Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by New York Stock Exchange, Inc. Relating to the Listing of Investment Company Units

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36032; International Series Release No. 832; File No.

SR-NYSE-95-23]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by New York Stock Exchange, Inc. Relating to the Listing of

Investment Company Units

July 28, 1995.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of

1934, 15 U.S.C. 78s(b)(1) (``Act''), notice is hereby given that on

June 7, 1995, the New York Stock Exchange, Inc. (``NYSE'' or the

``Exchange'') filed with the Securities and Exchange Commission the

proposed rule change as described in Items I, II, and III below, which

Items have been prepared by the self-regulatory organization. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NYSE proposes to adopt para. 703.16 of its Listed Company

Manual (``Manual''), consisting of listing standards for units of

trading (``Units'') that represent an interest in a registered

investment company (``Investment Company'') that could be organized as

a unit investment trust (``UNIT''), an open-end management investment

company, or a similar entity. The investment company would hold

securities comprising, or otherwise based on or representing an

investment in, an index or portfolio of securities. The investment

company either could hold the securities directly or could hold another

security representing the index or portfolio securities (such as in a

UIT that holds shares of an open-end investment company). The Exchange

also proposes to amend Exchange Rule 460 to permit specialists to whom

Units have been allocated to purchase and redeem Units, or securities

that can be subdivided or converted into Units, through a distributor,

from the issuer of such securities.

The Exchange initially seeks to list up to nine series of Units, in

the form of ``CountryBaskets.'' \1\ These CountryBaskets will be

structured in one of two ways. First, in the ``Fund-only structure,''

they could be structured as series of an open-end management investment

company investing in a portfolio of securities (``Index Securities'')

included in the corresponding component of the FT-Actuaries World Index

``FT-AWI'').\2\ Alternatively, in the ``Fund/UIT structure,'' they

could be structured as UITs that have as their assets shares of an

open-end investment company holding the underlying Index Securities.

If, in the future, the Exchange seeks to list Units with respect to

other indices, it will make an appropriate filing with the Commission

to provide the authorization to effect such listings.

\1\ ``CountryBasket,'' ``CountryBaskets'' and ``CB'' are

trademarks of Deutsche Bank Securities Corporation (``DBSC'').

\2\ ``FT-Actuaries World Indices,''``FT-Actuaries World Index,''

and ``FT-AWI'' are trade and service marks of The Finacial Times

Limited, and are used under license by Goldman, Sachs & Co. and

NatWest Securities Limited.

[[Page 40404]]

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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 self-regulatory organization

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 IV below. The self-regulatory organization

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

The Exchange proposes to list up to nine CountryBasket securities

(``Securities''). The Securities will be issued either by an open-end

management investment company or by UITs or similar entities that

invest in individual series of an index fund.\3\ Each series of such an

investment company (each a ``Fund'') is designed to provide investment

results that substantially correspond to the price and yield

performance of a specific component of the FT-Actuaries World Index.

The initial nine series of Funds will be based on the following FT-

Actuaries World Indices: Australia; France; Germany; Hong Kong; Italy;

Japan; South Africa; United Kingdom; and the United States.\4\

\3\ The specific character or structure of the Securities will

be determined based on, among other things, the types of exemptive

relief the product sponsors receive from the Commission with respect

to issues arising under the Investment Company Act of 1940. The

manner in which the Securities will be listed and traded on the

Exchange will be the same regardless of the structure chosen. For

ease of reference throughout this filing the term ``Fund'' will

refer either to each series of the open end management investment

company that will be trading on the Exchange (in a fund-only

structure) or to each series of the open end management investment

company that will be underlying a UIT (in a dual Fund/UIT

structure).

\4\ The actual components, component capitalization, and

component weightings for each series were submitted as part of a

Form N-1A registration statement of The CountryBaskets Index Fund,

Inc. under the Securities Act of 1933 and the Investment Company Act

of 1940. Registration Nos. 33-85710; 811-8734.

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The FT-Actuaries World Indices

DBSC, the adviser to the Funds, has provided the Exchange with the

following description of the FT-Actuaries World Indices.

Establishing an Index

The FT-AWI are jointly compiled by The Financial Times Limited,

Goldman, Sachs & Co., and NatWest Securities Limited, in conjunction

with the Institute of Actuaries (together, the ``Consortium''). The aim

of the Consortium is to create and maintain a series of high quality

equity indices for use by the global investment community.

Specifically, the Consortium seeks to establish and maintain the FT-AWI

so that with respect to their corresponding markets, they are

comprehensive, consistent, flexible, accurate, investible, and

representative.

The World Index Policy Committee (``WIPC'') makes all policy

decisions concerning the FT-AWI, including: objectives; selection

criteria; liquidity requirements; calculation methodologies; and the

timing and disclosure of additions and deletions. The WIPC makes those

decisions in a manner that is consistent with the stated aims and

objectives of the Consortium. In general, the WIPC aims for a minimum

of 70 percent coverage of the aggregate value of all domestic exchange-

listed stocks in every country, region and sector in which it maintains

an index.

The WIPC consists of: One representative of each Consortium member;

one member nominated by each of the parties as representing an actual

or prospective main user group of the World Indices; a Chairman and

additional member who are members of the Institute of Actuaries or the

Facility of Actuaries.

A country must satisfy the following criteria for the WIPC to

include it in the FT-Actuaries World Indices: (1) Direct equity

investment by non-nationals must be permitted; (2) accurate and timely

data must be available; (3) no significant exchange controls should

exist that would prevent the timely repatriation of capital or

dividends; (4) significant international investor interest in the local

equity market must have been demonstrated; and (5) adequate liquidity

must exist.

Securities in the FT-AWI are subject to the following

``investibility screens'': (1) Securities comprising the bottom five

percent of any market's capitalization are excluded; (2) securities

must be eligible to be owned by foreign investors; (3) 25 percent or

more of the full capitalization of eligible securities must be publicly

available for investment and not in the hands of a single party or

parties ``acting in concert''; and (4) securities that fail to trade

for more than 15 business days within each of two consecutive quarters

are excluded.

The WIPC seeks to select constituent stocks that capture 85 percent

of the equity that remains available in any market (known as the

``investible universe'') after applying the investibility screens.

Securities are selected with regard to economic sector and market

capitalization to make the FT-AWI component highly representative of

the overall economic sector make-up and market capitalization

distribution of the investible universe of a market.

Maintaining an Index

The WIPC may add securities to the FT-AWI for any of the following

reasons: (1) The addition would make the economic sector make-up and

market capitalization distribution of the FT-AWI component more

representative of its investible universe; (2) a non-constituent

security has gained in importance and replaces an existing constituent

security under the rules of review established by the WIPC; (3) the FT-

AWI component represents less than its targeted percentage of the

capitalization of its investible universe (usually in cases where the

investible universe has grown faster than the corresponding FT-AWI

component); (4) a new, eligible security becomes available whose total

capitalization is one percent or more of the current capitalization of

the relevant FT-AWI component; (5) an existing constituent ``spin off''

a part of its business and issues new equity to the existing

shareholders; or (6) changes in investibility factors lead to a stock

becoming eligible for inclusion and that stock now qualifies on other

grounds.

The WIPC may adjust the FT-AWI for any of the following reasons:

(1) The component comprises too high a percentage of its representative

universe; (2) a review by the WIPC shows that a constituent security

has declined in importance and should be replaced by a non-constituent

security; (3) the deletion of a security that has declined in

importance would make the FT-AWI component more representative of the

economic make-up of its investible universe; (4) circumstances

regarding investibility and free float change, causing the constituent

security to fail the FT-AWI screening criteria; (5) an existing

constituent security is acquired by another entity; or (6) the stock

has been suspended from trading for a period of more than ten working

days. Generally, but not in all cases, changes resulting from review by

the WIPC occur at the end of a calendar quarter. Changes resulting from

merger or ``spin-off'' activity will be effectuated as soon as

practicable.

[[Page 40405]]

Calculation and Dissemination of an Index

The FT-AWI are calculated through widely accepted mathematical

formulae, with the effect that the indices are weighted arithmetic

averages of the price relatives of the constituents--as produced solely

by changes in the marketplace--adjusted for intervening capital

changes. The FT-AWI are base-weighted aggregates of the initial market

capitalization, the price of each issue being weighted by the number of

shares outstanding, modified to reflect only those shares outstanding

that are eligible to be owned by foreign investors.

For each constituent security, the implied annual dividend is

divided by 260 (an accepted approximation for the number of business

days in a calendar year). This dividend is then reinvested daily

according to standard actuarial calculations. Distributions affect

adjustments to the base capital or the price per share in accordance

with prescribed FT-AWI standards. The indices' values and related

performance figures for various periods of time are calculated daily

and are disseminated to the public.\5\

\5\ The responsibility for collecting, calculating, and

transmitting the index data is split between Goldman Sachs and

NatWest Securities.

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The FT-AWI are valued in the terms of local currency, U.S. dollars,

and U.K. pounds sterling, thereby allowing the effect of currency value

on the index value to be measured. Changes to the indices are announced

as soon as possible, and on Mondays the Financial Times publishes a

list of changes to each index implemented during the previous week, if

any. The FT-AWI are calculated once a day on weekdays when one or more

of the constituent markets are open; the indices are syndicated and

published in the financial sections of several newspapers worldwide.

FT-AWI data also may be purchased electronically.

Distribution of the Securities

The Securities will be distributed in transactions with the Fund

through ``Creation Transactions.'' To effect a Creation Transaction in

the Fund-only structure, a person would buy Fund shares from the Fund

at their net asset value (``NAV'') next computed. The sales will be in

``Creation Unit'' size aggregations in exchange for a deposit

(``Deposit'') of Index Securities (a ``Fund Basket'') and a specified

amount of cash sufficient to equal the NAV of such shares.

Securities in Creation Unit size aggregations only may be redeemed,

at NAV, generally for an in-kind distribution of Index Securities

comprising the Fund shares, plus a cash payment. A Creation Unit size

of Fund shares will represent securities with approximately $2 to $5

million in market value. The Creation Unit would be disaggregated into

the individual Securities that would trade on the Exchange. For the

nine initial CountryBasket Securities, there would be the following

number of Securities per Creation Unit:

Australia.................................................... 75,000

France....................................................... 100,000

Germany...................................................... 100,000

Hong Kong.................................................... 75,000

Italy........................................................ 75,000

Japan........................................................ 100,000

South Africa................................................. 75,000

United Kingdom............................................... 100,000

United States................................................ 100,000

To effect a Creation Transaction in the Fund/UIT structure, a

person would buy a Fund Share (or fractional share) in exchange for the

Deposit. Each UIT would invest solely in shares of a specified series

of the Fund, and would offer one ``redeemable unit of beneficial

interest'' (a ``Redeemable Unit'') in exchange for each Fund share or

fractional share. The Redeemable Unit would be the functional

equivalent of the Creation Unit in the Fund-only structure.

The owner of a Redeemable Unit could separate that unit into a

specific number of identical fractional non-redeemable subunits that

would constitute the Securities traded on the Exchange. As with the

Fund-only structure, for example, in the case of the Germany

CountryBasket Trust there would be 100,000 Securities per Redeemable

Unit. These Securities could be recombined into Redeemable Units and

then redeemed, at NAV, for the appropriate number of Fund shares. In

turn, the Fund shares could be redeemed for the Index Securities and

cash. The Securities would not be redeemable other than in Creation

Unit aggregations.

Regardless of the structure used, there may be an initial

distribution period of Fund shares lasting from one to a few weeks.

During this period, the principal underwriter or distributor

(``Distributor'') directly or through soliciting dealers would accept

subscriptions to purchase Fund shares. In the dual Fund/UIT structure,

orders also would be accepted to exchange Fund shares for Redeemable

Units and to separate such units into tradeable Securities. Therefore,

the offering would be continuous.

Exchange Trading of Units

The proposed listing criteria provide flexible standards for the

listing of Units. Before commencing trading, the Exchange will require

that there be at least 300,000 tradeable Units outstanding,

representing, for the nine series encompassed by this filing, at least

three or four Creation Units. The Exchange will consider the suspension

of trading and the delisting of a series of Units if:

After the first year of trading, there are fewer than 50

record or beneficial holders of the Units for 30 or more consecutive

trading days;

The value of the underlying index or portfolio of

securities is no longer calculated or available; or

There occurs another event that makes further dealings in

the Units on the Exchange inadvisable.

Dealing in Units on the Exchange will be conducted pursuant to the

Exchange's general agency-auction trading rules. The Exchange's general

dealing and settlement rules would apply, including its rules on

clearance and settlement of securities transactions (see NYSE Rules 45

through 296). Other Exchange equity rules and procedures, such as the

Exchange's equity margin rules, would apply.\6\ Unless the prospectus

for a specific Security states otherwise, the Units trading on the

Exchange will have one vote per share; however, as with other

securities issued by registered investment companies, there will not be

a ``passthrough'' of the voting rights on the actual index securities

held by a fund or directly or indirectly by a trust.

\6\ With respect to margin, the Exchange will be requesting that

the Commission's Division of Market Regulation grant ``no action''

relief with respect to section 11(d)(1) of the Act, as amended, and

Rules 11d1-1 and 11d1-2 thereunder with respect to the extension of

credit to customers on a security that is part of a new issue.

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With respect to specialist dealings, Exchange Rule 460 precludes

certain business relationships between an issuer and the specialist in

the issuer's securities. This could be interpreted to prevent a

specialist from entering into Creation Transactions or redeeming

Securities or Redeemable Units from the issuer. However, such market

activities could enhance liquidity in the Units and facilitate the

specialist's market-making responsibilities. In addition, since the

specialist will be able to engage in Creation Transactions and

redemptions only according to the same terms and conditions as every

other investor (and only at NAV), the Exchange believes that there is

no potential for abuse.

[[Page 40406]]

The Exchange is thus proposing amendments to Rule 460 to permit

specialists to engage in these types of transactions if such

transactions would facilitate the maintenance of a fair and orderly

market in the Security. However, any Creation Transactions in which the

specialist engages will have to be effected through the Distributor,

and not directly with the issuer. This requirement will make clear that

the specialist is purchasing Units in Creation Unit size only to

facilitate normal specialist trading activity.

With respect to investor disclosure, the Exchange notes that,

pursuant to the requirements of the Securities Act of 1933, as amended

(``1933 Act''), all investors in CountryBaskets will receive a

prospectus regarding the Securities. Because the Securities will be in

continuous distribution, the prospectus delivery requirements of the

1933 Act will apply to all investors in CountryBaskets. However, it is

possible that an exemption from the prospectus delivery requirement may

be obtained at some point in the future, either with respect to these

Securities or other Units listed on the Exchange. In the event of such

an exemption, the Exchange will discuss with the Commission staff the

appropriate level of disclosure that should be required with respect to

the Units being listed, and will file any necessary rule change to

provide for such disclosure.

Upon the initial listing of any class of Units, the Exchange will

also issue a circular to its membership explaining the unique

characteristics and risks of this type of security. That circular,

among other things, will inform member organizations of their

responsibilities under Exchange Rule 405 (``know your customer rule'')

with respect to transactions in the Securities. The circular also will

inform member organizations of their responsibility to deliver a

prospectus to investors.

With respect to trading halts, the trading of Units would be

halted, along with the trading of all other listed stocks, in the event

the ``circuit breaker'' thresholds of Exchange Rule 80B are reached. In

addition, the Exchange will consider halting the trading in any series

of Units if necessary to maintain a fair and orderly market in the

Units. For example, the Exchange would consider halting the trading in

a series of Units if trading has been halted or suspended in the

primary market for stocks representing a significant percentage (such

as 20 percent) of the value of the underlying stock index or portfolio.

Finally, while equity securities traded on the Exchange must be

certificated, the Exchange is proposing that Units trade either in

certificated form or solely through the use of a global certificate.

The use of the global certificate would have to be consistent with

para. 501.02(B) of the Manual, which imposes conditions on the use of

global certificates for bonds. Permitting the use of global

certificates would be consistent with expediting the processing of

transactions in Units and would minimize the costs of engaging in

transactions in these securities.

The Exchange believes that its proposal is consistent with Section

6(b) of the Act. Specifically, the Exchange believes that its proposal

is consistent with the objectives of Section 6(b)(5) of the Act 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 regulating,

clearing, settling, processing information with respect to, and

facilitating transactions in securities, to remove impediments to and

perfect the mechanism of a free and open market and a national market

system, and, in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The proposed rule change does not impose any burden on competition

that is not necessary or appropriate in furtherance of the purposes of

the 1934 Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants or Others

The Exchange has not solicited, and does not intend to solicit,

comments on this proposed rule change. The Exchange has not received

any unsolicited written comments from members or other interested

parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(a) By order approve such proposed rule change, or

(b) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 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 above-mentioned

self-regulatory organization. All submissions should refer to File No.

SR-NYSE-95-23 and should be submitted by August 29, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

\7\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-19522 Filed 8-7-95; 8:45 am]

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