regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc., et al.,
[Federal Register: October 10, 2000 (Volume 65, Number 196)]
[Notices]
[Page 60230-60233]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10oc00-146]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43396; File No. SR-CHX-00-16 and SR-Amex-00-10]
Self-Regulatory Organizations; Order Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 3 by the Chicago Stock Exchange, Inc. Relating to the Listing and Trading of Trust Issued Receipts, and Order Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 by the American Stock Exchange LLC Relating to the Listing and Trading of Trust Issued Receipts
September 29, 2000.
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Introduction
On May 5, 2000, the Chicago Stock Exchange, Incorporated (``CHX''), filedwith 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 relating to the listing and trading of trust issued receipts. On June 7, 2000, CHX filedAmendment No. 1 to the proposal.\3\ The proposed rule change and Amendment No. 1 were published in the Federal Register on July 7, 2000.\4\ No comments were received on the proposal. On September 7, 2000, CHX filedAmendment No. 2 to the proposal.\5\ On September 20, 2000, CHX filedAmendment No. 3 to the proposal.\6\ This notice and order approves the proposed rule change and Amendment No. 1, solicits comment from interested persons on Amendment Nos. 2 and 3, and approves Amendment Nos. 2 and 3 on an accelerated basis.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, which was incorporated into the proposed rule change, CHX replaced a reference to ``trust issued receipts'' with a reference to ``a series of HOLDRs'' in the text of proposed Interpretation and Policy .01 to CHX Rule 27. See Letter from Ellen J. Neely, Vice President and General Counsel, CHX, to Andrew Shipe, Attorney, Division of Market Regulation (``Division''), Commission, dated June 6, 2000.
\4\ Securities Exchange Act Release No. 42049 (June 28, 2000), 65 FR 42049.
\5\ In Amendment No. 2, CHX changed all references to ``HOLDRs'' in the proposed rule text to ``trust issued receipts.'' See Letter from Ellen J. Neely, Vice President and General Counsel, CHX, to Heather Traeger, Attorney, Division, Commission, dated September 5, 2000.
\6\ In Amendment No. 3, CHX changed the proposed rule text to clarify that the listing criteria apply to each ``security'' underlying the trust issued receipt, not each ``company.'' See Letter from Ellen J. Neely, Vice President and General Counsel, CHX to Heather Traeger, Attorney, Division, Commission, dated September 19, 2000.
On February 14, 2000, the American Stock Exchange LLC (``Amex'') submitted to the Commission, pursuant to Section 19(b)(1) of the Act and Rule 19b-4 thereunder,\7\ a proposed rule change relating to generic listing standards for trust issued receipts. On June 2, 2000, Amex filedAmendment No. 1.\8\ The proposed rule change and Amendment No. 1 were published for comment in the Federal Register on June 12, 2000.\9\ No comments were received on the proposal. On August 29, 2000, Amex filedAmendment No. 2 to the proposal.\10\ This notice and order approves the proposed rule change and Amendment No. 1, solicits comment from interested persons on Amendment No. 2, and approves Amendment No. 2 on an accelerated basis.
\7\ 17 CFR 240.19b-4.
\8\ See letter from Scott Van Hatten, Legal Counsel, Derivative Securities, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated May 24, 2000. In Amendment No. 1, Amex made several technical changes that were incorporated into the proposed rule change when it was noticed in the Federal Register. Amex also clarified that it, and not the Commission, may approve a series of HOLDRs for listing pursuant to Rule 19b-4(e) provided each of the component securities satisfies the proposed listing criteria.
\9\ Securities Exchange Act Release No. 42895 (June 2, 2000), 65 FR 36853.
\10\ In Amendment No. 2, Amex changed all references to ``HOLDRs'' in the proposed rule text to ``trust issued receipts.'' See Letter from Scott Van Hatten, Legal Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated August 25, 2000.
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Description of the Proposals
The proposals would amend CHX Article XXVII, Rule 27 and Amex Rule 1202 to provide generic standards that permit listing and trading, or trading pursuant to unlisted trading privileges (``UTP''), of trust issued receipts pursuant to Rule 19b-4(e) of the Act.\11\ This procedure would allow Amex and CHX to begin trading qualifying products without the need for notice and comment and Commission approval under section 19(b) of the Act, thus reducing the Exchanges' regulatory burden, and benefiting the public interest.
\11\ 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, 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 that include the new derivative securities product and the self-regulatory organization has surveillance program for the product class. 17 CFR 240.19b-4(e).
Amex and CHX believe that their proposals supplement the existing
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rules \12\ with generic listing criteria meant, in part, to ensure that no security underlying a trust issued receipt will be readily susceptible to manipulation, while permitting sufficient flexibility in the construction of various trust issued receipts to meet investors' needs. Amex and CHX further believe that the additional criteria are meant to ensure sufficient liquidity for investors seeking to purchase and deposit the underlying securities with the trustee to create a new trust issued receipt.
\12\ The existing Amex and CHX rules provide that trust issued receipts will be listed and traded, or traded pursuant to UTP, subject to application of the following criteria: (a) Initial Listing--For each trust, the Exchange will establish a minimum number of trust issued receipts required to be outstanding at the time of commencement of trading on the Exchange; (b) Continued Listing--Following the initial twelve month period following formation of a trust and commencement of trading on the Exchange, the Exchange will consider the suspension of trading in or removal from listing of a Trust upon which a series of trust issued receipts is based under any of the following circumstances: (i) If the trust has more than 60 days remaining until termination and there are fewer than 50 record and/or beneficial holders of trust issued receipts for 30 or more consecutive trading days; (ii) if the trust has fewer than 50,000 receipts issued and outstanding; (iii) if the market value of all receipts issued and outstanding is less than $1,000,000; or (iv) if such other event shall occur or condition exists which in the opinion of the respective Exchange, makes further dealings on the Exchange inadvisable.
Thus, under the proposals, Amex and CHX could list or trade, pursuant to Rule 19b-4(e), any trust issued receipt product that met the following additional criteria: (1) Each component security in the trust issued receipt must be registered under Section 12 of the Act,\13\ (2) each component security underlying the trust issued receipt must have a minimum public float of at least $150 million; (3) each component security underlying the trust issued receipt must be listed on a national securities exchange or traded through the facilities of Nasdaq as a reported national market system security; (4) each component security underlying the trust issued receipt must have an average daily trading volume of at least 100,000 shares during the preceding sixty-day trading period; and (5) each component security underlying the trust issued receipt must have an average daily dollar value of shares traded during the preceding sixty-day trading period of at least $1 million. In addition, no underlying security may initially represent more than 20% of the overall value of the receipt.
\13\ 15 U.S.C. 781.
Finally, Amex and CHX will comply with the recordkeeping requirements of Rule 19b-4(e), and will file Form 19b-4(e) for each trust issued receipt listed under the rule within five business days of commencement of trading.\14\
\14\ 17 CFR 240.19b-4(e).
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Discussion
After careful review, the Commission finds that the proposed rule changes are 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).\15\ Specifically, the Commission finds that the proposals to provide generic standards to permit listing and trading of trust issued receipts pursuant to Rule 19b-4(e) further 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. By establishing generic standards, the proposals should reduce Amex and CHX's regulatory burden, as well as benefit the public interest, by enabling Amex and CHX to bring qualifying products to the market more quickly. Accordingly, the Commission finds that Amex and CHX's proposals 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.\16\
\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78f(b)(5). In approving these rules, the Commission notes that is has considered the proposed rules' impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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 that include the new derivative securities product and the SRO has a surveillance program for the product class.\17\
\17\ See Securities Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 (December 22, 1998).
As described above, the Commission has previously approved Amex and CHX rules that permit the listing and trading of individual trust issued receipts on the Exchanges or pursuant to UTP.\18\ In approving these securities for trading, the Commission considered their structure, their usefulness to investors and the markets, and the Exchanges' rules and surveillance programs that govern their trading. The Commission concluded then that securities approved for listing under those rules would allow investors to: (1) Respond quickly to changes in the overall securities markets generally and for the industry represented by a particular trust; (2) trade, at a price disseminated on a continuous basis, a single security representing a portfolio of securities that the investor owns beneficially; (3) engage in hedging strategies similar to those used by institutional investors; (4) reduce transactions costs for trading a portfolio of securities; and (5) retain beneficial ownership of the securities underlying the trust issued receipts. The Commission believes, for the reasons set forth below, that additional trust issued receipts that satisfy the proposed generic standards and, therefore, can be listed under Rule 19b-4(e) without prior Commission approval, should produce the same benefits to Amex and CHX and to investors.
\18\ See, e.g., Securities Exchange Act Release No. 42056 (October 22, 1999), 64 FR 58870 (November 1, 1999) (CHX); Securities Exchange Act Release No. 41892 (September 21, 1999), 64 FR 52559 (September 29, 1999) (Amex).
The Commission further believes that adopting generic listing standards for these securities and applying Rule 19b-4(e) should fulfill the intended objective of that rule by allowing those trust issued receipt products that satisfy the generic standards to start trading, without the need for notice and comment and Commission approval. Amex and CHX's ability to rely on Rule 19b-4(e) potentially reduces the time frame for bringing these securities to the market or for permitting the trading of these securities pursuant to UTP, and thus enhances investors' opportunities. The Commission notes that while the proposals reduce the Exchanges' regulatory burden, the Commission maintains regulatory oversight over any products listed under the generic standards through regular inspection oversight.
The Commission finds that Amex and CHX's proposals contain adequate rules and procedures to govern the listing and trading of trust issued receipts pursuant to Rule 19b-4(e) on the Amex or CHX, or pursuant to UTP. As the Commission noted in its previous review and approval of CHX Article XXVIII, Rule 27, and Amex Rules 1200 et seq., all trust issued receipt products listed under the generic standards will be subject to the full panoply of Amex and CHX rules and procedures that now govern both the trading of trust issued
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receipts and the trading of equity securities on the Amex and CHX, 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.\19\
\19\ Id.
The Commission further finds that: (1) By requiring that the underlying securities in a trust issued receipt are registered under section 12 of the Act and listed on a national securities exchange or Nasdaq and (2) by establishing minimum values for the number of outstanding receipts, average daily trading volume, average daily dollar volume, and public float, the Exchanges' proposed listing criteria will help to ensure that a minimum level of liquidity will exist to allow for the maintenance of fair and orderly markets for those trust issued receipt products listed and traded pursuant to Rule 19b-4(e). The Commission believes that these listing criteria will help to ensure that no security underlying a trust issued receipt will be readily susceptible to manipulation, while permitting sufficient flexibility in the construction of various trust issued receipts to meet investors' needs. The Commission further believes that these criteria should serve to ensure that the underlying securities of such trust issued receipts 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 trust issued receipts under Rule 19b-4(e). Accordingly, the Commission finds that these criteria are consistent with section 6(b)(5) of the Act, because they serve to prevent fraudulent or manipulative acts; promote just and equitable principles of trade; remove impediments to and perfect the mechanism of a free and open market and a national market system; and protect investors and the public interest.\20\
\20\ 15 U.S.C. 78f(b)(5).
Additionally, as the Commission noted in its previous review and approval of CHX Article XXVIII, Rule 27, and Amex Rules 1200 et seq., the Exchanges' delisting criteria allow them to consider the suspension of trading and the delisting of a trust issued receipt if an event occurs that makes further dealings in such securities inadvisable. This will give Amex and CHX flexibility to delist trust issued receipts if circumstances warrant. The proposals also rely on procedures to halt trading in trust issued receipts in certain enumerated circumstances that were approved previously by the Commission.\21\
\21\ See note 18, supra.
The Commission notes that, in connection with its previous review and approval of CHX Article XXVIII, Rule 27, and Amex rules 1200 et seq., it approved the Exchanges' minimum price increments, their surveillance procedures, and their disclosure and prospectus delivery requirements for trust issued receipts.\22\ In accord with these previous findings, the Commission believes that these rules, which will govern the trading of trust issued receipt products listed pursuant to Rule 19b-4(e), will provide adequate safeguards to prevent manipulative acts and practices and to protect investors and the public interest. Further, the Commission believes that the proposals will ensure that investors have information that will allow them to be adequately apprised of the terms, characteristics, and risk of trading trust issued receipts.
\22\ Id.
Finally, Amex and CHX will file Form 19-4(e) with the Commission within five business days of commencement of trading a trust issued receipt under the generic standards, and will comply with all Rule 19- 4(e) recordkeeping requirements.
Accordingly, the Commission believes that Amex and CHX's proposed rules governing the listing and trading of trust issued receipts pursuant to Rule 19-4(e) 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.\23\
\23\ 15 U.S.C. 78f(b)(5).
The Commission finds good cause for approving Amendments No. 2 to the CHX and Amex proposed rule changes prior to the thirtieth day after the date of publication of notice in the Federal Register, pursuant to section 19(b)(2) of the Act. Amendments No. 2 to the proposed rule changes established that the proposed generic standards are for the listing and trading of all trust issued receipts that satisfy the proposed standards. The proposed generic standards are not limited to HOLDRs, a type of trust issued receipt. Because the amendments establish the scope of the proposed rule change, the Commission believes that it is necessary to approve them at the same time as approving the proposed rule changes. Accordingly, the Commission finds that there is good cause, consistent with section 6(b)(5) of the Act,\24\ to approve Amendments No. 2 to the proposals on an accelerated basis.
\24\ 15 U.S.C. 78s(b)(5).
The Commission also finds good cause for approving Amendment No. 3 to the CHX proposed rule change prior to the thirtieth day after the date of publication of notice in the Federal Register pursuant to section 19(b)(2) of the Act. Amendment No. 3 changes the CHX proposed rule text to clarify that the listing criteria apply to the specific ``security'' underlying the trust issued receipt, and not to the ``company'' underlying the trust issued receipt. The Commission believes that this clarification is significant. A company could have multiple issues, only one of which underlies the trust issued receipt. If the text of the proposed rule change used the word ``company,'' the aggregate values for all issues of the company could meet the listing criteria for minimum daily float, daily trading volume and daily dollar volume; yet, these values would not be an accurate accounting of the value of the specific security that underlies the trust issued receipts. Thus, it is conceivable that a security underlying a trust issued receipt might not satisfy the proposed listing criteria, but the company's securities as a whole would satisfy the proposed criteria. Because Amendment No. 3 changes the proposed rule text to specify that it is the individual security that must be evaluated for listing purposes, the Commission believes that it is necessary to approve it at the same time as approving the proposed rule changes. Accordingly, the Commission finds that there is good cause, consistent with section 6(b)(5) of the Act,\25\ to approve CHX Amendment No. 3 on an accelerated basis.
\25\ 15 U.S.C. 78s(b)(5).
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Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning both Amex Amendment No. 2 and CHX Amendment Nos. 2 and 3, including whether those amendments are 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 filedwith 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
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provisions of 5 U.S.C. 552, will be available for inspection and copying at the Commission's Public Reference Room. 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-CHX-00-16 or SR-Amex-00-10 and should be submitted by October 31, 2000.
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Conclusion
For the foregoing reasons, the Commission finds that Amex and CHX's proposals relating to the listing and trading of trust issued receipts pursuant to Rule 19-4(e) are consistent with the requirements of the Act and rules and regulations thereunder.
It is therefore ordered, pursuant to section19(b)(2) of the Act,\26\ that the proposed rule change (SR-CHX-00-16), as amended, and the proposed rule change (SR-Amex-00-10), as amended, are approved.
\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\27\
\27\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 00-25866Filed10-6-00; 8:45 am]
BILLING CODE 8010-01-M
