Fund to qualify for tax treatment as a
regulated investment company, it would have to meet several
requirements under the IRC. Among these is the requirement that, at
the close of each quarter of the Fund's taxable year, (i) at least
50% of the market value of the Fund's total assets must be
represented by cash items, U.S. government securities, securities of
other regulated investment companies and other securities, with such
other securities limited for purposes of this calculation in respect
of any one issuer to an amount not greater than 5% of the value of
the Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value
of its total assets may be invested in the securities of any one
issuer, or two or more issuers that are controlled by the Fund
(within the meaning of Section 851 (b)(4)(B) of the IRC) and that
are engaged in the same or similar trades or businesses or related
trades or business (other than U.S. government securities or the
securities of other regulated investment companies).
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According to the Amex, the Application states that each Fund will
invest at least 90% of its assets in the component securities of its
respective Target Index.\13\
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\13\ According to the Amex, to the extent that a Fund were to
invest in instruments other than common stocks included in its
Target Index, it would invest no more than 10% of its assets in
those other instruments. Such instruments could include stock and
index futures, options on stocks and futures, convertible
securities, swap agreements, cash investments, forward foreign
currency investments, foreign currency exchange contracts, shares of
other investment companies (within the limits permitted by Section
12(d)(1) of the 1940 Act), stocks about to be added to the Target
Index, and any other instrument not inconsistent with the Fund's
investment policies as described in detail in its registration
statement, which the Adviser believes would help the Fund to track
the performance of its Target Index.
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[[Page 29583]]
According to the Amex, the Funds have been advised by MSCI that on
or before the first day of trading of each Fund, the value of its
Target Index would be updated intra-day as individual Component
Securities change in price. These intra-day values of the Target
Indices are and would be disseminated at regular intervals (every 15
seconds) throughout the trading day by organizations authorized by
MSCI. In addition, these organizations would disseminate values for
each Target Index once each trading day, based on closing prices in the
relevant exchange market.
According to the Amex, the daily closing index value and the
percentage change in the daily closing index value for the Target
Indices are publicly available on the MSCI Web site at http://www.msci.com. Data--including weights, index shares, closing prices and
corporate actions--regarding each Target Index is available to MSCI
subscribers through various methods of delivery. MSCI index data may be
delivered to subscribers directly from MSCI on a daily or monthly basis
via electronic delivery methods. MSCI subscribers also may receive
index data on a monthly or quarterly basis in print format via express
mail. Several independent data vendors package and disseminate MSCI
data in various value-added formats (including vendors displaying both
securities and index levels, such as FAME, FactSet, Datastream and
RIMES, and vendors displaying index levels only, such as Bloomberg, Dow
Jones Markets, DRI/McGraw Hill, Lipper Analytical, Quick, Quotron,
Reuters and Telekurs).
Target Indices--Key Characteristics. General. The Target Indices
would be subsets of the MSCI U.S. Investable Market 2500 Index, which
represents the investable universe of companies in the U.S. equity
market. The MSCI U.S. Investable Market 2500 Index is a free float
adjusted market capitalization weighted index that targets for
inclusion 2,500 companies and represents, as of June 30, 2003,
approximately 98% of the capitalization of the U.S. equity market. The
U.S. Equity Market consists of U.S. domiciled companies traded on the
New York Stock Exchange, Inc. (``NYSE''), Amex, Nasdaq National Market
System (``Nasdaq'') or Nasdaq Small Cap Market. The subsets are created
by grouping the constituents into their respective Global Industry
Classification Standard (GICS[reg]) industry sector code.
According to the Amex, the Target Indices would meet all of the
eligibility requirements for index components set out in Amex Rule
1000A and in particular, those requirements of Amex Rule 1000A,
Commentary .02, with the exception of the weighting standards set out
in (a)(3) of that commentary, and the VIPER Funds therefore would not
be eligible for approval for listing and trading pursuant to Rule 19b-
4(e) under the Act.\14\ As further described below, a significant
portion of the weight of all three of these indices would be accounted
for by stocks with substantial market capitalization and trading
volume, which, together with the other characteristics of the indices
and the Funds, would ensure that a minimum level of liquidity would
exist for each VIPER Fund, reducing the potential for manipulation of
the indices' component securities and allowing for the maintenance of
fair and orderly markets.
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\14\ According to the Amex, the MSCI U.S. Investable Market
Industrials Index at this time meets all of the standards of Amex
Rule 1000A, Commentary .02. It is included in this filing because,
based on the time required for preparation for listing, it is
possible that the index may not satisfy the standard relating to the
most heavily weighted stock component on the date of listing (the
heavily weighted component stock in the index currently constitutes
approximately 26% of the index).
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MSCI U.S. Investable Market Energy Index. The MSCI U.S. Investable
Market Energy Index represents the Energy companies of the MSCI U.S.
Investable Market 2500 Index as classified in accordance with the
Global Industry Classification Standard (GICS[reg]). The MSCI U.S.
Investable Market Energy Index is a free float adjusted market
capitalization weighted index. As of December 31, 2003, the index
contained 113 constituents with a total market capitalization of
$698,253,890,350. Each of the individual components of the index had a
market capitalization over $75,000,000 with an average market
capitalization of $6,234,409,735. All constituents had a monthly
trading volume during each of the last six months of at least 250,000
shares. The five highest weighted stocks--which represent 65.04% of
index weight--had an average daily dollar volume in excess of
$50,000,000 during the past two months. Additional detail on the MSCI
U.S. Investable Market Energy Index can be found in Exhibit A to the
Amex filing, which is available at the principal office of the Amex and
at the Commission.
MSCI U.S. Investable Market Industrials Index. The MSCI U.S.
Investable Market Industrials Index represents the Industrial companies
of the MSCI U.S. Investable Market 2500 Index as classified in
accordance with the Global Industry Classification Standard
(GICS[reg]). The MSCI U.S. Investable Market Industrials Index is a
free float adjusted market capitalization weighted index. As of
December 31, 2003, the index contained 314 constituents with a total
market capitalization of $1,259,470,832,295. Each of the individual
components of the index had a market capitalization over $75,000,000
with an average market capitalization of $4,011,053,606. Approximately
99.68% of the weight of the index is represented by the constituents
that had a monthly trading volume during each of the last six months of
at least 250,000 shares. The five highest weighted stocks--which
represent 40.53% of index weight--had an average daily dollar volume in
excess of $150,000,000 during the past two months. Additional detail on
the MSCI U.S. Investable Market Industrials Services Index can be found
in Exhibit B to the Amex filing, which is available at the principal
office of the Amex and at the Commission.
MSCI U.S. Investable Market Telecommunications Services Index. The
MSCI U.S. Investable Market Telecommunications Services Index
represents the Telecommunications Service companies of the MSCI U.S.
Investable Market 2500 Index as classified in accordance with the
Global Industry Classification Standard (GICS[reg]). The MSCI U.S.
Investable Market Telecommunications Services Index is a free float
adjusted market capitalization weighted index. As of December 31, 2003,
the index contained 41 constituents with a total market capitalization
of $367,750,455,980. Each of the individual components of the index had
a market capitalization over $75,000,000 with an average market
capitalization of $8,969,523,317. Approximately 99.95% of weight of the
index is represented by the constituents that had a monthly trading
volume during each of the last six months of at least 250,000 shares.
The five highest weighted stocks--which represent 76.33% of index
weight--had an average daily dollar volume in excess of $130,000,000
during the past two months. Additional detail on the MSCI U.S.
Investable Market Telecommunications Services Index can be found in
Exhibit C to the Amex filing, which is available at the principal
office of the Amex and at the Commission.
Availability of Information about VIPER Shares. Vanguard's Web
site, which is and will be publicly accessible at no charge, would
contain the following information for each Fund's
[[Page 29584]]
VIPER Shares: (a) The prior business day's closing net asset value
(``NAV''), the mid-point of the bid-asked spread at the time that the
Fund's NAV is calculated (``Bid-Asked Price''),\15\ and a calculation
of the premium or discount of the Bid-Asked Price in relation to the
closing NAV; (b) data for a period covering at least the four previous
calendar quarters (or the life of a Fund, if shorter) indicating how
frequently each Fund's VIPER Shares traded at a premium or discount to
NAV based on the Bid-Asked Price and closing NAV, and the magnitude of
such premiums and discounts; (c) its Prospectus and two most recent
reports to shareholders; and (d) other quantitative information such as
daily trading volume. The Product Description for each Fund would
inform investors that the Adviser's Web site has information about the
premiums and discounts at which the Fund's VIPER Shares have
traded.\16\
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\15\ According to the Application, because the NAV for all share
classes of all Vanguard funds is calculated as of the close of the
NYSE (usually 4 pm), but the market for VIPER Shares and other ETFs
does not close until 4:15 pm, the closing market price is not
measured at the same time as NAV. This difference in timing could
lead to discrepancies between performance based on NAV and
performance based on market price that give investors an inaccurate
picture of the correlation between the two figures. To remedy this
problem, the Funds compare performance of a Fund's VIPER Shares
based on NAV to performance of the VIPER Shares based on the mid-
point of the bid-asked spread at the time NAV is calculated. By
calculating market-based and NAV-based performance at the same time,
the two performance figures will be comparable, and any differences
will be attributable to market forces rather than timing
differences.
\16\ See ``Prospectus Delivery'' below regarding the Product
Description. The Exemptive Order granted relief from Section 24(d)
of the 1940 Act, which relief permits dealers to sell VIPER Shares
in the secondary market unaccompanied by a statutory prospectus when
prospectus delivery is not required by the Securities Act of 1933.
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The Amex would disseminate for each Fund on a daily basis by means
of Consolidated Tape Association (``CTA'') and CQ High Speed Lines
information with respect to the Intraday Indicative Value (as defined
and discussed below under ``Dissemination of Intraday Indicative
Value''), recent NAV, shares outstanding, estimated cash amount and
total cash amount per Creation Unit. The Exchange would make available
on its Web site daily trading volume, closing price, the NAV and final
dividend amounts to be paid for each Fund. The closing prices of the
Deposit Securities (as defined below) are readily available from, as
applicable, exchanges, automated quotation systems, published or other
public sources, or on-line information services such as Bloomberg or
Reuters.
Beneficial owners of VIPER Shares (``Beneficial Owners'') would
receive all of the statements, notices, and reports required under the
1940 Act and other applicable laws. They would receive, for example,
annual and semi-annual fund reports, written statements accompanying
dividend payments, proxy statements, annual notifications detailing the
tax status of fund distributions, and Form 1099-DIVs. Some of these
documents would be provided to Beneficial Owners by their brokers,
while others would be provided by the Fund through the brokers.
Creation and Redemption of VIPER Shares. Each Fund would issue and
redeem VIPER Shares only in aggregations of 100,000 (``Creation
Units'').\17\ Purchasers of Creation Units would be able to separate
the Units into individual VIPER Shares. The number of VIPER Shares in a
Creation Unit would not change except in the event of a stock split or
similar revaluation. According to the Amex, the initial value of a
VIPER Share for each of the three Funds is expected to be $50.
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\17\ The Funds would offer all current and future holders of
Conventional Shares, except those holding Conventional Shares
through a 401(k) or other participant-directed employer-sponsored
retirement plan, the opportunity to convert such shares into VIPER
shares of equivalent value (``Conversion Privilege''). The
Conversion Privilege would be a ``one-way'' transaction only.
Holders of Conventional Shares would be able to convert those shares
into VIPER shares, but Beneficial Owners of VIPER Shares would not
be permitted to convert those shares into Conventional Shares.
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Creation. Persons purchasing Creation Units from a Fund would be
required to make an in-kind deposit of a basket of securities
(``Deposit Securities'') consisting of stocks selected by the Adviser
from among the stocks contained in the issuing fund's portfolio,
together with an amount of cash specified by the Adviser (``Balancing
Amount''), plus the applicable transaction fee (``Transaction Fee'').
The Deposit Securities and the Balancing Amount collectively would be
referred to as the ``Creation Deposit.'' The Balancing Amount would be
a cash payment designed to ensure that the value of a Creation Deposit
is identical to the value of the Creation Unit it is used to purchase.
The Balancing Amount would be an amount equal to the difference between
the NAV of a Creation Unit and the market value of the Deposit
Securities.\18\ The Transaction Fee would be a fee imposed by the Funds
on investors purchasing (or redeeming--see ``Redemption'' below)
Creation Units. The purpose of the Transaction Fee would be to protect
the existing shareholders of the Funds from the dilutive effect of the
transaction costs (primarily custodial costs) that the Funds incur when
investors purchase (or redeem) Creation Units.\19\
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\18\ If the market value of the Deposit Securities were to be
greater than the NAV of a Creation Unit, then the Balancing Amount
would be a negative number, in which case the Balancing Amount would
be paid by the Fund to the purchaser, rather than vice-versa.
\19\ If a Fund were to permit a purchaser to deposit cash in
lieu of depositing one or more Deposit Securities, the purchaser
would be assessed an appropriate Transaction Fee to offset the
transaction cost to the Fund of buying those particular Deposit
Securities.
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The Adviser would make available through the DTC or the Distributor
on each business day, prior to the opening of trading on the Exchange,
a list of names and the required number of shares of each Deposit
Security to be included in the Creation Deposit for each Fund.\20\ The
Adviser also would make available on a daily basis information about
the previous day's Balancing Amount.
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\20\ In accordance with Vanguard's Code of Ethics and Insider
Trading Policy, personnel of the Adviser with knowledge about the
composition of a Creation Deposit would be prohibited from
disclosing such information to any other person, except as
authorized in the course of their employment, until such information
is made public.
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The Adviser currently contemplates that Creation Units would be
created principally in kind, but the Funds reserve the option to permit
or require the substitution of an amount of cash--i.e., a ``cash in
lieu'' amount--to be added to the Cash Component to replace any Deposit
Security that may not be available in sufficient quantity for delivery,
may not be eligible for transfer, or may not be eligible for trading by
an Authorized Participant (as defined below) or the investor for which
an Authorized Participant is acting.\21\ Brokerage commissions incurred
by a Fund to acquire any Deposit Security not part of a Creation
Deposit would be expected to be immaterial, and in any event the
Adviser represents that it would adjust the relevant Transaction Fee to
ensure that the Fund collects the extra expense from the purchaser.
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\21\ According to the Application, in certain instances, a Fund
may require a purchasing investor to purchase a Creation Unit
entirely for cash. For example, on days when a substantial
rebalancing of a Fund's portfolio is required, the Adviser might
prefer to receive cash rather than in-kind stocks so that it has
liquid resources on hand to make the necessary purchases. The
registration statement states that the Funds have no current
intention of issuing Creation Units for cash.
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Orders to create or redeem VIPER Shares would be required to be
placed through an Authorized Participant, which would be either (1) a
broker-dealer or other participant in the continuous net settlement
system of the
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National Securities Clearing Corporation or (2) a DTC participant, and
which has entered into a participant agreement with the Distributor.
As noted above, on each business day, each Fund would make
available a list of names and amount of each security constituting the
current Deposit Securities and the Balancing Amount effective as of the
previous business day. As noted below in ``Dissemination of Intraday
Indicative Value,'' the Exchange would disseminate through the
facilities of the CTA, at regular intervals (currently anticipated to
be 15 second intervals) during the Exchange's regular trading hours,
the Intraday Indicative Value on a per VIPER Share basis. The Funds
would not be involved in, or responsible for, the calculation or
dissemination of any such amount and would make no warranty as to its
accuracy.
Redemption. VIPER Shares in Creation Unit-size aggregations would
be redeemable on any day on which the NYSE is open in exchange for a
basket of securities (``Redemption Securities''). As it does for
Deposit Securities, the Adviser would make available to Authorized
Participants on each business day prior to the opening of trading a
list of the names and number of shares of Redemption Securities for
each Fund. The Redemption Securities given to redeeming investors in
most cases would be the same as the Deposit Securities required of
investors purchasing Creation Units on the same day.\22\ Depending on
whether the NAV of a Creation Unit is higher or lower than the market
value of the Redemption Securities, the redeemer of a Creation Unit
would either receive from or pay to the Fund a cash amount equal to the
difference. (In the typical situation where the Redemption Securities
are the same as the Deposit Securities, this cash amount would be equal
to the Balancing Amount described above in the creation process.) The
redeeming investor also would be required to pay to the Fund a
Transaction Fee to cover transaction costs.\23\
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\22\ There may be circumstances, however, where the Deposit and
Redemption Securities could differ. For example, if ABC stock were
replacing XYZ stock in a Fund's Target Index at the close of today's
trading session, today's prescribed Deposit Securities might include
ABC but not XYZ, while today's prescribed Redemption Securities
might include XYZ but not ABC. According to the Application, having
the flexibility to prescribe different baskets for creation and
redemption promotes efficient portfolio management and lowers the
Fund's brokerage costs, and thus is in the best interests of the
Fund's shareholders.
\23\ Redemptions in which cash is substituted for one or more
Redemption Securities would be assessed an appropriate Transaction
Fee to offset the transaction cost to the fund of selling those
particular Redemption Securities. See supra note .
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A Fund would have the right to make redemption payments in cash, in
kind, or a combination of each, provided that the value of its
redemption payments equals the NAV of the VIPER Shares tendered for
redemption.\24\ The Adviser currently contemplates that Creation Units
of each Fund would be redeemed principally in kind, except in certain
circumstances. A Fund would be able to make redemptions partly or
wholly in cash in lieu of transferring one or more Redemption
Securities to a redeeming investor if the Fund determines, in its
discretion, that such alternative is warranted due to unusual
circumstances. This could happen if the redeeming investor is unable,
by law or policy, to own a particular Redemption Security. The Adviser
represents that it would adjust the Transaction Fee imposed on a
redemption wholly or partly in cash to take into account any additional
brokerage or other transaction costs incurred by the Fund.
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\24\ In the event an Authorized Participant has submitted a
redemption request in good order and is unable to transfer all or
part of a Creation Unit-size aggregation for redemption, a Fund
would nonetheless be able to accept the redemption request in
reliance on the Authorized Participant's undertaking to deliver the
missing VIPER Shares as soon as possible, which undertaking shall be
secured by the Authorized Participant's delivery and maintenance of
collateral. The Authorized Participant Agreement would permit the
Fund to buy the missing VIPER Shares at any time and would subject
the Authorized Participant to liability for any shortfall between
the cost to the Fund of purchasing the VIPER Shares and the value of
the collateral.
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Dividends. Dividends from net investment income would be declared
and paid at least annually by each Fund in the same manner as by other
open-end investment companies. Capital gains distributions, if any,
would generally occur in December.
The final dividend amount for the VIPER Shares of each Fund, which
would be made available on http://www.amextrader.com, would be the
amount of dividends to be paid by a Fund to holders of its VIPER Shares
for the appropriate period (usually annually). The final dividend
amount would also be disseminated by the Funds to Bloomberg and other
sources.
According to the Amex, the Funds intend to make available to
Beneficial Owners of VIPER Shares the DTC book-entry dividend
reinvestment service. Without this service, Beneficial Owners would
have to take their distributions in cash. Information about the
dividend reinvestment service would appear in each Fund's prospectus
and in its Product Description.\25\
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\25\ See supra note 16, and below, ``Prospectus Delivery.''
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The cash proceeds of dividends and capital gain distributions
payable to all Beneficial Owners participating in DTC's reinvestment
service would be used to purchase additional VIPER Shares for such
Beneficial Owners. These additional shares would be purchased on the
secondary market. Some DTC Participants would be able to elect not to
utilize the dividend reinvestment service. Beneficial Owners who hold
VIPER Shares through these DTC Participants may not be able to reinvest
their dividends and distributions. These Beneficial Owners would
receive their dividends and distributions in cash. The prospectus for
VIPER Shares and the Product Description would disclose this fact.
Criteria for Initial and Continued Listing. Shares would be subject
to the criteria for initial and continued listing of Index Fund Shares
in Amex Rule 1002A. A minimum of 100,000 VIPER Shares would be required
to be outstanding for each Fund at the start of trading. This minimum
number of Shares required to be outstanding at the start of trading
would be comparable to requirements that have been applied to
previously listed series of Portfolio Depositary Receipts and Index
Fund Shares. The initial price of a VIPER Share for each Fund would be
approximately $50 per share.
The Exchange believes that the proposed minimum number of VIPER
Shares outstanding at the start of trading is sufficient to provide
market liquidity.
Original and Annual Listing Fees. The Amex original listing fee
applicable to the listing of the Index Fund Shares would be $5,000 for
each Fund. In addition, the annual listing fee applicable to the VIPER
Funds under Section 141 of the Amex Company Guide (``Company Guide'')
would be based upon the year-end aggregate number of outstanding VIPER
Shares in all Vanguard funds listed on the Exchange.
Stop and Stop Limit Orders. Amex Rule 154, Commentary .04(c)
provides that stop and stop limit orders to buy or sell a security
(other than an option, which is covered by Amex Rule 950(f) and
Commentary thereto) the price of which is derivatively based upon
another security or index of securities, may with the prior approval of
a Floor Official, be elected by a quotation, as set forth in Commentary
.04(c) (i-v). The Exchange has designated Index Fund
[[Page 29586]]
Shares, including VIPER Shares, as eligible for this treatment.\26\
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\26\ See Securities Exchange Act Release No. 29063 (April 10,
1991), 56 FR 15652 (April 17, 1991) (SR-Amex-90-31), regarding
Exchange designation of equity derivative securities as eligible for
such treatment under Amex Rule 154, Commentary .04(c).
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Amex Rule 190. Amex Rule 190, Commentary .04 applies to Index Fund
Shares listed on the Exchange, including VIPER Shares. Commentary .04
states that nothing in Amex Rule 190(a) should be construed to restrict
a specialist registered in a security issued by an investment company
from purchasing and redeeming the listed security, or securities that
can be subdivided or converted into the listed security, from the
issuer as appropriate to facilitate the maintenance of a fair and
orderly market.
Prospectus Delivery. The Exchange, in an Information Circular to
Exchange members and member organizations, would inform members and
member organizations, prior to commencement of trading, of the
prospectus and Product Description delivery requirements that apply to
the Funds. The Exemptive Order granted relief from Section 24(d) of the
1940 Act, which relief permits dealers to sell VIPER Shares in the
secondary market unaccompanied by a statutory prospectus when
prospectus delivery is not required by the Securities Act of 1933. Any
Product Description used in reliance on the Section 24(d) exemptive
order would comply with all representations made therein and all
conditions thereto.
Trading Halts. In addition to other factors that may be relevant,
the Exchange would be able to consider factors such as those set forth
in Amex Rule 918C(b) in exercising its discretion to halt or suspend
trading in Index Fund Shares, including VIPER Shares. These factors
would include, but are not limited to, (1) the extent to which trading
is not occurring in stocks underlying the index; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present.\27\ In addition, trading in VIPER
Shares would be halted if the circuit breaker parameters under Amex
Rule 117 have been reached.
---------------------------------------------------------------------------
\27\ See Amex Rule 918C.
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Suitability. Prior to commencement of trading, the Exchange would
issue an Information Circular informing members and member
organizations of the characteristics of the Funds' VIPER Shares and of
applicable Exchange rules, as well as of the requirements of Amex Rule
411 (Duty to Know and Approve Customers).
Purchases and Redemptions in Creation Unit Size. In the Information
Circular referenced above, members and member organizations would be
informed that procedures for purchases and redemptions of VIPER Shares
in Creation Unit Size are described in the Fund prospectus and
Statement of Additional Information, and that VIPER Shares would not be
individually redeemable but would be redeemable only in Creation Unit
size aggregations or multiples thereof.
Surveillance. The Exchange represents that its surveillance
procedures are adequate to properly monitor the trading of the VIPER
Shares. Specifically, the Amex would rely on its existing surveillance
procedures governing Index Fund Shares, which have been deemed adequate
under the Act. In addition, the Exchange and MSCI also have a general
policy prohibiting the distribution of material, non-public information
by its employees. Because MSCI is a broker-dealer that maintains the
Target Indices, it is imperative that a functional separation exist,
such as a firewall between the trading desk of the broker-dealer and
the research persons responsible for maintaining the Target Indices.
MSCI has represented that such a firewall exists.
Hours of Trading/Minimum Price Variation. The Funds would trade on
the Exchange until 4:15 pm (New York time) each business day. Shares of
each fund would trade with a minimum price variation of $.01.
Dissemination of Intraday Indicative Value. In order to provide
updated information relating to each Fund for use by investors,
professionals and persons wishing to create or redeem VIPER Shares, as
noted above, the Exchange would disseminate through the facilities of
the CTA: (i) continuously throughout the trading day, through the
facilities of the consolidated tape, the market value of a VIPER
Share,\28\ and (ii) every 15 seconds throughout the trading day,
separately from the consolidated tape, a calculation of the estimated
NAV (also known as the Intraday Indicative Value or ``IIV'') \29\ of a
VIPER Share as calculated by a third party calculator (``IIV
Calculator'') (that is currently expected to be the Amex). Comparing
these two figures would help an investor to determine whether, and to
what extent, VIPER Shares may be selling at a premium or a discount to
NAV.
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\28\ The consolidated tape would show the market price of VIPER
Shares only; it would not show the price (i.e., the NAV) of
Conventional Shares.
\29\ The Application refers to the IIV as the ``estimated NAV.''
The IIV is also referred to by other issuers as an ``Underlying
Trading Value,'' ``Indicative Optimized Portfolio Value (IOPV),''
and ``Intraday Value'' in various places such as the prospectus and
marketing materials for different exchange-traded funds.
---------------------------------------------------------------------------
The IIV Calculator would calculate the IIV of a VIPER Share as
follows: First, it would establish the market value of a Creation
Deposit based on the previous night's closing price of each Deposit
Security plus the previous night's Balancing Amount. Then, throughout
the day at 15-second intervals, it would recalculate the market value
of a Creation Deposit based on the then-current market price of each
Deposit Security plus the previous night's Balancing Amount.
The IIV may not reflect the value of all securities included in the
applicable Target Index. In addition, the IIV would not necessarily
reflect the precise composition of the current portfolio of securities
held by each Fund at a particular point in time. Therefore, the IIV on
a per VIPER Share basis disseminated during Amex trading hours should
not be viewed as a real time update of the net asset value of a
particular Fund, which would be calculated only once a day. The IIV
that would be disseminated by the Amex at the start of the trading day
is expected to be generally close to the most recently calculated Fund
net asset value on a per VIPER Share basis. It is possible that the
value of the portfolio of securities held by a Fund may diverge from
the value of the Deposit Securities during any trading day. If there
were to be such a divergence, the IIV would not precisely reflect the
value of the Fund portfolio. However, during the trading day, the IIV
of a Fund's VIPER Shares would be expected to closely approximate the
value per VIPER Share of the portfolio of securities for each 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
Adviser).
The Exchange believes that dissemination of the IIV based on the
Deposit Securities would provide additional information regarding each
Fund that would not otherwise be available to the public and would be
useful to professionals and investors in connection with VIPER Shares
trading on the Exchange or the creation or redemption of VIPER Shares.
The IIV would also include the applicable estimated cash component for
each Fund.
[[Page 29587]]
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6 of the Act,\30\ in general, and furthers the
objectives of Section 6(b)(5),\31\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change, as
amended, will impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange did not receive any written comments on the proposed
rule change.
III. 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. Comments may be submitted by any of
the following methods:
Electronic comments:
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-Amex-2004-16 on the subject line.
Paper comments:
Send paper comments in triplicate to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609.
All submissions should refer to File Number SR-Amex-2004-16. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 the
filing also will be available for inspection and copying at the
principal office of the Amex. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Amex-2004-16 and should be submitted on or before June
14, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, 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.\32\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \33\ and will
promote just and equitable principles of trade, foster cooperation and
coordination with persons engaged in clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and, in general, protect investors and the public
interest.\34\
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\32\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of exchange trading for new products upon a
finding that the introduction of the product is in the public
interest. Such a finding would be difficult with respect to a
product that served no investment, hedging or other economic
functions, because any benefits that might be derived by market
participants would likely be outweighed by the potential for
manipulation, diminished public confidence in the integrity of the
markets, and other valid regulatory concerns.
---------------------------------------------------------------------------
The Commission believes that the new VIPER Shares will provide
investors with an additional investment choice. The Commission believes
that the Amex'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 single
securities at negotiated prices throughout the business day that
generally track the price and yield performance of the respective
underlying Target Indices.\35\
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\35\ The Commission notes that, as is the case with similar
previously approved exchange traded funds, investors in VIPER Shares
can redeem in Creation Unit size aggregations only. See, e.g.,
Securities Exchange Act Release No. 44990 (October 25, 2001), 66 FR
55712 (November 2, 2001) (SR-Amex-2001-45) (``Release No. 34-
44990''). This citation was corrected by Securities Exchange Act
Release No. 44990 (November 5, 2001), 66 FR 56869 (November 13,
2001) (SR-Amex-2001-45).
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Furthermore, the proposed rule change raises no issues that have
not been previously considered by the Commission in connection with
earlier filings for Index Fund Shares pursuant to Rule 19b-4 under the
Act.\36\ The VIPER Shares to be issued by the Vanguard Index Funds are
similar in structure and operation to exchange-traded index fund shares
that the Commission has previously approved for listing and trading on
national exchanges under Section 19(b)(2) of the Act.\37\ In
particular, with respect to each of the following key issues, the
Commission believes that the VIPER Shares satisfy established
standards.
---------------------------------------------------------------------------
\36\ 17 CFR 240.19b-4.
\37\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
A. Fund Characteristics
Similar to other previously-approved, exchange-listed index fund
shares, the Commission believes that the proposed VIPER Shares 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 a product representing an interest in a portfolio of
securities designed to reflect substantially the applicable Target
Index. The estimated cost of individual VIPER Shares, approximately
$50, should make them attractive to individual retail investors who
wish to hold a security representing the performance of a portfolio of
stocks. In addition, unlike the case with standard open-end investment
companies specializing in such stocks, investors will be able to trade
each of the VIPER Shares continuously throughout the business day in
secondary market transactions at negotiated prices.\38\ Accordingly,
the proposed Funds will allow investors to: (1) Respond quickly to
market changes through intra-day trading opportunities; (2) engage in
hedging strategies similar to those used by institutional investors;
[[Page 29588]]
and (3) reduce transaction costs for trading a portfolio of securities.
---------------------------------------------------------------------------
\38\ Because of the potential arbitrage opportunities, the
Commission believes that VIPER Shares will not trade at a material
discount or premium in relation to their NAV.
---------------------------------------------------------------------------
The Commission believes that each of the proposed Funds is
reasonably designed to provide investors with an investment vehicle
that substantially reflects in value the applicable Target Index and,
in turn, the performance of: (1) The component securities comprising
the MSCI U.S. Investable Market Energy Index; (2) the component
securities comprising the MSCI U.S. Investable Market Industrials
Index; and (3) the MSCI U.S. Investable Market Telecommunications
Services Index.
The Commission notes that the MSCI U.S. Investable Market Energy
Index and the MSCI U.S. Investable Market Telecommunications Services
Index do not meet the weighting standards set out in Amex Rule 1000A,
Commentary .02(a)(3), which require that the most heavily weighted
component stock cannot exceed 30% of the weight of the index or
portfolio, and the five most heavily weighted component stocks cannot
exceed 65% of the weight of the index or portfolio. The Commission
notes further that, although the MSCI U.S. Investable Market
Industrials Index currently meets the requirements of Amex Rule 1000A,
Commentary .02, it is possible that the index may not satisfy the
standard relating to the most heavily weighted stock component on the
date of listing (the heavily weighted component stock in the index
currently constitutes approximately 26% of the index). The Commission
notes, however, that a significant portion of the weight of each of the
three Target Indices is accounted for by stocks with substantial market
capitalization and trading volume. Together with the other
characteristics of the Target Indices and the Funds, the Commission
believes that a minimum level of liquidity would exist for each VIPER
Fund, reducing the potential for manipulation of the Target Indices'
component securities and allowing for the maintenance of fair and
orderly markets.
Moreover, the Commission finds that, although the value of the
VIPER Shares will be derived from and based on the value of the
securities and cash held in the Fund, VIPER Shares are not leveraged
instruments. Accordingly, the level of risk involved in the purchase or
sale of VIPER Shares is similar to the risk involved in the purchase or
sale of traditional common stock, with the exception that the pricing
mechanism for the VIPER Shares is based on a portfolio of securities.
The Commission notes that each Fund will invest at least 90% of its
assets in the component securities of its respective Target Index. As
noted above, each Fund will use a replication method of indexing to
attempt to track its Target Index. It is expected that each Fund will
have a tracking error relative to the performance of its Underlying
Index of less than five percentage points per annum. The Advisers to
each Fund may attempt to reduce tracking error by using a variety of
investment instruments, including futures contracts, options,
convertible securities, swaps and currency exchange contracts; however,
these instruments will not constitute more than 10 percent of the
Funds' assets.
While the Commission believes that the above characteristics of the
Target Indices make it unlikely that the Funds could become highly
concentrated with illiquid stocks, susceptible to manipulation, in the
event that the Funds' characteristics change significantly from that
described herein, the Commission would expect the Amex to contact
Commission staff to file a proposed rule change pursuant to Rule 19b-4
of the Act. Accordingly, the level of risk involved in the purchase or
sale of VIPER Shares is similar to the risk involved in the purchase or
sale of traditional common stock, with the exception that the pricing
mechanism for the VIPER Shares is based on a portfolio of securities.
B. Disclosure
The Commission believes that the Amex's proposal should provide for
adequate disclosure to investors relating to the terms,
characteristics, and risks of trading the Funds. The Exchange will
circulate an Information Circular detailing applicable prospectus and
product description delivery requirements. Because the VIPER Shares
have been granted relief from the prospectus delivery requirements of
the 1940 Act, they will be subject to Amex Rule 1000A, which requires
delivery of a product description describing the Funds. Pursuant to the
rule, the delivery requirement will extend to a member or member
organization carrying an omnibus account for a non-member broker-
dealer, who must notify the non-member to make the product description
available to its customers on the same terms as are directly applicable
to members and member organizations. In addition, Rule 1000A requires
that a member or member organization must deliver a prospectus to a
customer upon request.
The circular also will address members' responsibility to deliver a
prospectus or product description to all investors and highlight the
characteristics of the Funds. For example, the information circular
will also inform members and member organizations that VIPER Shares are
not individually redeemable, but are redeemable only in Creation-Unit-
size aggregations as set forth in each Fund prospectus and statement of
additional information. The circular will also advise members of their
obligations pursuant to Amex Rule 411 (Duty to Know and Approve
Customer).
C. Dissemination of Fund Information
With respect to pricing, the Exchange will disseminate the recent
NAV for each Fund on the Exchange Web site.\39\ As indicated above,
each Fund's NAV will be calculated once daily as of 4 p.m. Amex will
also disseminate by means of the CTA and CQ High Speed Lines each
Fund's IIV at 15-second intervals and the market value of its VIPER
Shares. The Commission believes that comparing these two figures will
help an investor to determine whether, and to what extent, VIPER Shares
may be selling at a premium or a discount to NAV.
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\39\ The Exchange will post additional information about each
fund, including dividend amounts to be paid as well.
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Amex will also make available additional information about each
Fund, including shares outstanding, daily trading volume, closing
price, estimated cash amount and total cash amount per Creation Unit,
and final dividend amounts to be paid for each Fund.\40\ The Commission
believes that dissemination of this information will facilitate
transparency with respect to the proposed VIPER Shares and diminish the
risk of manipulation or unfair informational advantage.
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\40\ The Commission believes that the closing prices of Deposit
Securities are readily available from, as applicable, the relevant
exchanges, automated quotation systems, published or other public
sources, or on-line information services such as Bloomberg or
Reuters.
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In addition, the Commission notes that Vanguard's Web site is and
will be publicly accessible at no charge, and will contain each fund's
NAV as of the prior business day, the Bid-Asked Price, and a
calculation of the premium or discount of the Bid-Asked Price in
relation to the closing NAV. Additional information available to
investors will include data for a period covering at least the four
previous calendar quarters (or the life of a Fund, if shorter)
indicating how frequently each Fund's VIPER Shares traded at a premium
or discount to NAV based on the Bid-Asked Price and closing NAV, and
the magnitude of such premiums and discounts; the Fund's Prospectus and
two most recent reports to shareholders;
[[Page 29589]]
and other quantitative information such as daily trading volume.\41\
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\41\ See supra ``Availability of Information about VIPER
Shares.''
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Based on the representations made in the Amex proposal, the
Commission believes that pricing and other important information about
each Fund is adequate.
D. Listing and Trading
The Commission finds that adequate rules and procedures exist to
govern the listing and trading of VIPER Shares. VIPER Shares will be
deemed equity securities subject to Amex rules governing the trading of
equity securities, including, among others, rules governing trading
halts, responsibilities of the specialist, account opening and customer
suitability requirements, and the election of stop and stop limit
orders.
In addition, the Funds will be subject to Amex listing and
delisting/suspension rules and procedures governing the trading of
Index Fund Shares on the Amex.\42\ As the Commission has noted
previously,\43\ the listing and delisting criteria for VIPER Shares
should help to ensure that a minimum level of liquidity will exist in
each of the Funds to allow for the maintenance of fair and orderly
markets. Accordingly, the Commission believes that the rules governing
the trading of VIPER Shares provide adequate safeguards to prevent
manipulative acts and practices and to protect investors and the public
interest.
---------------------------------------------------------------------------
\42\ See Amex Rule 1002A.
\43\ See, e.g., Release No. 34-44990, supra note 35.
---------------------------------------------------------------------------
As noted above, a minimum of 100,000 VIPER Shares will be required
to be outstanding for each Fund at the start of trading. The Commission
believes that this minimum number is sufficient to help to ensure that
a minimum level of liquidity will exist at the start of trading.\44\
---------------------------------------------------------------------------
\44\ This minimum number of shares required to be outstanding at
the start of trading is comparable to requirements that have been
applied to previously listed series of Portfolio Depositary Receipts
and Index Fund Shares.
---------------------------------------------------------------------------
E. Surveillance
The Commission finds that Amex has adequate surveillance procedures
to monitor the trading of the proposed VIPER Shares, including concerns
with specialists purchasing and redeeming Creation Units. The Amex
represents that it will rely on existing surveillance procedures
governing Index Fund Shares, and in addition, that the exchange and
MSCI prohibit the distribution of material, non-public information by
their employees that could undermine a fair and orderly market. In
addition, the Exchange and MSCI also have a general policy prohibiting
the distribution of material, non-public information by their
employees. Because MSCI is a broker-dealer that maintains the Target
Indices, it is imperative that a functional separation exist, such as a
firewall between the trading desk of the broker-dealer and the research
persons responsible for maintaining the Target Indices. MSCI has
represented that such a firewall exists.
F. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\45\ for approving the proposed rule change prior to the
thirtieth day after the date of publication of notice in the Federal
Register. The Commission notes that the proposed rule change is
consistent with the listing and trading standards in Amex Rule 1000A et
seq. (Index Fund Shares), and the Commission has previously approved
similar products.\46\ The Commission does not believe that the proposed
rule change raises novel regulatory issues. Consequently, the
Commission believes that it is appropriate to permit investors to
benefit from the flexibility afforded by trading these products as soon
as possible. Accordingly, the Commission finds that there is good
cause, consistent with Section 6(b)(5) of the Act,\47\ to approve the
proposal on an accelerated basis.
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78s(b)(2).
\46\ See, e.g., Release No. 34-44990, supra note 35.
\47\ 15 U.S.C. 78s(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\48\ that the proposed rule change (SR-Amex-2004-16), is hereby
approved on an accelerated basis.
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\48\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\49\
---------------------------------------------------------------------------
\49\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-11652 Filed 5-21-04; 8:45 am]
BILLING CODE 8010-01-P