[Federal Register Volume 70, Number 157 (Tuesday, August 16, 2005)]
[Notices]
[Pages 48222-48224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52221; File No. SR-PCX-2005-74]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
and Amendment No. 1 Thereto To Trade Shares of Certain Vanguard 
International Equity Index Funds Pursuant to Unlisted Trading 
Privileges

August 8, 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 June 22, 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 substantially prepared by the Exchange. 
PCX amended the proposed rule change on July 28, 2005.\3\ The 
Commission is publishing this notice and order to solicit comments on 
the proposal, as amended, from interested persons and to approve the 
proposal, as amended, 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 modified the trading hours 
in which it proposes to trade these exchange traded funds.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly owned subsidiary PCXE, proposes to 
trade shares of the following exchange traded funds (``ETFs'') based on 
three Vanguard International Equity Indices pursuant to unlisted 
trading privileges (``UTP'') based on PCXE Rule 5.5(j)(3):
     Morgan Stanley Capital International Inc. (``MSCI'') 
Europe Index (ticker symbol: VGK)
     MSCI Pacific Index (ticker symbol: VPL); and
     MSCI Emerging Markets Select Index (ticker symbol: VWO).

    The text of the proposed rule change is available from the 
Exchange's Web site (http://www.pacificex.com), at the principal office 
of the Exchange, and at the Commission's Public Reference Room.

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
    The Exchange proposes to trade, pursuant to UTP, Vanguard Index 
Participation Equity Receipts, which are securities issued by the three 
funds (``VIPER Shares''). The MSCI Europe Index and the MSCI Pacific 
Index are market-capitalization-weighted indices that are designed to 
measure developed market equity performance in Europe and the Pacific 
region, respectively. Each MSCI country index is created separately and 
then aggregated, without change, into the larger regional index. The 
MSCI Europe Index is comprised of securities from 16 of 50 countries 
for which MSCI has indices.\4\ The MSCI Pacific Index is comprised of 
securities from 5 of the 50 countries for which MSCI has indices.\5\ 
The MSCI Emerging Markets Select Index is comprised of securities from 
18 of the 50 countries for which MSCI has indices.\6\ The Commission 
previously approved the original listing and trading of the VGK, VPL, 
and VWO on the American Stock Exchange (``Amex'').\7\
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    \4\ Currently, the MSCI Europe Index includes Austria, Belgium, 
Denmark, Finland, France, Germany, Greece, Ireland, Italy, the 
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the 
United Kingdom.
    \5\ Currently, the MSCI Pacific Index includes Australia, Hong 
Kong, Japan, New Zealand, and Singapore.
    \6\ Currently, the MSCI Emerging Markets Select Index includes 
Argentina, Brazil, Chile, China, Czech Republic, Hungary, India, 
Indonesia, Israel, Korea, Mexico, Peru, Philippines, Poland, South 
Africa, Taiwan, Thailand, and Turkey. This information on countries 
represented in the indices is current as of February 25, 2005. 
Telephone conversation between Tania J.C. Blanford, Staff Attorney, 
PCX, and Natasha Cowen, Attorney, Division of Market Regulation, 
Commission, on July 13, 2005.
    \7\ See Securities Exchange Act Release No. 50189 (August 12, 
2004), 69 FR 51723 (August 20, 2004) (SR-Amex-2004-05) (``Original 
Listing Order'').
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    The Exchange deems these VIPER Shares to be equity securities, thus 
rendering trading in these securities subject to the Exchange's 
existing rules governing the trading of equity securities. PCX will 
trade these ETFs during the hours that the Intraday Indicative Value 
(``IIV'') is disseminated.\8\
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    \8\ The IIV is the estimated net asset value, which is 
disseminated by Amex every 15 seconds throughout the trading day. 
The IIV is designed to give investors a sense of the relationship 
between a basket of securities that are representative of those 
owned in the ETF and the share price of the ETF on an intraday 
basis.
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    The Exchange understands that the listing exchange, Amex, will 
disseminate the following information for each ETF on a daily basis 
through the facilities of the Consolidated Tape Association (``CTA''): 
Recent net asset value (``NAV''), shares outstanding, and estimated 
cash amount and total cash amount per creation unit. In addition, the 
Exchange understands that Amex will make the following information 
available on its Web site: Daily trading volume, closing price, NAV, 
and final dividend amounts to be paid for each VIPER Share. The closing 
prices of the deposit securities are readily available from, as 
applicable, the relevant exchanges, automated quotation systems, 
published or other public sources in the relevant country, or on-line 
information services such as Bloomberg or Reuters. The exchange rate 
information required to convert such information into U.S. dollars is 
also readily available in newspapers and other publications and from a 
variety of on-line services.
    To provide updated information relating to each ETF for use by 
investors, professionals, and persons wishing to create or redeem the 
VIPER Shares, Amex disseminates through the facilities of the CTA: (1) 
continuously throughout the trading day, last sale information for each 
ETF; and (2) every 15 seconds throughout the trading a day, the 
estimated IIV of each ETF as calculated by a third party.
    The IIV may not reflect the value of all securities included in the 
applicable underlying index. In addition, the IIV does not necessarily 
reflect the precise composition of each index at a particular point in 
time. Therefore, the IIV on a per-share basis disseminated during 
Amex's regular trading hours should not be viewed as a real-time

[[Page 48223]]

update of the NAV of a particular fund, which is calculated only once a 
day. While the IIV disseminated by Amex at the start of the trading day 
is expected to be generally close to the value of the particular fund's 
holdings on a per-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. In such case, the IIV 
would not precisely reflect the value of the fund portfolio. The 
Exchange expects, however, that during the trading day, while the 
relevant foreign markets are open for trading, the IIV of a fund can be 
expected to closely approximate the value per share of the portfolio of 
securities for each fund, except under unusual circumstances.
    For the MSCI Pacific Index, there is no overlap in trading hours 
between the foreign markets and Amex. Therefore, for this fund, the IIV 
utilizes closing prices (in applicable foreign currency prices) in the 
principal foreign market for securities in the fund portfolio, and 
converts the price to U.S. dollars. Those values are updated every 15 
seconds during Amex trading hours to reflect changes in exchange rates 
between the U.S. dollar and the applicable foreign currency.
    The MSCI Europe Index and Emerging Markets Select Index, both of 
which include companies trading in markets with trading hours 
overlapping regular Amex trading hours, the third-party calculator 
updates the applicable IIV every 15 seconds to reflect price changes in 
the principal foreign market and converts such prices into U.S. dollars 
based on the current exchange rate. When the foreign market or markets 
are closed but Amex is open for trading, the IIV is updated every 15 
seconds to reflect changes in exchange rates after the foreign markets 
close.
    The Exchange represents that, if the MSCI ceases to maintain or to 
calculate the value of the index on a periodic basis or if the value of 
the index ceases to be widely available, the Exchange would cease 
trading these VIPER Shares.
    In connection with the trading of these three ETFs, PCX would 
inform its Equity Trading Permit (``ETP'') Holders in an Information 
Circular of the special characteristics and risks associated with 
trading these ETFs, including how the VIPER Shares are created and 
redeemed, the requirement that ETP Holders deliver a prospectus or 
product description to investors purchasing any of these ETFs prior to 
or concurrently with the confirmation of a transaction, applicable 
Exchange rules, how information about the value of the underlying index 
is disseminated, trading information, and the applicability of 
suitability rules. The Information Circular will also discuss any 
applicable exemptive, no-action, and interpretive relief granted by the 
Commission.
    Before an ETP Holder recommends a transaction in one of the 
proposed ETFs, the ETP Holder must determine that the ETF is suitable 
for the customer as set forth in PCXE Rule 9.2(a)-(b).
    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products to monitor trading in 
these ETFs. The Exchange believes that these procedures are adequate to 
monitor such trading.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \9\ in general and Section 6(b)(5) of the Act \10\ in 
particular 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. In addition, the 
Exchange believes that the proposal is consistent with Rule 12f-5 under 
the Act \11\ because it deems the VIPER Shares to be equity securities, 
thus rendering trading in the VIPER Shares subject to the Exchange's 
existing rules governing the trading of equity securities.
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    \9\ 9 15 U.S.C. 78s(b).
    \10\ 15 U.S.C. 78s(b)(5).
    \11\ 17 CFR 240.12f-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 would 
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-2005-74 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-2005-74. 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-2005-74 and should be submitted on or before 
September 6, 2005.

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

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the

[[Page 48224]]

Act,\13\ which requires that an exchange have rules designed, among 
other things, to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and in general to protect 
investors and the public interest. The Commission believes that this 
proposal will benefit investors by increasing competition among markets 
that trade VGK, VPL, and VWO.
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    \12\ In approving this rule change, as amended, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission believes that the proposal is 
consistent with Section 12(f) of the Act,\14\ which permits an exchange 
to trade, pursuant to UTP, a security that is listed and registered on 
another exchange.\15\ The Commission notes that it previously approved 
the listing and trading of these three ETFs on Amex.\16\ The Commission 
also believes that the proposal is consistent with Rule 12f-5 under the 
Act,\17\ which provides that an exchange shall not extend UTP to a 
security unless the exchange has in effect a rule or rules providing 
for transactions in the class or type of security to which the exchange 
extends UTP. The Exchange has represented that it meets this 
requirement because it deems these VIPER Shares to be equity 
securities, thus rendering trading in these VIPER Shares subject to the 
Exchange's existing rules governing the trading of equity securities.
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    \14\ 15 U.S.C. 78l(f).
    \15\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally 
prohibits a broker-dealer from trading a security on a national 
securities exchange unless the security is registered on that 
exchange pursuant to Section 12 of the Act. Section 12(f) of the Act 
excludes from this restriction trading in any security to which an 
exchange ``extends UTP.'' When an exchange extends UTP to a 
security, it allows its members to trade the security as if it were 
listed and registered on the exchange even though it is not so 
listed and registered.
    \16\ See Original Listing Order, supra note 7.
    \17\ 17 CFR 240.12f-5.
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    The Commission further believes that the proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\18\ which sets forth 
Congress's finding that it is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure the availability to brokers, dealers, and investors 
of information with respect to quotations for and transactions in 
securities. Quotations for and last sale information regarding these 
ETFs are disseminated through the facilities of the CTA. Furthermore, 
Amex disseminates the estimated IIV of each ETF every 15 seconds 
throughout the trading day. The Exchange represents that if MSCI ceases 
to maintain or to calculate the value of an index or if the value of an 
index ceases to be widely available, it would cease trading an ETF 
based on the index.
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    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Finally, the Commission notes that, if any of these ETFs should be 
delisted by Amex, the original listing exchange, PCX would no longer 
have authority to trade the ETF pursuant to this order.
    In support of this proposal, the Exchange has made the following 
representations:
    1. PCX surveillance procedures are adequate to properly monitor the 
trading of these ETFs on a UTP basis.
    2. Prior to the commencement of trading of these ETFs on the 
Exchange, PCX will distribute an information circular to its members 
explaining the terms, characteristics, and risks of trading these ETFs.
    3. PCX will require an ETP Holder with a customer that purchases 
shares of any of these ETFs on the Exchange to provide that customer 
with a product prospectus and will note this prospectus delivery 
requirement in the information circular.

This approval order is conditioned on PCX's adherence to these 
representations.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. As noted previously, the Commission previously found 
that the listing and trading of these three ETFs on Amex to be 
consistent with the Act.\19\ The Commission presently is not aware of 
any issue that should cause it to revisit that earlier finding or 
preclude the trading of these ETFs on PCX pursuant to UTP. Therefore, 
accelerating approval of this proposal should benefit investors by 
creating, without undue delay, additional competition in the market for 
these ETFs.
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    \19\ See Original Listing Order, supra note 7.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-PCX-2005-74), as amended, is 
hereby approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4420 Filed 8-15-05; 8:45 am]
BILLING CODE 8010-01-P