[Federal Register Volume 70, Number 153 (Wednesday, August 10, 2005)]
[Notices]
[Pages 46559-46565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4326]



[[Page 46559]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52204; File No. SR-PCX-2005-63]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
and Amendment Nos. 1 and 2 Thereto Relating to the Adoption of Generic 
Listing Standards for Index-Linked Securities

August 3, 2005.
    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 April 28, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE'' or ``Corporation''), 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 the Exchange. 
On July 26, 2005, PCX submitted Amendment No. 1 to the proposed rule 
change.\3\ On August 3, 2005, PCX submitted Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and is approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made clarifying and 
technical changes to the original rule filing. Amendment No. 1 
replaced PCX's original submission in its entirety.
    \4\ In Amendment No. 2, the Exchange corrected a reference in 
the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Through PCXE, the Exchange proposes to amend its rules governing 
the Archipelago Exchange (``ArcaEx''), the equities trading facility of 
PCXE, to adopt PCXE Rule 5.2(j)(6). With this filing, the Exchange 
proposes to adopt generic listing standards pursuant to Rule 19b-4(e) 
\5\ of the Act in connection with index-linked securities (``Index 
Securities''). The text of the proposed rule change is set forth below. 
Proposed new language is in italics.
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    \5\ 17 CFR 240.19b-4(e).
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* * * * *

Rule 5

Listings

* * * * *
    Rule 5.2(a)-(i)-No change.
    Rule 5.2(j)(1)-(5)-No Change.

Index-Linked Securities

    Rule 5.2(j)(6). Index-linked securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of an underlying index or indexes. Such securities may or may not 
provide for the repayment of the original principal investment amount. 
The Corporation may submit a rule filing pursuant to Section 19(b)(2) 
of the Securities Exchange Act of 1934 (``Act'') to permit the listing 
and trading of index-linked securities that do not otherwise meet the 
standards set forth below in paragraphs (a) through (k). The 
Corporation will consider for listing and trading pursuant to Rule 19b-
4(e) under the Act, index-linked securities provided:
    (a) Both the issue and the issuer of such security meet the 
criteria set forth above in ``General Criteria,'' except that the 
minimum public distribution shall be 1,000,000 units with a minimum of 
400 public holders, except, if traded in thousand dollar denominations, 
then no minimum number of holders.
    (b) The issue has a minimum term of one (1) year but not greater 
than ten (10) years.
    (c) The issue must be the non-convertible debt of the issuer.
    (d) The payment at maturity may or may not provide for a multiple 
of the positive performance of an underlying index or indexes; however, 
in no event will payment at maturity be based on a multiple of the 
negative performance of an underlying index or indexes.
    (e) The issuer will be expected to have a minimum tangible net 
worth in excess of $250,000,000, and to otherwise substantially exceed 
the earnings requirements set forth in PCXE Rule 5.2(c). In the 
alternative, the issuer will be expected: (i) To have a minimum 
tangible net worth of $150,000,000 and to otherwise substantially 
exceed the earnings requirement set forth in PCXE Rule 5.2(c), and (ii) 
not to have issued securities where the original issue price of all the 
issuer's other index-linked note offerings (combined with index-linked 
note offerings of the issuer's affiliates) listed on a national 
securities exchange or traded through the facilities of Nasdaq exceeds 
25% of the issuer's net worth.
    (f) The issuer is in compliance with Rule 10A-3 under the Act.
    (g) Initial Listing Criteria--Each underlying index is required to 
have at least ten (10) component securities. In addition, the index or 
indexes to which the security is linked shall either (1) have been 
reviewed and approved for the trading of options or other derivatives 
by the Commission under Section 19(b)(2) of the Act and rules 
thereunder and the conditions set forth in the Commission's approval 
order, including comprehensive surveillance sharing agreements for non-
U.S. stocks, continue to be satisfied, or (2) the index or indexes meet 
the following criteria:
    (i) Each component security has a minimum market value of at least 
$75 million, except that for each of the lowest weighted component 
securities in the index that in the aggregate account for no more than 
10% of the weight of the index, the market value can be at least $50 
million;
    (ii) Each component security shall have trading volume in each of 
the last six months of not less than 1,000,000 shares, except that for 
each of the lowest weighted component securities in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
the trading volume shall be at least 500,000 shares in each of the last 
six months;
    (iii) In the case of a capitalization weighted index or modified 
capitalization weighted index, the lesser of the five highest weighted 
component securities in the index or the highest weighted component 
securities in the index that in the aggregate represent at least 30% of 
the total number of component securities in the index, each have an 
average monthly trading volume of at least 2,000,000 shares over the 
previous six months;
    (iv) No underlying component security will represent more than 25% 
of the weight of the index, and the five highest weighted component 
securities in the index do not in the aggregate account for more than 
50% of the weight of the index (60% for an index consisting of fewer 
than 25 component securities);
    (v) 90% of the index's numerical value and at least 80% of the 
total number of component securities will meet the then current 
criteria for standardized option trading set forth in PCX Rule 5.3;
    (vi) Each component security shall be an Act reporting company 
which is listed on a national securities exchange or is traded through 
the facilities of Nasdaq and reported national market system 
securities; and
    (vii) Foreign country securities or American Depository Receipts 
(``ADRs'') that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index.
    (h) Continued Listing Criteria-- (1) The Corporation will commence 
delisting or removal proceedings (unless the Commission has approved 
the

[[Page 46560]]

continued trading of the subject index-linked security), if any of the 
standards set forth above in paragraph (g)(2) are not continuously 
maintained, except that:
    (i) the criteria that no single component represent more than 25% 
of the weight of the index and the five highest weighted components in 
the index can not represent more than 50% (or 60% for indexes with less 
than 25 components) of the weight of the Index, need only be satisfied 
for capitalization weighted, modified capitalization weighted and price 
weighted indexes as of the first day of January and July in each year;
    (ii) the total number of components in the index may not increase 
or decrease by more than 33\1/3\% from the number of components in the 
index at the time of its initial listing, and in no event may be less 
than ten (10) components;
    (iii) the trading volume of each component security in the index 
must be at least 500,000 shares for each of the last six months, except 
that for each of the lowest weighted components in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
trading volume must be at least 400,000 shares for each of the last six 
months; and
    (iv) in a capitalization-weighted index or modified capitalization 
weighted index, the lesser of the five highest weighted component 
securities in the index or the highest weighted component securities in 
the index that in the aggregate represent at least 30% of the total 
number of stocks in the index have had an average monthly trading 
volume of at least 1,000,000 shares over the previous six months.
    (2) In connection with an index-linked security that is listed 
pursuant to paragraph (g)(1) above, the Corporation will commence 
delisting or removal proceedings (unless the Commission has approved 
the continued trading of the subject index-linked security) if an 
underlying index or indexes fails to satisfy the maintenance standards 
or conditions for such index or indexes as set forth by the Commission 
in its order under Section 19(b)(2) of the Act approving the index or 
indexes for the trading of options or other derivatives.
    (3) The Corporation will also commence delisting or removal 
proceedings (unless the Commission has approved the continued trading 
of the subject index-linked security), under any of the following 
circumstances:
    (i) if the aggregate market value or the principal amount of the 
securities publicly held is less than $400,000;
    (ii) if the value of the index or composite value of the indexes is 
no longer calculated or widely disseminated on at least a 15-second 
basis; or
    (iii) if such other event shall occur or condition exists which in 
the opinion of the Corporation makes further dealings on the 
Corporation inadvisable.
    (i) Index Methodology and Calculation--(i) Each index will be 
calculated based on either a capitalization, modified capitalization, 
price, equal-dollar or modified equal-dollar weighting methodology. 
(ii) Indexes based upon the equal-dollar or modified equal-dollar 
weighting method will be rebalanced at least quarterly. (iii) If the 
index is maintained by a broker-dealer, the broker-dealer shall erect a 
``firewall'' around the personnel who have access to information 
concerning changes and adjustments to the index and the index shall be 
calculated by a third party who is not a broker-dealer. (iv) The 
current value of an index will be widely disseminated at least every 15 
seconds. (v) If the value of an index-linked security is based on more 
than one (1) index, then the composite value of such indexes must be 
widely disseminated at least every 15 seconds.
    (j) Surveillance Procedures. The Corporation will implement written 
surveillance procedures for index-linked securities, including adequate 
comprehensive surveillance sharing agreements for non-U.S. securities, 
as applicable.
    (k) Index-linked securities will be treated as equity instruments.
    Rule 5.2(k)-(n)--No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Under PCXE Rule 5.2(j)(1), the Exchange may approve, for listing 
and trading, securities that cannot be readily categorized under the 
listing criteria for common and preferred securities, bonds, 
debentures, or warrants.\6\ The Exchange proposes to adopt PCXE Rule 
5.2(j)(6) to provide generic listing standards to permit the trading 
of, either by listing or pursuant to unlisted trading privileges 
(``UTP''), Index Securities pursuant to Rule 19b-4(e) under the Act.\7\ 
This filing is based on the American Stock Exchange LLC's (``AMEX'') 
proposed rule filing, which the Commission recently approved.\8\
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    \6\ See PCXE Rule 5.2(j)(1).
    \7\ 17 CFR 240.19b-4(e).
    \8\ See Securities Exchange Act Release No. 51563 (April 15, 
2005), 70 FR 21257 (April 25, 2005) (SR-AMEX-2005-001).
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a. Generic Listing Standards
    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 
paragraph (c)(1) of Rule 19b-4,\9\ if the Commission has approved, 
pursuant to section 19(b) of the Act,\10\ the SRO's trading rules, 
procedures, and listing standards for the product class that would 
include the new derivatives securities product, and the SRO has a 
surveillance program for the product class.\11\ Hence, the Exchange is 
proposing this rule filing to adopt generic listing standards under new 
PCXE Rule 5.2(j)(6) for this product class, pursuant to which it will 
be able to trade, whether by listing or pursuant to UTP, Index 
Securities without individual Commission approval of each product 
pursuant to section 19(b)(2) of the Act.\12\ Instead, the Exchange 
represents that any securities it lists and/or trades pursuant to PCXE 
Rule 5.2(j)(6) will satisfy the standards set forth therein. The 
Exchange states that within five (5) business days after commencement 
of trading of an Index Security in reliance on PCXE Rule 5.2(j)(6), the 
Exchange will file a Form 19b-4(e).\13\
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    \9\ 17 CFR 240.19b-4(c)(1).
    \10\ 17 U.S.C. 78s(b).
    \11\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (the ``19b-4(e) Order'').
    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 240.19b-4(e)(2)(ii); 17 CFR 249.820.
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b. Index Securities
    Index Securities are designed for investors who desire to 
participate in a specific market segment through index products by 
providing investors with exposure to an identifiable underlying market 
index or combination of market indexes (the ``Underlying Index'' or 
``Underlying Indexes'').\14\ Index

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Securities are the non-convertible debt of an issuer that have a term 
of at least one (1) year but not greater than ten years. Index 
Securities may or may not make interest payments based on dividends or 
other cash distributions paid on the securities comprising the 
Underlying Index or Indexes to the holder during their term. Despite 
the fact that Index Securities are linked to an underlying index, each 
will trade as a single, exchange-listed security.
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    \14\ The Exchange understands that the holder of an Index 
Security may or may not be fully exposed to the appreciation and/or 
depreciation of the underlying component securities. For example, an 
Index Security may be subject to a ``cap'' on the maximum principal 
amount to be repaid to holders or a ``floor'' on the minimum 
principal amount to be repaid to holders at maturity.
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    A typical Index Security traded, whether by listing or pursuant to 
UTP, on the Exchange provides for a payment amount in a multiple 
greater than one (1) times the positive index return or performance, 
subject to a maximum gain or cap. More generally, Index Securities may 
or may not be structured with accelerated returns, upside or downside, 
based on the performance of the Underlying Index. The Exchange 
represents that the proposed generic listing standards will not be 
applicable to Index Securities where the payment at maturity may be 
based on a multiple of negative performance of an underlying index or 
indexes. An Index Security may or may not provide ``principal 
protection,'' i.e., a minimum guaranteed amount to be repaid.\15\ The 
Exchange believes that the flexibility to list a variety of Index 
Securities will offer investors the opportunity to more precisely focus 
their specific investment strategies.
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    \15\ Some Index Securities may provide for ``contingent'' 
protection of the principal amount, whereby the principal protection 
may disappear if the Underlying Index at any point in time during 
the life of such security reaches a certain predetermined level.
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    The Exchange understands that the original public offering price of 
Index Securities may vary, with the most common offering price expected 
to be $10 or $1,000 per unit. As discussed above, Index Securities 
entitle the owner at maturity to receive a cash amount based upon the 
performance of a particular market index or combination of indexes. The 
Index Securities do not give the holder any right to receive a 
portfolio security, dividend payments, or any other ownership right or 
interest in the portfolio or index of securities comprising the 
Underlying Index. Pursuant to PCXE Rule 5.2(j)(6), the current value of 
an Underlying Index or composite value of the Underlying Index will be 
widely disseminated every 15 seconds during the trading day.
    Index Securities are expected to trade at a lower cost than the 
cost of trading each of the underlying component securities separately 
(because of reduced commission and custody costs) and are also expected 
to give investors the ability to maintain index exposure without the 
corresponding management or administrative fees and ongoing expenses. 
The initial offering price for an Index Security will be established on 
the date the security is priced for sale to the public. The final value 
of an Index Security will be determined on the valuation date at or 
near maturity consistent with the mechanics detailed in the prospectus 
for such Index Security.
c. Proposed Listing Criteria
    The Exchange proposes the following for each issuer of Index 
Securities:
    (A) Assets/Equity--Pursuant to PCXE Rule 5.2(j)(1), the issuer 
shall have assets in excess of $100 million and stockholders' equity of 
at least $10 million. In the case of an issuer that is unable to 
satisfy the earnings criteria set forth in PCXE Rule 5.2(c), the 
Exchange generally will require the issuer to have the following: (i) 
assets in excess of $200 million and stockholders' equity of at least 
$10 million; or (ii) assets in excess of $100 million and stockholders' 
equity of at least $20 million.
    (B) Distribution--Minimum public distribution of 1,000,000 notes 
with a minimum of 400 public shareholders, except, if traded in 
thousand dollar denominations, then no minimum number of holders.
    (C) Principal Amount/Aggregate Market Value--Not less than $4 
million.
    (D) Term--The issue has a minimum of one (1) year but not greater 
than ten (10) years.
    (E) Tangible Net Worth--The issuer will be expected to have a 
minimum tangible net worth \16\ in excess of $250,000,000 and to 
otherwise substantially exceed the earnings requirements set forth in 
PCXE Rule 5.2(c). In the alternative, the issuer will be expected: (i) 
To have a minimum tangible net worth of $150,000,000 and to otherwise 
substantially exceed the earnings requirement set forth in PCXE Rule 
5.2(c), and (ii) not to have issued securities where the original issue 
price of all the issuer's other index-linked note offerings (combined 
with index-linked note offerings of the issuer's affiliates) listed on 
a national securities exchange or traded through the facilities of 
Nasdaq exceeds 25% of the issuer's net worth.
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    \16\ ``Tangible net worth'' is defined as total assets less 
intangible assets and total liabilities. Intangibles include non-
material benefits such as goodwill, patents, copyrights and 
trademarks.
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Criteria for Underlying Indexes
    Under the Exchange's proposal, each Underlying Index must satisfy 
the specific criteria set forth in proposed PCXE Rule 5.2(j)(6)(g) or 
be an index previously approved for the trading of options or other 
derivative securities by the Commission under Section 19(b)(2) of the 
Act \17\ and rules thereunder. In general, the criteria for the 
underlying component securities of the Underlying Index are 
substantially similar to the requirements for index options set forth 
in PCX Rule 5.13(a). In all cases, an Underlying Index must contain at 
least ten (10) component securities (each, an ``Underlying Security'').
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    \17\ 15 U.S.C. 78s(b)(2).
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    Examples of Underlying Indexes intended to be covered under the 
proposed generic listing standards include the Standard & Poor's 500 
Index (``S&P 500''), Nasdaq-100 Index (``Nasdaq 100''), the Dow Jones 
Industrial Average (``DJIA''), Nikkei 225 Index (``Nikkei 225''), the 
Dow Jones STOXX 50 Index (``DJ STOXX 50''), the Global Titans 50 Index 
(``Global Titans 50''), Amex Biotechnology Index (``Amex Biotech''), 
and certain other indexes that represent various industry and/or market 
segments.
    In order to satisfy the proposed generic listing standards, the 
Underlying Index will be calculated based on either a market 
capitalization,\18\ modified market capitalization,\19\ price,\20\ 
equal-dollar \21\ or modified equal-dollar \22\ weighting

[[Page 46562]]

methodology. If a broker-dealer is responsible for maintaining (or has 
a role in maintaining) the Underlying Index, such broker-dealer is 
required to erect and maintain a ``firewall,'' in a form satisfactory 
to the Exchange, to prevent the flow of information regarding the 
Underlying Index from the index production personnel to the sales and 
trading personnel.\23\ In addition, an Underlying Index that is 
maintained by a broker-dealer is also required to be calculated by an 
independent third party who is not a broker-dealer.
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    \18\ A ``market capitalization'' index is the most common type 
of stock index. The components are weighted according to the total 
market value of the outstanding shares, i.e., share price times the 
number of shares outstanding. This type of index will fluctuate in 
line with the price moves of the component stocks.
    \19\ A ``modified market capitalization'' index is similar to 
the market capitalization index, except that an adjustment to the 
weights of one or more of the components occurs. This is typically 
done to avoid having an index that has one or a few stocks 
representing a disproportionate amount of the index value.
    \20\ A ``price weighted'' index is an index in which the 
component stocks are weighted by their share price. The most common 
example is the DJIA.
    \21\ An ``equal dollar weighted'' index is an index structured 
so that share quantities for each of the component stocks in the 
index are determined as if one were buying an equal dollar amount of 
cash stock in the index. Equal dollar weighted indexes are usually 
rebalanced to equal weightings either quarterly, semi-annually, or 
annually.
    \22\ A ``modified equal-dollar weighted'' index is designed to 
be a fair measurement of the particular industry or sector 
represented by the index, without assigning an excessive weight to 
one or more index components that have a large market capitalization 
relative to the other index components. In this type of index, the 
cash component is assigned a weight that takes into account the 
relative market capitalization of the securities comprising the 
index. The index is subsequently re-balanced to maintain these pre-
established weighting levels. Like equal-dollar weighted indexes, 
the value of a modified equal-dollar weighted index will equal the 
current combined market value of the assigned number of shares of 
each of the underlying components divided by the appropriate index 
divisor. A modified equal-dollar weighted index will typically be 
re-balanced quarterly.
    \23\ For certain indexes, an index provider, such as Dow Jones, 
may select the components and calculate the index, but overseas 
broker-dealer affiliates of U.S. registered broker-dealers may sit 
on an ``advisory'' committee that recommends component selections to 
the index provider. In such case, the Exchange should ensure that 
appropriate information barriers and insider trading policies exist 
for this advisory committee. See Securities Exchange Act Release No. 
51563 (April 15, 2005), 70 FR 21257 (April 25, 2005) (SR-AMEX-2005-
001).
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Eligibility Standards for Underlying Securities
    Index Securities will be subject to the criteria in proposed PCXE 
Rule 5.2(j)(6)(g) and (h) for initial and continued listing. For an 
Underlying Index to be appropriate for the initial listing of an Index 
Security, such Index must either be approved for the trading of options 
or other derivative securities by the Commission under section 19(b)(2) 
of the Act \24\ and rules thereunder or meet the following 
requirements:
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    \24\ 15 U.S.C. 78s(b)(2).
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     Each Underlying Security must have a minimum market value 
of at least $75 million, except that for each of the lowest weighted 
Underlying Securities in the index that in the aggregate account for no 
more than 10% of the weight of the index, the market value can be at 
least $50 million;
     Each Underlying Security must have a trading volume in 
each of the last six months of not less than 1,000,000 shares, except 
that for each of the lowest weighted Underlying Securities in the index 
that in the aggregate account for no more than 10% of the weight of the 
index, the trading volume shall be at least 500,000 shares in each of 
the last six months;
     In the case of a capitalization-weighted or modified 
capitalization-weighted index, the lesser of the five highest weighted 
Underlying Securities in the index or the highest weighted Underlying 
Securities in the index that in the aggregate represent at least 30% of 
the total number of Underlying Securities in the index, each have an 
average monthly trading volume of at least 2,000,000 shares over the 
previous six months;
     No component security will represent more than 25% of the 
weight of the index, and the five highest weighted component securities 
in the index will not in the aggregate account for more than 50% of the 
weight of the index (60% for an index consisting of fewer than 25 
Underlying Securities);
     90% of the index's numerical index value and at least 80% 
of the total number of component securities will meet the then current 
criteria for standardized options trading set forth in PCX Rule 5.3;
     Each component security shall be a reporting company under 
the Act, which is listed on a national securities exchange or is traded 
through the facilities of a national securities system and is subject 
to last sale reporting; and
     Foreign country securities or American Depository Receipts 
(``ADRs'') that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index.
    As described above in the Section entitled ``Criteria for 
Underlying Indexes,'' all Underlying Indexes are required to have at 
least ten (10) component securities.
    The proposed continued listing criteria set forth in proposed PCXE 
Rule 5.2(j)(6)(h) regarding the underlying components of an Underlying 
Index provides that the Exchange will commence delisting or removal 
proceedings of an Index Security (unless the Commission has approved 
the continued trading of the Index Security) if any of the standards 
set forth in the initial eligibility criteria of proposed PCXE Rule 
5.2(j)(6)(g)(2) are not continuously maintained, except that:
     The criteria that no single component represent more than 
25% of the weight of the index and the five highest weighted components 
in the index can not represent more than 50% (or 60% for indexes with 
less than 25 components) of the weight of the Index, need only be 
satisfied for capitalization weighted and price weighted indexes as of 
the first day of January and July in each year;
     The total number of components in the index may not 
increase or decrease by more than 33\1/3\% from the number of 
components in the index at the time of its initial listing, and in no 
event may be less than ten (10) components;
     The trading volume of each component security in the index 
must be at least 500,000 shares for each of the last six months, except 
that for each of the lowest weighted components in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
trading volume must be at least 400,000 shares for each of the last six 
months; and
     In a capitalization-weighted or modified capitalization 
weighted index, the lesser of the five highest weighted component 
securities in the index or the highest weighted component securities in 
the index that in the aggregate represent at least 30% of the total 
number of stocks in the index have had an average monthly trading 
volume of at least 1,000,000 shares over the previous six months.
    In connection with an Index Security that is listed pursuant to 
proposed PCXE Rule 5.2(j)(6)(g)(1), the Exchange will commence 
delisting or removal proceedings (unless the Commission has approved 
the continued trading of the Index Security) if an underlying index or 
indexes fails to satisfy the maintenance standards or conditions for 
such index or indexes as set forth by the Commission in its order under 
section 19(b)(2) of the Act \25\ approving the index or indexes for the 
trading of options or other derivatives.
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    \25\ 15 U.S.C. 78s(b)(2).
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    As set forth in proposed PCXE Rule 5.2(j)(6)(h)(3), the Exchange 
will also commence delisting or removal proceedings of an Index 
Security (unless the Commission has approved the continued trading of 
the Index Security), under any of the following circumstances:
     If the aggregate market value or the principal amount of 
the securities publicly held is less than $400,000;
     If the value of the Underlying Index or composite value of 
the Underlying Index is no longer calculated and widely disseminated on 
at least a 15-second basis; or
     If such other event shall occur or condition exists which 
in the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    The Exchange represents that Index Securities traded, whether by 
listing or pursuant to UTP, on the Exchange will be required to be in 
compliance with Rule 10A-3 under the Act.\26\
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    \26\ See 17 CFR 240.10A-3(c)(7).

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[[Page 46563]]

Exchange Rules Applicable to Index-Linked Securities
    Index Securities will be treated as equity instruments and will be 
subject to all Exchange rules governing the trading of equity 
securities, including, among others, rules governing priority, parity 
and precedence of orders, market volatility related trading halt 
provisions pursuant to PCXE Rule 7.12. Exchange equity margin rules and 
the regular trading hours set forth in PCXE Rule 7.34 will apply to 
transactions in Index-Linked Securities.
Information Circular
    In addition, upon evaluating the nature and complexity of each 
Index Security, the Exchange represents that it will prepare and 
distribute, if appropriate, an Information Circular to Equities Trading 
Permit (``ETP'') Holders describing the product. Accordingly, the 
particular structure and corresponding risk of an Index Security traded 
on the Exchange will be highlighted and disclosed.\27\ In particular, 
the circular will set forth the Exchange's suitability rule that 
requires ETP Holders recommending a transaction in Index Securities: 
(1) To determine that such transaction is suitable for the customer 
(PCXE Rule 9.2) and (2) to have a reasonable basis for believing that 
the customer can evaluate the special characteristics of, and is able 
to bear the financial risks of such transaction.
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    \27\ The Exchange notes that ETP Holders conducting a public 
securities business are subject to the rules and regulations of the 
National Association of Securities Dealers, Inc. (``NASD''), 
including NASD Rule 2310(a) and (b). Accordingly, NASD Notice to 
Members 03-71 regarding non-conventional investments or ``NCIs'' 
applies to ETP Holders recommending/selling index-linked securities 
to public customers. This Notice specifically reminds members in 
connection with NCIs (such as index-linked securities) of their 
obligations to: (1) Conduct adequate due diligence to understand the 
features of the product; (2) perform a reasonable-basis suitability 
analysis; (3) perform customer-specific suitability analysis in 
connection with any recommended transactions; (4) provide a balanced 
disclosure of both the risks and rewards associated with the 
particular product, especially when selling to retail investors; (5) 
implement appropriate internal controls; and (6) train registered 
persons regarding the features, risk and suitability of these 
products.
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Surveillance
    The Exchange will closely monitor activity in Index Securities to 
identify and deter any potential improper trading activity in Index 
Securities. Additionally, the Exchange represents that its surveillance 
procedures are adequate to properly monitor the trading of Index 
Securities. Specifically, the Exchange will rely on its existing 
surveillance procedures governing equities, options and exchange-traded 
funds, which have been deemed adequate under the Act. The Exchange has 
developed procedures to closely monitor activity in the Index Security 
and related Underlying Securities to identify and deter potential 
improper trading activity. Proposed PCXE Rule 5.2(j)(6)(j) provides 
that the Exchange will implement written surveillance procedures for 
Index Securities.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees. As detailed above 
in the description of the generic standards, if the issuer or a broker-
dealer is responsible for maintaining (or has a role in maintaining) 
the Underlying Index, such issuer or broker-dealer is required to erect 
and maintain a ``firewall'' in a form satisfactory to the Exchange, in 
order to prevent the flow of information regarding the Underlying Index 
from the index production personnel to sales and trading personnel. In 
addition, the Exchange will require that calculation of Underlying 
Indexes be performed by an independent third party who is not a broker-
dealer.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\28\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\29\ in particular in that it 
is designed to 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 mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on the proposed rule change 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. 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-PCX-2005-63 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-63. 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 such 
filing also will be available for inspection and copying at the 
principal offices of the Exchange. 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-PCX-2005-63 and should be submitted on or before August 
31, 2005.

IV. Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with section 6(b) of the Act 
\30\ and the

[[Page 46564]]

rules and regulations thereunder applicable to a national securities 
exchange.\31\ In particular, the Commission believes that the proposal 
furthers the objectives of section 6(b)(5) of the Act \32\ in that it 
is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments and 
perfect the mechanisms of a free and open market and to protect 
investors and the public interest.
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    \30\ 15 U.S.C. 78f(b).
    \31\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
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    The Commission has previously approved the listing and trading of 
several Index Securities based on a variety of debt structures and 
market indexes.\33\ The Commission has also approved, pursuant to Rule 
19b-4(e) under the Act,\34\ generic listing standards for these 
securities proposed by the AMEX that, in all material respects, are 
identical to those proposed by PCX.\35\
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    \33\ See Securities Exchange Act Release Nos. 41091 (February 
23, 1999), 64 FR 10515 (March 4, 1999) (Narrow-Based Index Options); 
42787 (May 15, 2000), 65 FR 33598 (May 24, 2000) (ETFs); and 43396 
(September 29, 2000), 65 FR 60230 (October 10, 2000) (TIRs).
    \34\ 17 CFR 240.19b-4(e).
    \35\ See supra note 6.
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    Consistent with its previous orders, the Commission believes that 
generic listing standards proposed by PCX for Index Securities should 
fulfill the intended objective of Rule 19b-4(e) by allowing those Index 
Securities that satisfy the generic listing standards to commence 
trading without public comment and Commission approval.\36\ This has 
the potential to reduce the time frame for bringing Index Securities to 
market and thereby reduce the burdens on issuers and other market 
participants. Further, the Exchange's ability to rely on Rule 19b-4(e) 
for Index Securities potentially reduces the time frame for listing and 
trading these securities, and thus enhances investors' opportunities. 
The Commission notes that it maintains regulatory oversight over any 
products listed pursuant to generic listing standards through regular 
inspection oversight.
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    \36\ The Commission notes that the failure of a particular index 
to comply with the proposed generic listing standards under Rule 
19b-4(e), however, would not preclude the Exchange from submitting a 
separate filing pursuant to Section 19(b)(2), requesting Commission 
approval to list and trade a particular index-linked product.
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A. Trading of Index Securities

    Taken together, the Commission finds that the PCX proposal contains 
adequate rules and procedures to govern the trading of Index Securities 
listed pursuant to Rule 19b-4(e) on the Exchange or traded pursuant to 
unlisted trading privileges. All Index Security products listed under 
the standards will be subject to the full panoply of PCX rules and 
procedures that now govern the trading of Index Securities and the 
trading of equity securities on the PCX, including among others, rules 
and procedures governing trading halts, disclosures to members, 
responsibilities of the specialist, account opening and customer 
suitability requirements, the election of a stop or limit order, and 
margin.
    PCX has proposed asset/equity requirements and tangible net worth 
for each Index Security issuer, as well as minimum distribution, 
principal/market value, and term thresholds for each issuance of Index 
Securities. As set forth more fully above, PCX's proposed listing 
criteria include minimum market capitalization, monthly trading volume, 
and relative weighting requirements for the Index Securities. These 
requirements are designed to ensure that the trading markets for index 
components underlying Index Securities are adequately capitalized and 
sufficiently liquid, and that no one stock dominates the index. The 
Commission believes that these requirements should significantly 
minimize the potential for of manipulation. The Commission also finds 
that the requirement that each component security underlying an Index 
Security be listed on a national securities exchange or traded through 
the facilities of a national securities system and subject to last sale 
reporting will contribute significantly to the transparency of the 
market for Index Securities. Alternatively, if the index component 
securities are foreign securities that are not reporting companies, the 
generic listing standards permit listing of an Index Security if the 
Commission previously approved the underlying index for trading in 
connection with another derivative product and certain surveillance 
sharing arrangements exist with foreign markets. The Commission 
believes that if it has previously determined that such index and its 
components were sufficiently transparent, then the Exchange may rely on 
this finding, provided it has comparable surveillance sharing 
arrangements with the foreign market that the Commission relied on in 
approving the previous product.
    The Commission believes that by requiring pricing information for 
both the relevant underlying index or indexes and the Index Security to 
be readily available and disseminated, the proposed listing standards 
should help ensure a fair and orderly market for Index Securities 
approved pursuant to PCXE Rule 5.2(j)(6).
    The Commission also believes that the requirement that at least 90 
percent of the component securities, by weight, and 80 percent of the 
total number of Underlying Securities, be eligible individually for 
options trading will prevent an Index Security from being a vehicle for 
trading options on a security not otherwise options eligible.
    The Exchange has also developed delisting criteria that will permit 
PCX to suspend trading of an Index Security in case of circumstances 
that make further dealings in the product inadvisable. The Commission 
believes that the delisting criteria will help ensure a minimum level 
of liquidity exists for each Index Security to allow for the 
maintenance of fair and orderly markets. Also, the Exchange will 
commence delisting proceedings in the event that the value of the 
underlying index or index is no longer calculated and widely 
disseminated on at least a 15-second basis.

B. Surveillance

    The Exchange must surveil trading in any products listed under the 
generic listing standards. In that regard, the Commission believes that 
a surveillance sharing agreement between an Exchange proposing to list 
a stock index derivative product and the exchange(s) trading the stocks 
underlying the derivative product is an important measure for 
surveillance of the derivative and underlying securities markets. When 
a new derivative securities product based upon domestic securities is 
listed and traded on an exchange pursuant to Rule 19b-4(e) under the 
Act, the exchange should determine that the markets upon which all of 
the U.S. component securities trade are members of the Intermarket 
Surveillance Group (``ISG''), which provides information relevant to 
the surveillance of the trading of securities on other market 
centers.\37\ For new derivative securities products based on securities 
from one or more foreign markets, the exchange should have a 
comprehensive Intermarket Surveillance Agreement that covers the 
securities underlying the new securities

[[Page 46565]]

product.\38\ Accordingly, with respect to indexes not previously 
approved by the Commission, the Commission finds that PCX's commitment 
to implement comprehensive surveillance sharing agreements,\39\ as 
necessary, and the definitive requirements that (i) each component 
security shall be a registered reporting company under the Act and (ii) 
no more than 20 percent of the weight of the Underlying Index or 
Underlying Indexes may be comprised of foreign country securities or 
ADRs not subject to a comprehensive surveillance sharing agreement,\40\ 
will make possible adequate surveillance of trading of Index Securities 
listed pursuant to the proposed generic listing standards.
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    \37\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98). ISG was 
formed on July 14, 1983, to, among other things, coordinate more 
effectively surveillance and investigative information sharing 
arrangements in the stock and options markets. The Commission notes 
that all of the registered national securities exchanges, including 
the ISE, as well as the NASD, are members of the ISG.
    \38\ See id.
    \39\ Proposed PCXE Rule 5.2(j)(6)(j).
    \40\ Proposed PCXE Rule 5.2(j)(6)(g)(vii).
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    With regard to actual oversight, PCX represents that its 
surveillance procedures are sufficient to detect fraudulent trading 
among members in the trading of Index Securities pursuant to proposed 
PCXE Rule 5.2(j)(6).

C. Acceleration

    The Commission finds good cause for approving proposed rule change, 
as amended, prior to the 30th day after the date of publication of 
notice of filing thereof in the Federal Register. The proposal 
implements generic listing standards substantially identical to those 
already approved for the Amex. The Commission does not believe that the 
Exchange's proposal raises any novel regulatory issues. The proposed 
generic listing criteria should enable more expeditious review and 
listing of Index Securities by PCX, thereby reducing administrative 
burdens and benefiting the investing public. Thus, the Commission finds 
good cause to accelerate approval of the proposed rule change, as 
amended.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-PCX-2005-63), as amended, is 
hereby approved on an accelerated basis.
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    \41\ 15 U.S.C. 78s(b)(2).
    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\42\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-4326 Filed 8-9-05; 8:45 am]
BILLING CODE 8010-01-P