[Federal Register Volume 65, Number 240 (Wednesday, December 13, 2000)]
[Notices]
[Pages 77949-77952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31679]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43679; File No. SR-NYSE-00-46]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change by the New York
Stock Exchange, Inc. Regarding the Listing and Trading of Exchange
Traded Funds
December 5, 2000.
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 November 21, 2000, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
Amendment No. 1 was filed on December 5, 2000.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
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 made several technical
corrections to the rule text and clarified that the Exchange will
issue a circular to members highlighting the characteristics of
purchases in ICUs, prior to the commencement of trading in ICUs. See
Letter to Nancy J. Sanow, Assistant Director, Division of Market
Regulation, Commission from James E. Buck, Corporate Secretary, NYSE
dated December 5, 2000 (received by facsimile) (``Amendment No.
1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is amending certain rules and adopting other rules
relative to listing and trading of investment company units (``ICUs''),
also known as exchange traded funds. The text of the proposed rule
change is available at the Office of the Secretary, the Exchange or the
Commission.
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 and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange has rules in Section 703.16, Investment Company Units,
of the Listed Company Manual (``LCM'') related to the listing of
ICUs.\4\ Subsequent to the adoption of those rules, the Commission
determined to allow the adoption of ``generic'' listing standards that
permit listing and trading of new derivative products pursuant to Rule
19b-4(e) under the Act.\5\ The Exchange is proposing to amend its
listing standards in Section 703.16 of the LCM to adopt generic
standards to permit the trading of ICUs pursuant to Rule 19b-4(e).
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\4\ See Securities Exchange Act Release No. 36923 (March 5,
1996), 61 FR 10410 (March 13, 1996).
\5\ 17 CFR 240.19b-4(e). Rule 19b-4(e) permits self-regulatory
organizations (``SROs'') to list and trade new derivatives products
that comply with existing SRO trading rules, procedures,
surveillance programs and listing standards, without submitting a
proposed rule change under Section 19(b). See Securities Exchange
Act Release No. 40761 (December 8, 1998), 63 FR 70952 (December 22,
1998).
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The Exchange's proposed generic listing criteria are intended to
ensure that a substantial portion of the weight of an index or
portfolio underlying an ICU is composed of securities with substantial
market capitalization and trading volume. Under the proposal, the
Exchange may approve a series of ICUs for listing or trading pursuant
to Rule 19b-4(e) under the following criteria. Upon the initial listing
of a series of ICUs, component stocks accounting for at least 90% of
the weight of the underlying index or portfolio have a minimum market
value of at least $75 million. In addition, the component stocks
representing at least 90% of the weight of the index or portfolio must
have a minimum monthly trading volume during each of the last six
months of at least 250,000 shares.
Under the Exchange's proposed generic listing standard, the most
heavily weighted component stock in an underlying index or portfolio
cannot exceed 25% of the weight of the index or portfolio, and the five
most heavily weighted component stocks cannot together exceed 65% of
the weight of the index or portfolio. The index or portfolio must
include a minimum of 13 stocks, and all securities in an underlying
index or portfolio must be listed on a national securities exchange or
The Nasdaq Stock Market (including The Nasdaq SmallCap Market).
To comply with generic listing standards, the Exchange proposed
that the underlying index or portfolio must be calculated based on
either the market capitalization, modified market capitalization,
price, equal-dollar or modified equal-dollar weighting methodology. In
addition, if the index is maintained by a broker-dealer, the broker-
dealer must erect a ``fire-wall'' around the personnel who have access
to information concerning changes and adjustments to the index or
portfolio, and the index must be calculated by a third party who is not
a broker-dealer.
The proposed generic listing standards specify that the current
index value must be disseminated every 15 seconds over the consolidated
tape, as well as an estimate of the net asset value per share of the
ICU. A minimum of 100,000 shares of an ICU must be outstanding at the
time trading begins. The minimum trading variation for an ICU will be
\1/16\, \1/32\ or \1/64\ of $1.00, as determined by the Exchange for a
specific series. The Exchange will shortly move to decimals, after
which the minimum trading variation for an ICU is expected to be the
same as for other stocks generally on the Exchange, which is one penny.
The Exchange will implement written surveillance procedures for the
ICUs that it trades pursuant to the generic listing standards. In
addition, the Exchange will comply with the record-keeping requirements
of Rule 19b-4(e), and will file Form 19b-4(e) for each ICU within five
business days of commencement of trading.
[[Page 77950]]
Outside of the proposed generic listing standards, the rules will
specify that a fund will be required to have such number of units
outstanding on listing as determined by the Exchange in connection with
the specific fund. ICUs will also be permitted to be in book-entry-only
format, without certificates, to bring them in line not only with ICUs
listed on other marketplaces, but with ordinary open-end mutual funds
as well.
In addition to the proposed generic rules, the Exemption is
proposing other ICU rules under proposed NYSE Rule 1100. A discreet
section in the rulebook will centralize certain ICU-related rules and
provide cross references to other related rules. Under proposed NYSE
Rule 1100, specific limitations of liability are provided to protect
the Exchange, index proprietors, calculators and vendors. The proposed
rules also state that there are no express or implied warranties with
respect to ICUs. These provisions are based on similar provisions
already contained in the rules of the Exchange regarding other similar
activities, such as those that were enacted a number of years ago in
connection with Exchange trading in standardized options and Exchange
Stock Baskets.\6\
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\6\ See NYSE Rule 702(b) and Rule 814.
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Furthermore, prior to the commencement of trading in ICUs, the
Exchange will issue a circular to members highlighting the
characteristics of purchases in ICUs.\7\ The circular will discuss the
special characteristics and risks of trading this type of security.
Specifically, the circular, among other issues, will discuss what ICUs
are, how they are created and redeemed, the requirement that members
and member firms deliver a prospectus to investors purchasing ICUs
prior to or concurrently with the confirmation of a transaction,
applicable Exchange Rules, dissemination information, trading
information, and the applicability of suitability rules.\8\
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\7\ See supra note 3.
\8\ Id.
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The Exchange also will require its members to provide all
purchasers of newly issued ICUs with a prospectus. For those ICUs that
will be in continuous distribution, the prospectus delivery
requirements of the Securities Act of 1993 \9\ applies to all investors
in ICUs, including secondary market purchases on the Exchange in ICUs.
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\9\ 15 U.S.C. 77a, et seq.
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With respect to series of ICUs that are the subject of an order by
the Commission exempting such series from certain prospectus delivery
requirements under section 24(d) of the Investment Company Act of
1940,\10\ the proposal provides that the Exchange will inform members
and member organizations regarding disclosure obligations with respect
to a particular series of ICUs by means of an Information Circular
prior to commencement of trading in such series.
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\10\ 15 U.S.C. 80a-24(d).
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The proposal provides that the Exchange will require that members
and members organizations provide to all purchasers of a series of ICUs
a written description of the terms and characteristics of such
securities, in a form prepared or approved by the Exchange, not later
than the time a confirmation of the first transaction in such series is
delivered to such purchaser. In addition, members and member
organizations shall include such a written description with any sales
material relating to a series of ICUs that is provided to customers or
the public. Any other written materials provided by a member or member
organization to customers or the public making specific reference to a
series of ICUs as an investment vehicle must include a statement in
substantially the following form: ``A circular describing the terms and
characteristics of [the series of Investment Company Units] has been
prepared or approved by the New York Stock Exchange and is available
from your broker or the Exchange. It is recommended that you obtain and
review such circular before purchasing [the series of Investment
Company Units]. In addition, upon request you may obtain from your
broker a prospectus for [the series of Investment Company Units].''
A member or member organizations carrying an omnibus account for a
non-member broker-dealer is required to inform such non-member that
execution of an order to purchase a series of ICUs for such omnibus
account will be deemed to constitute agreement by the non-member to
make such written description available to its customers on the same
terms as are directly applicable to members and member organizations
under this rule.
Upon request of a customer, a member or member organization shall
also provide a prospectus for the particular series of ICUs.
The Exchange also proposes to retain the authority to prescribe
trading hours that extend until 4:15 p.m. for particular ICUs. This
will be done in all probability only for those ICUs that are based on
indexes that are also the subject of a futures contract. In those cases
the Exchange believes it is appropriate to match the trading hours of
the related futures contract.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6 of the act \11\ in general and furthers the objectives
of section 6(b)(5) of the Act \12\ in particular in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in 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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\11\ 15 U.S.C. 78f(b).
\12\ 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0609.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any persons, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
above-mentioned self-regulatory organization. All submissions should
refer to File No.
[[Page 77951]]
SR-NYSE-00-46 and should be submitted by January 3, 2001.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
After careful consideration, 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, and, in particular, with the requirements of
section 6(b)(5) of the Act.\13\ The Commission believes that the
Exchange's proposal to amend its rules relative to the listing and
trading of ICUs will provide investors with a convenient and efficient
way of participating in the securities markets. The Exchange's proposal
should also provide investors with increased flexibility in satisfying
their investment needs by allowing them to purchase and sell a single
security, at negotiated prices throughout the business day that
replicates the performance of an index or a portfolio of stocks. In
addition, the Commission finds that the Exchange's proposal to
establish generic standards to permit the trading of ICUs pursuant to
Rule 19b-4(e) furthers the intent of that rule by facilitating
commencement of trading in these securities without the need for notice
and comment and Commission approval under Section 19(b) of the act.
Thus, by establishing generic standards, the proposal should reduce the
Exchange's regulatory burden, as well as benefit the public interest,
by enabling the Exchange to bring qualifying products to the market
more quickly.\14\ Accordingly, as discussed below, the Commission finds
that the Exchange's proposal will promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, and, in general, protect
investors and the public interest consistent with section 6(b)(5) of
the Act.\15\
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\13\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\14\ The Commission notes that while the proposal reduces the
Exchange's regulatory burden, the Commission maintains regulatory
oversight over any products listed under the generic standards
through regular inspection oversight.
\15\ 15 U.S.C. 78f(b)(5).
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In general, ICUs represent an interest in a registered investment
company that could be organized as a unit investment trust, an open-end
management investment company, or similar entity. ICUs represent
interests in a registered investment company that typically holds
security which comprise or are otherwise based on or represent an
investment in an index or portfolio. Each ICU is intended to provide
investors with an instrument that closely tracks the underlying
securities index or portfolio, that trades like a share of common
stock, and that pays holders a periodic cash payment proportionate to
the dividends paid, on the underlying portfolio of securities, less
certain expenses, as described in the applicable prospectus. As noted
above, the Commission has previously approved NYSE Section 703.16,
Investment Company Units, of the LCM that permit the listing and
trading of ICUs.\16\ In approving these securities for trading, the
Commission considered the structure of these securities, their
usefulness to investors and to the markets, and the NYSE rules that
govern their trading.
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\16\ See supra note 4.
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The Commission previously concluded that ICUs trading under the
existing Exchange rules would 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;
and (3) reduce transactions costs for trading a portfolio of
securities.\17\ The Commission believes, for the reasons set forth
below, that the product classes that satisfy the proposed additional
listing standards and the proposed generic listing standards for ICUs,
in proposed NYSE Rule 1100 and Section 703.16 of the LCM, should
produce the same benefits to investors.
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\17\ See supra note 4.
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The Commission notes that certain concerns are raised when a
broker-dealer is involved in both the development and maintenance of a
stock index upon which an ICU is based. The proposal requires that, in
such circumstances, the broker-dealer must have procedures in place to
prevent the misuse of material, non-public information regarding
changes and adjustments to the index and that the index value be
calculated by a third party who is not a broker-dealer. The Commission
believes that these requirements should help address concerns raised by
a broker-dealer's involvement in the management of such an index.
The Commission believes that the Exchange's proposal will ensure
that investors have information that will allow them to be adequately
apprised of the terms, characteristics, and risks of trading ICUs. ICUs
listed under the generic standards will be subject to a prospectus
delivery requirement or, for series that have been granted relief from
the prospectus delivery requirements of the Investment Company Act of
1940,\18\ a product description delivery requirement. The requirement
extends 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. Finally, a
member or member organization must deliver a prospectus to a customer
upon request.
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\18\ 15 U.S.C. 80a-1, et seq.
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The Commission also notes that upon the initial listing, or trading
of ICUs, the Exchange will issue a circular to its members explaining
the unique characteristics and risks of this particular type of
security. The circular also will note the Exchange members' prospectus
or product description delivery requirements, and highlight the
characteristics of purchases of ICUs. The circular also will inform
members of their responsibilities under the Exchange's rules in
connection with customer transactions in these securities. The
Commission believes that these requirements ensure adequate disclosure
to investor about the terms and characteristics of a particular series
and is consistent with section 6(b)(5) of the Act.\19\
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\19\ 15 U.S.C. 78f(b)(5).
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The proposal also provides that the Exchange can prescribe that the
trading hours for a particular ICU extend until 4:15 p.m.; ICUs be
entered in book-entry-only format; and the Exchange can determine the
number of units required to be outstanding on listing a specific ICU.
The Commission believes each of these requirements afford investors
flexibility in satisfying their investment needs in purchasing and
selling ICUs, while providing for a fair and orderly market. Further,
the proposal would establish certain limitations related to liability
and warranties. The Commission believes that such provisions are
reasonable and foster cooperation and coordination in facilitating
transactions in securities.
Rule 19b-4(e) provides that the listing and trading of a new
derivative securities product by an SRO shall not be deemed a proposed
rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if the
Commission has approved, pursuant to Section 19(b) of the Act, the
SRO's trading rules, procedures and listing standards for the product
class
[[Page 77952]]
that include the new derivative securities product and the SRO has a
surveillance program for the product class.\20\ The Commission believes
that the NYSE' proposal contains adequate rules and procedures to
govern the trading of ICUs under Rule 19b-4(e).
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\20\ See Securities Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998).
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All series of ICUs listed under the generic standards will be
subject to the full panoply of NYSE rules and procedures that now
govern the trading of existing ICUs on the Exchange. In addition, the
Exchange has established that upon initial listing, component stocks
that in the aggregate account for at least 90% of the weight of the
index or portfolio must have a minimum market value of at least $75
million. Further the component stocks in the index must have a minimum
monthly trading volume during each of the last six months of at least
250,000 shares for stocks representing at least 90% of the weight of
the index or portfolio. The most heavily weighted component stock
cannot exceed 25% 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 index or portfolio must include a
minimum of 13 stocks, and all securities in an underlying index or
portfolio must be listed on a national securities exchange or the
Nasdaq Stock Market.
Moreover, any series seeking to list under the generic standards
must meet these eligibility criteria as of the date of the initial
deposit of securities and cash into the trust or fund. The Commission
believes that these criteria should serve to ensure that the underlying
securities of these indexes and portfolios are well capitalized and
actively traded, which will help to ensure that U.S. securities markets
are not adversely affected by the listing and trading of new series of
ICUs under Rule 19b-4(e). These listing criteria also will make certain
that new ICUs do not contain features that are likely to impact
adversely the U.S. securities markets.
In addition, the Exchange has developed specific listing criteria
for ICUs qualifying for Rule 19b-4(e) treatment that will help to
ensure that a minimum level of liquidity will exist to allow for the
maintenance of fair and orderly markets. Specifically, the proposed
generic listing standards require that a minimum of 100,000 shares of
ICUs are outstanding as of the start of trading. The Commission
believes that this minimum number of securities is sufficient to
establish a liquid Exchange market at the commencement of trading.
In addition, as previously noted, all series of ICUs listed or
traded under the generic standards will be subject to the Exchange's
existing continuing listing criteria under Section 703.16 of the LCM.
This requirement allows the Exchange to consider the suspension of
trading and the delisting of a series if an event occurs that makes
further dealings in such securities inadvisable. The Commission
believes that this will give the Exchange flexibility to delist ICUs if
circumstances warrant such action.
Furthermore, the Commission finds that the Exchange's proposal to
trade ICUs in minimum fractional increments of \1/16\, \1/32\, or \1/
64\ of $1.00 is consistent with the Act. The Commission believes that
such trading should enhance market liquidity, and should promote more
accurate pricing, tighter quotations, and reduced price fluctuations,
all of which benefit the investor. The Commission also believes that
such trading should allow customers to receive the best possible
execution of their transactions in ICUs, thereby protecting customers
and the public interest consistent with section 6(b)(5) of the Act.\21\
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\21\ 15 U.S.C. 78f(b)(5).
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The Exchange represents that the current underlying index value as
well as an estimate of the value per share of the ICU will be
disseminated over the consolidated tape every 15 seconds. The
Commission believes that the information the Exchange proposes to have
disseminated will provide investors with timely and useful information
concerning the value of each series.
The Exchange has developed surveillance procedures for the ICUs
listed under the generic standards that incorporate and rely upon
existing surveillance procedures governing ICUs and equities. The
Commission believes that these surveillance procedures are adequate to
address concerns associated with listing and trading ICUs under the
generic standards. The Exchange further represents that it will file
Form 19b-4(e) with the Commission within five business days of
commencement of trading a series under the generic standards, and will
comply with all Rule 19b-4(e) record keeping requirements. Accordingly,
the Commission believes that the rules governing the trading of such
securities provide adequate safeguards to prevent manipulative acts and
practices and to protect investors and the public interest, consistent
with section 6(b)(5) of the Act.\22\
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\22\ 15 U.S.C. 78f(b)(5).
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The Commission finds good cause for approving the proposed rule
change, as amended, prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register pursuant to
section 19(b)(2) of the Act. The Commission notes that the proposed
rule change is based on the listing standards of several other
exchanges, which the Commission previously approved after soliciting
public comment on the proposals pursuant to section 19(b) of the
Act.\23\ The Commission does not believe that the proposed rule change
raises novel regulatory issues that were not addressed in the other
filings. Accordingly, the Commission believes it is appropriate to
permit investors to benefit from the flexibility afforded by these new
instruments by trading them as soon as possible. Accordingly, the
Commission finds that there is good cause, consistent with section
6(b)(5) of the Act,\24\ to approve the proposal, as amended, on an
accelerated basis.
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\23\ See e.g., Securities Exchange Act Release No. 42787 (May
15, 2000), 65 FR 33598 (May 24, 2000) (approval of American Stock
Exchange generic listing standards).
\24\ 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,\25\ that the proposed rule change (SR-NYSE-00-46), is hereby
approved on an accelerated basis.
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\25\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland
Deputy Secretary
[FR Doc. 00-31679 Filed 12-11-00; 8:45 am]
BILLING CODE 8010-01-M