[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Notices]
[Pages 56008-56012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41983; International Series Release No. 1206; File No.
SR-PCX-98-29]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Approving Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 1 to Proposed Rule Change
Relating to the Listing and Trading of Investment Company Units,
Including World Equity Benchmark Shares (``WEBS'')
October 6, 1999.
I. Introduction
On June 18, 1998, the Pacific Exchange, Inc. (``Exchange'' or
``PCX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt rules governing the listing and trading
of Investment Company Units, including World Equity Benchmark Shares''
(``WEBS TM'').\3\ The proposed rule change was published for
comment in the Federal Register on November 3, 1998.\4\ The Commission
did not receive any comments on the proposal. The Exchange submitted
Amendment No. 1 to the proposal on May 13, 1999.\5\ This order approves
the amended proposed rule change and accelerates approval of Amendment
No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ ``World Equity Benchmark Shares'' and ``WEBS'' are service
marks of Morgan Stanley Group, Inc.
\4\ See Securities Exchange Act Release No. 40603 (Oct. 26,
1998), 63 FR 59354 (Nov. 3, 1998).
\5\ In Amendment No. 1, the Exchange: (i) provided confidential
surveillance procedures; (ii) stated its intent to trade WEBS
pursuant to unlisted trading privileges; (iii) proposed to delay the
trading of Malaysian WEBS due to Malaysian currency restrictions;
(iv) provided rule language clarifying that Exchange specialists may
redeem or create WEBS only on the same terms and conditions as any
other investor and only at the net asset value; (v) explained how
the Exchange will review the creation or redemption of WEBS by
Exchange specialists; (vi) specified how the net asset values for
Index Series will be disseminated; and (vii) confirmed that Exchange
members may rely on certain exemptive and no-action relief that the
Commission previously provided to the American Stock Exchange. See
Letter from Robert P. Pacileo, Staff Attorney, Regulatory Policy,
Exchange, to Michael A. Walinskas, Associate Director, Division of
Market Regulation Commission, dated May 11, 1999 (``Amendment No.
1'').
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II. Description of the Proposal
A. Standards for Listing and Trading Investment Company Units
The Exchange seeks to adopt new rules to accommodated the trading
of Investment Company Units (``Units''), whether by Exchange listing or
pursuant to unlisted trading privileges.\6\ A Unit is a security that
represents an interest in a registered investment company (``Investment
Company''), which Investment Company is organized as a unit investment
trust, open-end management investment company, or similar entity.
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\6\ Pursuant to Section 12(f) of the Act and the rules
thereunder, a national securities exchange may extend unlisted
trading privileges to a security listed and registered on another
national securities exchange if certain conditions are satisfied.
See 15 U.S.C. 781(f) and 17 CFR 240.12f-1, 12f-2, 12f-3, 12f-4, and
12f-5.
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Under the Exchange's proposed listing standards, an Investment
Company that issues Units must: (i) hold securities comprising, or
otherwise based on or representing an interest in, an index or
portfolio of seucrities; or (ii) hold securities in another registered
investment company that holds securities comprising, or otherwise based
on or representing an interest in, an index or portfolio of securities.
An index or portfolio may be revised as necessary or appropriate to
maintain the quality and character of the index or portfolio.
In addition, the Investment Company must issue Units in a specified
aggregate number in return for a deposit (``Deposit''). The Deposit
must consist of: (i) a specified number of shares of securities that
comprise the index or portfolio, or are otherwise based on or represent
an investment in securities comprising such index or portfolio, and/or
a cash amount; or (ii) shares of a registered investment company, which
investment company holds securities comprising, or otherwise based on
or representing an interest in, an index or portfolio of securities,
and/or a cash amount. Units must be redeemable, directly or indirectly,
from the Investment Company for securities and/or cash then comprising
the Deposit.\7\ Units must pay holders periodic cash payments
corresponding to the regular cash dividends or distributions declared
with respect to the securities held by the Investment Company, less
applicable expenses and charges. At least 300,000 Units must be
outstanding before trading in a series of such Units may begin on the
Exchange.
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\7\ For example, as discussed below in Section II(B), WEBS are
only redeemable from the Foreign Fund, Inc. in ``Creation Unit''
sizes. See note 11 infra and accompanying text for a description of
the various Creation Unit sizes.
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Each series of Units traded on the Exchange must be based on a
specified index or portfolio of securities. The value of the index or
portfolio must be calculated and disseminated to the public at least
once per business day.\8\ However, if the securities representing at
least half the value of the index or portfolio are securities of a
single country other than the United States, the value of the index or
portfolio may be calculated and disseminated to the public at least
once per business day in that country. Units may be either certified or
issued in the form of a single global certificate.
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\8\ The Commission generally believes that updating values on a
real-time basis throughout the trading day is essential to any
securities product. In this regard, the Commission notes that the
Exchange will also disseminate an indicative optimized portfolio
value (``Value''), which closely approximates the value of the
portfolio of securities comprising each WEBS series, at least every
fifteen seconds during regular trading hours. While the Values
disseminated by the Exchange will not be the official values for the
portfolios of securities comprising each WEBS series, the Values are
designed to accurately reflect the value of each WEBS portfolio and
to provide investors with timely access to important market
information during trading hours.
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The Exchange would be permitted to consider suspending trading and
delisting (if applicable) a series of Units if: (i) after the initial
twelve-month period beginning upon the commencement of trading of a
series of Units, there are fewer than 50 record and/or beneficial
holders of Units for 30 or more consecutive trading days; (ii) the
value of the index or portfolio of securities on which the series is
based is no longer calculated or available; or (iii) such other event
occurs or condition exists which, in the opinion of the Exchange, makes
further dealings
[[Page 56009]]
on the Exchange inadvisable. In addition, the Exchange would be allowed
to remove Units from trading and listing (if applicable) upon
termination of the issuing Investment Company or upon the termination
of listing of the Units on their primary market, if the primary market
is not the Exchange.
B. Trading of WEBS
Upon approval of the proposed rule change, the Exchange intends to
trade a specific class of Units--WEBS--pursuant to unlisted trading
privileges. WEBS are issued by Foreign Fund, Inc. (``Fund'') and are
structured as shares of separate series (``Index Series''). Each Index
Series invests primarily in the equity securities traded in a
designated market in an effort to track the performance of a specified
equity market index.
Currently, the Fund offers seventeen WEBS Index Series based on
seventeen Morgan Stanley Capital International (``MSCI'') Indices
(individually ``MSCI Index'' and collectively ``MSCI Indices''). The
countries whose exchange markets are represented by the seventeen MSCI
Indices are: Australia, Austria, Belgium, Canada, France, Germany, Hong
Kong, Italy, Japan, Malaysia,\9\ Mexico, Netherlands, Singapore, Spain,
Sweden, Switzerland, and the United Kingdom. The Commission has already
approved proposed rule changes to accommodate the listing and trading
of these seventeen WEBS series on the American Stock Exchange
(``Amex'') and to permit the trading of the WEBS series on the Chicago
Stock Exchange (``CHX'') pursuant to unlisted trading privileges.\10\
Both the Amex and CHX currently trade all seventeen WEBS series.
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\9\ Although the Exchange seeks approval to trade the Malaysia
Index Series WEBS pursuant to unlisted trading privileges, the
Exchange will not immediately trade such WEBS due to Malaysian
currency restrictions. The Exchange will notify the Commission
before the start of trading in Malaysian Index Series WEBS and, if
required, will submit a rule filing under Section 19(b) of the Act.
See Amendment No. 1 supra note 5.
\10\ See Securities Exchange Act Release Nos. 36947 (Mar. 8,
1996), 61 FR 10606 (Mar. 14, 1996) (approval of the Amex's request
to list and trade Index Fund Shares, including WEBS); and 39117
(Sept. 22, 1997), 62 FR 50973 (Sept. 29, 1997) (approval of the
CHX's request to trade WEBS pursuant to unlisted trading
privileges). The Commission notes that the Amex has filed a proposed
rule change to list for trading eleven additional WEBS based on MSCI
Indices for Brazil, Greece, Indonesia, South Korea, Portugal, South
Africa, Taiwan, Thailand, Turkey, the United States, and the EMU
(European Economic and Monetary Union). The Amex's proposal is still
pending with the Commission. See Securities Exchange Act Release No.
41322 (Apr. 22, 1999), 64 FR 23138 (Apr. 29, 1999).
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The investment objective of each WEBS series is to provide
investment results that correspond generally to the aggregate price and
yield performance of publicly traded securities in particular markets,
as represented by specific MSCI Indices. Each WEBS series will use a
``passive'' or indexing investment approach, which attempts to
approximate the investment performance of its benchmark index through
quantitative analytical procedures.
A WEBS series normally will invest at least 95% of its total assets
in stocks that are represented in the relevant MSCI Index and will at
all times invest at least 90% of its total assets in such stocks. A
WEBS series will not hold all of the issues that comprise the subject
MSCI Index, but will attempt to hold a representative sample of the
securities comprising the MSCI Index in a technique known as
``portfolio sampling.''
The Fund will issue and redeem WEBS of each Index Series only in
aggregations of shares specified for each Index Series (each
aggregation is a ``Creation Unit''). The number of shares per Creation
Unit will range from 40,000 to 600,000.\11\ Following the issuance of
WEBS in Creation Unit aggregations, WEBS may be traded on the Exchange
in lots of any size.
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\11\ The number of shares per Creation Unit for the seventeen
WEBS are: (1) Australia Index Series: 200,000; (2) Austria Index
Series: 100,000; (3) Belgium Index Series: 40,000; (4) Canada Index
Series: 100,000; (5) France Index Series: 200,000; (6) Germany Index
Series: 300,000; (7) Hong Kong Index Series: 75,000; (8) Italy Index
Series: 150,000; (9) Japan Index Series: 600,000; (10) Malaysia
Index Series: 75,000; (11) Mexico (Free) Index Series: 100,000; (12)
Netherlands Index Series: 50,000; (13) Singapore (Free) Index
Series: 100,000; (14) Spain Index Series: 75,000; (15) Sweden Index
Series: 75,000; (16) Switzerland Index Series: 125,000; and (17)
United Kingdom Index Series: 200,000.
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C. Structure of the MSCI Indices
MSCI generally seeks to have 60% of the capitalization of a
country's stock market reflected in the MSCI Index for such country.
The MSCI Indices seek to balance the inclusiveness of an ``all share''
index against the replicability of a ``blue chip'' index. MSCI applies
the same criteria and calculation methodology across all markets for
all indices, developed and emerging.
All single-country MSCI Indices are market capitalization weighted.
For countries that restrict foreign ownership, MSCI calculates two
types of indices: the MSCI Index and an additional index call the
``Free Index.'' The Free Index excludes companies and share classes
that may not be purchased by foreigners. MSCI currently calculates Free
Indices for Singapore and Mexico, and for those regional and
international indices which include such markets. The Singapore and
Mexico WEBS series will be based on the Free Indices for those
countries.
All MSCI Indices are calculated daily. The calculation method
weights stocks in an MSCI Index by their beginning-of-period market
capitalization. Share prices are ``swept clean'' daily and adjusted for
any rights issues, stock dividends, or splits. The MSCI Indices
presently are calculated in each market's local currency,\12\ in U.S.
dollars, without dividends, and with dividends reinvested.
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\12\ To obtain foreign currency exchange rates, MSCI uses WM/
Reuters Closing Spot Rates for all developed and emerging markets
except those in Latin America. Because of the high volatility of
currencies in some Latin American countries, MSCI continues to
calculate its own rates for those countries. Under exception
circumstances MSCI may elect to use an alternative exchange rate for
any country if the WM/Reuters Closing Spot Rate is not believed to
be representative for a given currency on a particular day.
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Each MSCI Index underlying a WEBS series is calculated by MSCI for
each trading day in the applicable market based on official closing
prices taken from the predominant exchange in such market. For each
trading day, MSCI publicly disseminates each MSCI Index value for the
previous day's close. MSCI Indices are reported periodically in major
financial publications and also are available through vendors of
financial information.
The Fund will cause to be made available daily the names and
required number of shares of each of the securities to be deposited in
connection with the issuance of WEBS in Creation Unit size aggregations
for each WEBS series. Also included will be information relating to the
required cash payment representing, in part, the amount of accrued
dividends applicable to such WEBS series. This information will be made
available by the Fund Advisor to any National Securities Clearing
Corporation (``NSCC'') participant requesting such information. In
addition, such information may be requested directly from the Fund
Distributor.
D. Disclosure to Market Participants
The Fund Administrator, PFPC, Inc., will calculate the net asset
value (``NAV'') for each Index Series each trading day as of 4:00 P.M.,
Eastern Standard Time. The NAVs will be made available to the public by
the Fund Distributor by means of a toll-free number and will also be
accessible to
[[Page 56010]]
NSCC participants through NSCC data. In addition, the NAVs will be
provided to the Exchange by NSCC, and disseminated through the
Exchange's Computerized Order Access System (``P/COAST'').
The Exchange will provide current WEBS pricing information by
disseminating through the facilities of the Consolidated Tape
Association (``CTA'') an indicative optimized portfolio value
(``Value'') for each Index Series as calculated by Bloomberg, L.P. The
Value will be disseminated on a per WEBS basis every fifteen seconds
during the Exchange's regular trading hours.\13\
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\13\ The Exchange recognizes that each Value is unlikely to
reflect the value of all securities included in the applicable
benchmark MSCI Index. In addition, the Exchange believes that the
Value does not necessarily reflect the precise composition of the
current portfolio of securities held by the Fund for each WEBS
series at a particular moment. Therefore, the Exchange believes that
the Value for each WEBS series disseminated during Exchange trading
hours should not be viewed as a real-time update of the NAV of the
Fund, which is calculated only once a day. The Exchange recognizes,
however, that during the trading day the Value will closely
approximate the value, per WEBS share, of the portfolio of
securities for each WEBS series, except under unusual circumstances.
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Before the start of trading in WEBS, the Exchange will distribute
to its members an information circular that discusses the special
characteristics and risks of trading WEBS. The circular will discuss
the basic structure of WEBS, creation and redemption over WEBS,
prospectus delivery to investors purchasing WEBS, applicable Exchange
rules (e.g., suitability rule), and dissemination of trading
information. The Exchange will use existing and proposed surveillance
procedures to surveil trading in WEBS, including specialist compliance
with Exchange Rule 5.33(a), ``Specialist Trading,'' and proposed
Commentaries .02 and .03 to Exchange Rule 5.33(a), which contemplate
specialists engaging in transactions with the issuer of WEBS under
certain circumstances.\14\
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\14\ Proposed Commentary .02 to Exchange Rule 5.33 states that,
``[s]pecialists may only redeem and create WEBS on the same terms
and conditions as any other investor and only at the net asset value
(``NAV''). Proposed commentary .03 to Exchange Rule 5.33 states
that:
[n]othing in rule 5.33(a) should be construed to restrict a
Specialist registered in a security issued by an investment company
from purchasing and redeeming the listed security, or securities
that can be subdivided or converted into the listed security from
the issuer as appropriate to facilitate the maintenance of a fair
and orderly market in the subject security.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, with the requirements of Section 6(b)(5) of the Act.\15\
The Commission believes that the Exchange's proposal to adopt new rules
to accommodate the trading of Units, whether by Exchange listing or
pursuant to unlisted trading privileges, will establish a framework to
facilitate the trading of new products such as WEBS. The Commission
also believes that the Exchange's proposal to trade WEBS pursuant to
unlisted trading privileges will provide investors with a convenient
way of participating in foreign securities markets, and could benefit
investors through increased competition between the market centers
trading the WEBS product. Moreover, the Commission believes that the
Exchange's WEBS proposal would provide investors with increased
flexibility in satisfying their investment needs by allowing them to
buy and sell, at negotiated prices throughout the trading day,
securities that replicate the performance of several stock
portfolios.\16\ Accordingly, as discussed below, the Commission finds
that the proposal is consistent with the requirements of Section
6(b)(5) of the Act in that it facilitates transactions in securities,
removes impediments to and perfects the mechanism of a free and open
market and a national market system, and, in general, protects
investors and the public interest.\17\
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\15\ 15 U.S.C. 78f(b)(5).
\16\ Unlike typical open-end investment companies, where
investors have the right to redeem their shares on a per share
basis, investors in WEBS can redeem them in creation unit size
aggregations only.
\17\ In approving this proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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The Commission notes that WEBS should provide investors with
several advantages compared to shares of standard, open-end management
investment companies (i.e., mutual funds). Specifically, investors will
be able to trade WEBS continuously throughout the day in secondary
markets at negotiated prices.\18\ In contrast, Investment Company Act
Rule 22c-1 \19\ requires investors to purchase and redeem shares issued
by an open-end management investment company based upon the NAV of the
securities held by such company. The ability to trade WEBS throughout
the day should allow investors to respond quickly to market changes and
provide expanded opportunities to engage in hedging strategies. In
addition, the cost of WEBS should make them affordable and attractive
to individual retail investors who wish to purchase a single security
that replicates the performance of a portfolio of foreign stocks.\20\
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\18\ The Commission believes that WEBS will not trade at a
material discount or premium in relation to their net asset value,
because of potential arbitrage opportunities. The potential for
arbitrage should keep the market price of WEBS comparable to their
net asset values; therefore, arbitrage activity likely will not be
significant.
\19\ Investment Company Act Rule 22c-1 generally provides that a
registered investment company issuing a redeemable security, its
principal underwriter, and dealers in that security may sell,
redeem, or repurchase the security only at a price based on the net
asset value next computed after receipt of an investor's request to
purchase, redeem, or resell. See 17 CFR 270.22c-1. The net asset
value of an open-end management investment company generally is
computed once daily Monday to Friday as designated by the investment
company's board of directors. The Commission granted WEBS an
exemption from this provision to allow them to trade in the
secondary market at negotiated prices.See Amex WEBS Approval Order,
infra note 21.
\20\ As of the close of trading on October 1, 1999, the Spain
Index Series WEBS, which was valued at $25.375, was the highest
priced of the seventeen listed WEBS series. The least expensive WEBS
series was the Malaysia Index Series, value at $4.9375.
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Although the market price of each WEBS series is derived from the
value of the securities and cash held in the Fund, WEBS are not
leveraged instruments. Rather, WEBS essentially are equity securities
that represent an interest in a portfolio of stocks designed to track a
specific MSCI Index. While the Commission believes that it is
appropriate to regulate WEBS like other equity securities, the unique
nature of WEBS raises certain trading, disclosure, and surveillance
issues. The remainder of this order addresses these issues, although
they are discussed in greater detail in the Amex WEBS Approval Order,
where the Commission initially approved WEBS for trading as a new
product.\21\
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\21\ See Securities Exchange Act Release No. 36947 (Mar. 8,
1996), 61 FR 10606 (Mar. 14, 1996) (``Amex WEBS Approval Order'').
The Commission hereby incorporates by reference the discussion and
rationale for approving WEBS as stated in the Amex WEBS Approval
Order.
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A. Trading of WEBS on the Exchange
Before an exchange begins to trade a security pursuant to unlisted
trading privileges, Rule 12f-5 of the Act requires the exchange to have
in place rules providing for transactions in such security.\22\ The
Commission finds that the Exchange has proposed adequate rules and
procedures to govern the trading of WEBS on the Exchange. Specifically,
WEBS will be deemed
[[Page 56011]]
equity securities and will be subject to the Exchange's existing
general rules that govern the trading of equity securities.\23\ In
addition, proposed Exchange Rules 3.2(k), ``Investment Company Units,''
and 3.5(h), ``Investment Company Units: Continued Listing Criteria,''
which contain specific listing and delisting criteria to accommodate
the trading of Units, will apply to the trading of WEBS.\24\ These
provisions should help to ensure that a minimum level of liquidity
exists in each WEBS series to facilitate the maintenance of fair and
orderly markets. The delisting criteria will allow the Exchange to
consider the suspension of trading and the delisting of a series of
Units (including WEBS), if an event were to occur that made further
dealings in such securities inadvisable. This provision will give the
Exchange the requisite flexibility to suspend or delist trading in WEBS
if circumstances warrant. Accordingly, the Commission believes that the
Exchange's rules in general, and proposed Exchange Rules 3.2(k) and
3.5(h), in particular, provide adequate safeguards to prevent
manipulative acts and practices and to protect investors and the public
interest.\25\
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\22\ Rule 12f-5 states that, ``[a] national securities exchange
shall not extend unlisted trading privileges to any security unless
the national securities exchange has in effect a rule or rules
providing for transactions in the class or type of security to which
the exchange extends unlisted trading privileges.'' 17 CFR 240.12f-
5.
\23\ Such general rules include, for example, margin and net
capital rules, the short sale rule, trading halt provisions,
customer suitability requirements, trading hours, and minimum
trading increments.
\24\ The Commission notes that the Exchange's rules for listing
and delisting Units are substantially similar to companion rules
adopted by the Amex and CHX.
\25\ The Commission also believes that the proposed rule change
should help protect investors and the public interest, and help
perfect the mechanisms of a national market system, in that it will
allow for the trading of WEBS on the Exchange pursuant to unlisted
trading privileges, making WEBS more broadly available to the
investing public.
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B. Disclosure of Investors and Exchange Members
The Commission believes that the Exchange's proposal provides for
adequate disclosure to investors relating to the terms,
characteristics, and risks of trading WEBS. All investors purchasing
WEBS on the Exchange will receive a prospectus regarding the specific
WEBS product. Because the WEBS proposed to be traded on the Exchange
will be in continuous distribution, the prospectus delivery
requirements of the Securities Act of 1933 will apply to both the
initial purchasers and to investors purchasing such WEBS in the
secondary market on the Exchange. The prospectus will address the
special characteristics of WEBS, including a statement regarding their
redeemability and method of creation, and specify that WEBS are not
individually redeemable.
The Exchange also drafted an information circular that will be
distributed to all Exchange members before trading of WEBS begins on
the Exchange. The Commission has reviewed this draft information
circular and believes it adequately explains the unique characteristics
and risks of WEBS. The circular also identifies Exchange member
responsibilities. For example, before an Exchange member undertakes to
recommend a transaction in WEBS, the member should make a determination
that such WEBS transaction is suitable for its customer. The circular
also addresses members' responsibility to deliver a prospectus to
investors purchasing WEBS, and highlights that WEBS are redeemable only
in Creation Unit size aggregations.\26\ The Commission notes that the
Exchange's draft information circular is very similar to the WEBS
circulars prepared by the Amex and CHX that were previously reviewed by
the Commission.
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\26\ The Exchange confirmed with the Commission that PCX members
may rely on certain exemptive and no-action relief regarding WEBS
that the Commission previously provided to the Amex. The Commission
gave to Amex exemptive relief from Rules 10a-1, 10b-6, 10b-7, 10b-
10, 10b-13, and 10b-17 under the Act; and no-action relief for
Section 11(d)(1) of the Act and Rules 11d1-2, 15c1-5 and 15c1-6
thereunder. To the extent that Regulation M supersedes Rules 10b-6
and 10b-7, Exchange members may continue to rely upon the relief
regarding those two rules. See Letter from Robert P. Pacileo, Staff
Attorney, Regulatory Policy, Exchange, to Michael A. Walinskas,
Associate Director, Division of Market Regulation, Commission, dated
May 11, 1999; and letter from Nancy J. Sanow, Assistant Director,
Division of Market Regulation, Commission, to Donald R. Crawshaw,
Sullivan & Cromwell, dated April 17, 1996.
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C. Dissemination of WEBS Portfolio Information
The Commission believes that the dissemination of the Values for
the seventeen WEBS series will provide investors with timely and useful
information concerning the value of WEBS, on a per WEBS basis. The
Commission notes that this information will be disseminated through the
facilities of the CTA and will closely approximate the value, per WEBS
share, of the portfolio of securities for each WEBS series. The Values
will be disseminated every 15 seconds during the Exchange's regular
trading hours, and will be available to all investors, irrespective of
the exchange market on which a transaction is executed. Also, because
each Value is expected to closely track the applicable WEBS series, the
Commission believes the Values will provide investors with adequate
information to generally determine the intra-day value of a given WEBS
series. The Commission expects the Exchange to monitor the disseminated
Values and, if the Exchange determines that a Value does not closely
track the applicable WEBS series, arrange to disseminate an adequate
alternative.
D. Surveillance of WEBS Trading
The Commission notes that the Exchange submitted confidential
surveillance procedures regarding the trading of WEBS on its equity
floor. The Commission believes that the surveillance procedures
adequately address concerns associated with the trading of WEBS,
including concerns attendant to the purchase and redemption of Creation
Units. Specifically, the Commission believes that the surveillance
procedures should help the Exchange to monitor specialists purchasing
and redeeming Creation Units, and ensure compliance with Exchange Rules
5.29(f), ``Specialist Responsibility,'' \27\ and 5.33(a), ``Specialist
Trading.''
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\27\ Exchange Rule 5.29(f) specifies that, ``a Specialist is to
engage in a course of dealings for his own account to assist in the
maintenance, insofar as reasonably practicable, of a fair and
orderly market on the Exchange.''
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The Commission believes that adequate safeguards are in place to
prevent the abuse of inside information relating to the composition of
the MSCI Indices. In the Amex WEBS Approval Order, the Commission
discussed abuse of information concerns that arise when a broker-dealer
is involved in the development and maintenance of a stock index
underlying a derivative product. The Commission believes that
procedures to prevent the misuse of material, non-public information
regarding changes to component stocks in the MSCI Indices have been
adopted and should help to address concerns raised by Morgan Stanley's
role in maintaining the MSCI Indices.
E. Specialist Activities
The Commission finds that it is consistent with the Act to allow a
specialist registered in a security issued by an Investment Company to
purchase or redeem the security from the issuer, as appropriate, to
facilitate the maintenance of a fair and orderly market in that
security. The Commission generally believes that such market activities
should enhance liquidity in the security and facilitate a specialist's
market making responsibilities. In addition, because a WEBS specialist
will be required to purchase and redeem WEBS only on the
[[Page 56012]]
same terms and conditions as any other investor (and only at the NAV),
and Creation Unit transactions occur through the Fund Distributor, the
Commission believes that the potential for abuse is minimized.
Furthermore, the Exchange's surveillance procedures should help the
Exchange to monitor specialist trading activity and determine whether a
specialist's transaction was effected to maintain fair and orderly
markets, or for some improper or speculative purpose. Finally, the
Commission notes that its approval of this aspect of the Exchange's
proposal does not address any other requirements or obligations under
the federal securities laws that may be applicable.\28\
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\28\ The Commission notes that with respect to WEBS, broker-
dealers and other persons are cautioned in the prospectus and/or the
Fund's Statement of Additional Information that some activities on
their part may, depending on the circumstances, result in their
being deemed statutory underwriters and subject them to the
prospectus delivery and liability provisions of the Securities Act
of 1933.
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The Commission finds good cause for approving proposed Amendment
No. 1 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. Amendment No. 1
provides additional information responsive to Commission staff concerns
and proposes several revisions that strengthen the Exchange's proposed
rule change. First, Amendment No. 1 provides confidential surveillance
procedures that describe how the Exchange will monitor trading in WEBS.
The Commission believes that the procedures are well designed and will
help the Exchange detect trading abuses and safeguard the integrity of
WEBS trading on the Exchange. Amendment No. 1 also proposes
Commentaries .02 and .03 to Exchange Rule 5.33(a), which clarify that:
(i) Exchange specialists may redeem and create WEBS only on the same
terms and conditions as any other investor, and only at the NAV; and
(ii) Exchange specialists registered in an Investment Company security
may purchase and redeem the listed Investment Company security, or
securities that can be subdivided or converted into the listed
Investment Company security, from the issuer as appropriate to
facilitate the maintenance of a fair and orderly market in the subject
security. These provisions establish appropriate limitations on the
trading activities of Exchange specialists, but also provide the
flexibility necessary to maintain fair and orderly markets.
Amendment No. 1 also clarifies several aspects of the proposal,
including: (i) the Exchange's intent to trade WEBS pursuant to unlisted
trading privileges; (ii) treatment of the Malaysian Index Series WEBS;
(iii) review of specialist trading activity in WEBS; and (iv) the
dissemination of NAVs. Lastly, Amendment No. 1 confirms that Exchange
members may rely on certain exemptive and no-action relief regarding
WEBS, which the Commission previously provided to the Amex.\29\
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\29\ See supra note 5 for a more detailed description of
Amendment No. 1.
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Based on the above, the Commission finds that good cause exists,
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\30\ to
accelerate approval of Amendment No. 1 to the proposed rule change.
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\30\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1, including whether Amendments No.
1 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 submissions, 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 Section, 450 Fifth Street, NW., Washington, DC 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the Exchange. All submissions should refer
to File No. SR-PCX-98-29 and should be submitted by November 5, 1999.
V. Conclusion
It is Therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule change (SR-PCX-98-29), as amended, is
approved.
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\31\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26897 Filed 10-14-99; 8:45 am]
BILLING CODE 8010-01-M