Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 thereto by the American Stock Exchange, Inc. Relating to Index Fund Shares

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36527; International Series Release No. 891; File No.

SR-Amex-95-43]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 thereto by the American Stock Exchange, Inc.

Relating to Index Fund Shares

November 29, 1995.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on October 26, 1995, the

American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the

Securities and Exchange Commission (``Commission'') the proposed rule

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

been prepared by the Amex. On November 14, 1995, the Amex filed

Amendment No. 1 to its proposal.\2\ The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

\1\15 U.S.C. 78s(b)(1) (1988).

\2\In Amendment No. 1, the Amex states that any broker-dealer

handling transactions for customers in ``World Equity Benchmark

Securities'' (or ``WEBS'') will have an obligation to deliver to

such customers a prospectus regarding WEBS pursuant to the

requirements of the Securities Act of 1933. Amendment No. 1 also

states that prior to listing series of Index Fund Shares for indices

other than those described in the present rule filing, it will make

an appropriate filing pursuant to Rule 19b-4 under the Act. Letter

from James F. Duffy, Executive Vice President and General Counsel,

Legal Chief, Office of Market Supervisor, Division of Market

Regulation, Commission, dated November 14, 1995 (``Amendment No.

1'').

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

Substance of the Proposed Rule Change

The Amex proposes to list and trade under Amex Rules 1000A et seq.

Index Fund Shares, which are shares issued by an open-end management

investment company that seeks to provide investment results that

correspond generally to the price and yield performance of a specified

foreign or domestic equity market index.

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.

[[Page 62514]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Introduction

The Amex proposed to list and trade under Rules 1000A et seq. Index

Fund Shares issued by an open-end management investment company

(``Fund'') that seeks to provide investment results that correspond

generally to the price and yield performance of a specified foreign or

domestic equity market index. Index Fund Shares will be issued by an

entity registered with the Commission as an open-end management

investment company, and which may be organized as a series fund

providing for the creation of separate series of securities, each with

a portfolio consisting of some or all of the component securities of a

specified securities index. A Fund may be managed so as to permit the

purchase or sale or certain securities in the underlying portfolio in

an effort to track, to the extent desired, the relevant securities

index. A Fund may establish tracking tolerances which will be disclosed

in the prospectus for a particular Fund or series thereof. Such Fund or

series normally will not replicate exactly a specific index, but

instead will seek to track an index within the tolerances stated in the

prospectus.

Issuances of Index Fund Shares by a Fund will be made only in

minimum Creation Unit size aggregations or multiplies thereof. The size

of the applicable Creation Unit size aggregation will be set forth in

the Fund's prospectus and will vary from one series of Index Fund

Shares to another, but generally will be of substantial size (e.g.,

value in excess of $500,000 per Creation Unit). It is expected that a

Fund will issue and sell Index Fund Shares through a principal

underwriter (``Distributor'') on a continuous basis at the net asset

value per share next determined after an order to purchase Index Fund

Shares in Creation Unit size aggregations is received in proper form.

Following issuance, Index Fund Shares would be traded on the Exchange

like other equity securities by professionals, as well as retail and

institutional investors.

It is expected that Creation Unit size aggregations of Index Fund

Shares generally will be issued in exchange for the ``in kind'' deposit

of a specified portfolio of securities, together with a cash payment

representing, in part, the amount of dividends accrued up to the time

of issuance. It is anticipated that such deposits will be made

primarily by institutional investors, arbitrageurs, and the Exchange

specialist. Redemption of Index Fund Shares generally will be made ``in

kind,'' with a portfolio of securities and cash exchanged for Index

Fund Shares that have been tendered for redemption. Issuance or

redemptions also could occur for cash under specified circumstances

(e.g., if it is not possible to effect delivery of securities

underlying the specific series in a particular foreign country) and at

other times in the discretion of the Fund.

It is expected that a Fund will make available on a daily basis a

list of the names and the required number of shares of each of the

securities to be deposited in connection with issuance of Index Fund

Shares of a particular series in Creation Unit size aggregations, as

well as information relating to the required cash payment representing,

in part, the amount of accrued dividends.

A Fund make periodic distributions of dividends from net investment

income, including net foreign currency gains, if any, in an amount

approximately equal to accumulated dividends on securities held by the

Fund during the applicable period, net of expenses and liabilities for

such period.

Index Fund Shares will be registered in book entry form through The

Depository Trust Company. Trading in Index Fund Shares on the Exchange

may be effected until 4:15 p.m. (New York time) each business day.

Index Fund Shares initially to be listed on the Exchange will be

series (``Index Series'') of World Equity Benchmark Shares issued by

Foreign Fund, Inc., and based on the following Morgan Stanley Capital

International (``MSCI'') Indices (``MSCI Indices'' or ``(Indices'');

MSCI Australia Index; MSCI Belgium Index; MSCI Canada Index; MSCI

France Index; MSCI Germany Index; MSCI Hong Kong Index; MSCI Italy

Index; MSCI Japan Index; MSCI Malaysia Index; MSCI Mexico Index; MSCI

Netherlands Index; MSCI Singapore (Free) Index; MSCI Spain Index; MSCI

Sweden Index; MSCI Switzerland Index; and MSCI United Kingdom Index.\3\

\3\The Exchange has stated that it will make an appropriate

filing pursuant to Rule 19b-4 under the Act prior to listing series

of Index Fund Shares for indices other than those described in the

present proposal. Amendment No. 1, supra note 2.

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Foreign Fund, Inc. will issue and redeem WEBS of each Index Series

only in aggregations of shares specified for each Index Series. The

following table sets forth the number of shares of an Index Series that

it is anticipated will constitute a Creation Unit for such Index

Series:

------------------------------------------------------------------------

Shares

per

Index series creation

unit

------------------------------------------------------------------------

Australia Index Series....................................... 75,000

Austria Index Series......................................... 40,000

Belguim Index Series......................................... 40,000

Canada Index Series.......................................... 75,000

France Index Series.......................................... 75,000

Germany Index Series......................................... 250,000

Hong Kong Index Series....................................... 40,000

Italy Index Series........................................... 40,000

Japan Index Series........................................... 250,000

Malaysia Index Series........................................ 75,000

Mexico Index Series.......................................... 75,000

Neterlands Index Series...................................... 75,000

Singapore (Free) Index Series................................ 75,000

Spain Index Series........................................... 40,000

Sweden Index Series.......................................... 75,000

Switzerland Index Series..................................... 75,000

United Kingdom Index Series.................................. 75,000

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3. The MSCI Indices\4\

\4\The description of the MSCI Indices was prepared by Foreign

Fund, Inc.

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General

The Indices were founded in 1969 by Capital International S.A. as

the first international performance benchmarks constructed to

facilitate accurate comparison of world markets. Morgan Stanley

acquired rights to the Indices in 1986. The MSCI Indices have covered

the world's developed markets since 1969, and in 1988, MSCI commenced

coverage of the emerging markets.

Although local stock exchanges traditionally have calculated their

own indices, these generally are not comparable with one another, due

to differences in the representation of the local market, mathematical

formulas, base dates, and methods of adjusting for capital changes.

MSCI applies the same criteria and calculation methodology across all

markets for all indices, developed and emerging.

MSCI generally seeks to have 60% of the capitalization of a

country's stock market reflected in the MSCI Index for such country.

Thus, the MSCI Indices balance the inclusiveness of an ``all share''

index against the replicability of a ``blue chip'' index.

Weighting

All single-country MSCI Indices are market capitalization weighted,

i.e., companies are included in the indices at their full market value

(total number of shares issued and paid up, multiplied by price). For

countries that restrict foreign ownership, MSCI calculates two indices.

The additional indices are called ``free'' indices, and they exclude

companies and share classes not purchasable by foreigners. Free indices

currently are calculated for Singapore, Mexico, the Philippines, and

Venezuela,

[[Page 62515]]

and for those regional and international indices which include such

markets.

Selection Criteria

The constituents of a country index are selected from the full

range of securities available in the market, excluding issues which are

either small or highly illiquid. Non-domiciled companies and investment

trusts are also excluded from consideration. After the index

constituents are chosen, they are reclassified using MSCI's schema of

38 industries and eight economic sectors to facilitate cross-country

comparisons.

The process of choosing index constituents from the universe of

available securities is consistent among indices. Determining the

constituents of an index is an optimization process which involves

maximizing float and liquidity, reflecting accurately the market's size

and industry profiles, and minimizing cross-ownership.

To reflect accurately country-wide performance, MSCI aims to

capture 60% of total market capitalization at both the country and

industry level. To reflect local market performance, an index should

contain a percentage of the market's overall capitalization sufficient

to achieve a high level of tracking. The greater the coverage, however,

the greater the risk of including securities which are illiquid or have

restricted float. MSCI's 60% coverage target seeks to balance these

considerations.

Within the overall target of 60% market coverage, MSCI aims to

capture 60% of the capitalization of each industry group, as defined by

local practice. MSCI believes this target assures that the index

reflects the industry characteristics of the overall market and permits

the construction of accurate industry indices.

MSCI may exceed the 60% of market capitalization target in the

index for a particular country because, e.g., one or two large

companies dominate an industry. Similarly, MSCI may underweight an

industry in an index if, e.g., the companies in such industry lack good

liquidity and float, or because of extensive cross-ownership.

Liquidity is measured by trading value, as reported by the local

exchanges. Trading value is monitored over time to determine ``normal''

levels exclusive of short-term peaks and troughs. A stock's liquidity

is significant not only in absolute terms (i.e., a determination of the

market's most actively traded stocks), but also relative to its market

capitalization and to average liquidity for the country as a whole.

Float, or the percentage of shares freely tradeable, is one measure

of potential short-term supply. Low float raises the risk of

insufficient liquidity. MSCI monitors float for every security in its

coverage, and low float may exclude a stock from consideration.

However, float can be difficult to determine. In some markets good

sources generally are not available. In other markets, information on

smaller and less prominent issues can be subject to error and time

lags. Government ownership and cross-ownership positions can change

over time, and are not always made public. Float also tends to be

defined differently depending on the source. MSCI seeks to maximize

float. As with liquidity, float is an important determinant, but not a

hard-and-fast screen, for inclusion of a stock in, or exclusion of a

stock from, a particular index.

Cross-ownership occurs when one company has an ownership position

in another. In situations where cross-ownership is substantial,

including both companies in an index can skew industry weights, distort

country-level valuations and overrepresent buyable opportunities. An

integral part of MSCI's country research is identifying cross-

ownerships to avoid or minimize inclusion of both companies in an

index. Cross-ownership cannot always be avoided, especially in markets

where it is prevalent. When MSCI makes exceptions, it seeks to select

situations where the constituents operate in different economic

sectors, or where the subsidiary company makes only a minor

contribution to the parent company's results.

MSCI attempts to meet its 60% coverage target by including a

representative sample of large, medium and small capitalization stocks,

to capture the sometimes disparate performance of these sectors. In the

emerging markets, the liquidity of smaller issues can be a constraint.

At the same time, properly representing the lower capitalization end of

the market risks overwhelming the index with names. Within these

constraints, MSCI strives to include smaller capitalization stocks,

provided they exhibit sufficient liquidity.

Calculation Methodology

All MSCI Indices are calculated daily using Laspeyres' concept of a

weighted arithmetic average together with the concept of ``chain-

linking,'' a classical method of calculating stock market indices. The

Laspeyres method weighs stocks in an 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 currently are calculated in local currency and in U.S. dollars,

without dividends and with gross dividends reinvested (e.g., before

withholding taxes).

In respect of developed markets, MSCI Indices with dividends

reinvested constitute an estimate of total return arrived at by

reinvesting one-twelfth of the month end yield at every month end.

In respect of emerging markets, MSCI has constructed its indices

with dividends reinvested as follows:

In the period between the ex-date and the date of dividend

reinvestment, a dividend receivable is a component of the index return.

Dividends are deemed received on the payment date.

To determine the payment date, a fixed time lag is assumed to

exist between the ex-date and the payment date. This time lag varies by

country, and is determined in accordance with general practices within

that market.

Reinvestment of dividends occurs at the end of the month in

which the payment date falls.

Price and Exchange Rates

Prices used to calculate the MSCI Indices are the official exchange

closing prices. All prices are taken from the dominant exchange in each

market. In countries where there are foreign ownership limits, MSCI

uses the price quoted on the official exchange, regardless of whether

the limit has been reached.

MSCI uses WM/Reuters Closing Spot Rates for all developed and

emerging markets except those in Latin America. The WM/Reuters Closing

Spot Rates were established by a committee of investment managers and

data providers, including MSCI, whose object was to standardize

exchange rates used by the investment community. Exchange rates are

taken daily at 4 p.m. London time by the WM Company and are sourced

whenever possible from multi-contributor quotes on Reuters.

Representative rates are selected for each currency based on a number

of ``snapshots'' of the latest contributed quotations taken from the

Reuters service at short intervals around 4 p.m. WM/Reuters provides

closing bid and offer rates. MSCI uses these to calculate the mid-point

to 5 decimal places.

MSCI continues to monitor exchange rates independently and may,

under exceptional circumstances, elect to use an alternative exchange

rate if the WM/Reuters rate is believed not to be representative for a

given currency on a

[[Page 62516]]

particular day. Because of the high volatility of currencies in some

Latin American countries, MSCI continues to use its own timing and

sources for these markets.

Changes to the Indices

In changing the constituents of the indices, MSCI attempts to

balance representativeness versus undue turnover. An index must

represent the current state of an evolving marketplace, yet minimize

turnover, which is costly as well as inconvenient for managers.

There are two broad categories of changes to the MSCI Indices. The

first consists of market-driven changes such as mergers, acquisitions,

bankruptcies, etc. These are announced and implemented as they occur.

The second category consists of structural changes to reflect the

evolution of a market, including changes in industry composition or

regulations. In the emerging markets, index restructurings generally

take place every 12 to 18 months. Structural changes may occur only on

four dates during the year: the first business days of March, June,

September and December. They are preannounced at least two weeks in

advance.

Restructuring an index involves a balancing of additions and

deletions. To maintain continuity and minimize turnover, MSCI is

reluctant to delete index constituents, and its approach to additions

is correspondingly stringent. As markets grow because of

privatizations, investor interest, or the relaxation of regulations,

index additions (with or without corresponding deletions) may be needed

to bring industry representations up to the 60% target. Companies are

considered not only with respect to their broad industry, but also with

respect to their subsector, so as to reflect if possible a broader

range of economic activity. Beyond industry representativeness, new

constituents are selected based on the criteria discussed above, i.e.

float, liquidity, cross-ownership, etc.

In general, new issues are not eligible for immediate inclusion in

the MSCI Indices because their liquidity remains unproven. Usually, new

issues undergo a ``seasoning'' period of one year to 18 months between

index restructurings until a trading pattern and volume are

established. After that time, they are eligible for inclusion, subject

to the criteria discussed above.

In the emerging markets, however, it is not uncommon that a large

new issue, usually a privatization, comes to market and substantially

changes the country's industry profile. In exceptional circumstances,

where an issue's size, visibility and investor interest assure high

liquidity, and where excluding it would distort the characteristics of

the market, MSCI may decide to include it immediately in an Index. In

other cases, MSCI may decide not to include a large new issue even in

the normal process of restructuring, and in spite of substantial size

and liquidity.

MSCI's primary concern when considering deletions is the continuity

of the Indices. Of secondary concern are the turnover costs associated

with deletions. The Indices must represent the full investment cycle,

including bear as well as bull markets. Out-of-favor stocks may exhibit

declining price, market capitalization or liquidity, and yet continue

to be good representatives of their industry.

Companies may be deleted because they have diversified away from

their industry classification, because the industry has evolved in a

different direction from the company's thrust, or because a better

industry representative exists (either a new issue or an existing

company). In addition, in order not to exceed the 60% target coverage

of industries and countries, adding new index companies may entail

corresponding deletions. Usually such deletions take place within the

same industry, but there are occasional exceptions.

3. Criteria for Initial and Continued Listing

Because of the open-end nature of Funds issuing Index Fund Shares,

the Exchange believes it is necessary to maintain appropriate

flexibility in connection with the listing of Index Fund Shares of a

particular Fund or series thereof. In connection with initial listing,

the Exchange will establish a minimum number of Index Shares required

to be outstanding at the time of commencement of Exchange trading. For

each series of Index Fund Shares, it is anticipated that a minimum of

the equivalent of three Creation Units will be required to be

outstanding when trading begins.

Each series of Index Fund Shares will be subject to the initial and

continued listing criteria of Rule 1002A(b) which provides that

following the initial twelve month period following commencement of

Exchange trading of a series of Index Fund Shares, the Exchange will

consider suspension of trading in, or removal from listing of, such

series under any of the following circumstances:

(a) if there are fewer than 50 beneficial holders of the series of

Index Fund Shares for 30 or more consecutive trading days; or

(b) if the value of the index or portfolio of securities on which

the series of Index Fund Shares is based is no longer calculated or

available; or

(c) if such other event shall occur or condition exists which, in

the opinion of the Exchange, makes further dealings on the Exchange

inadvisable.

The Exchange will require the Index Fund Shares be removed from

listing upon termination of the Fund that issued such shares.

4. Trading Halts

Prior to commencement of trading in Index Fund Shares, the Exchange

will issue a circular to members informing them of Exchange policies

regarding trading halts in such securities. The circular will make

clear that, in addition to other factors that may be relevant, the

Exchange may consider factors such as those set for in Rule 918C(b) in

exercising its discretion to halt or suspend trading. These factors

would include: (1) for Index Fund Shares based on a domestic stock

index, whether trading has been halted or suspended in the primary

market(s) for any combination of underlying stocks accounting for 20%

or more of the applicable current index group value; (2) for Index Fund

Shares based on a foreign stock index, whether trading has been halted

or suspended market-wide in the applicable foreign market; or (3)

whether other unusual conditions or circumstances detrimental to the

maintenance of a fair and orderly market are present.

5. Terms and Characteristics

Prior to commencement of trading of a series of Index Fund Shares,

the Exchange will distribute to Exchange members and member

organizations an Information Circular calling attention to

characteristics of the specific series and to applicable Exchange

rules. The circular also will inform member organizations regarding any

applicable requirements for delivery of a prospectus to investors. The

Amex has stated that any broker-dealer handling transactions for

customers in WEBS will have an obligation to deliver to such customers

a prospectus regarding WEBS pursuant to the requirements of the

Securities Act of 1933.\5\

\5\Amendment No. 1, supra note 2. The Amex also states that in

the event that it obtains an exemption from the prospectus delivery

requirements in the future with respect to WEBS or to the other

series of Index Fund Shares listed on the Exchange, the Exchange

will consult with Commission staff and will file any necessary rule

changes. Id.

[[Page 62517]]

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The Exchange believes that the proposed rule change is consistent

with Section 6(b) of the Act in general and furthers the objectives of

Section 6(b)(5) in particular in that it is designed to prevent

fraudulent and manipulative acts and practices, 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 transaction in

securities, and, in general protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Amex believes that the proposed rule change will not impose any

burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received from Members, Participants, or Others

Written comments on the proposed rule change were neither solicited

nor received.

III. 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. 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-Amex-95-43 and should be submitted by December 27, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority\6\

\6\17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-29691 Filed 12-5-95; 8:45 am]

BILLING CODE 8010-01-M