Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc. Relating to the Listing and Trading of Investment Company Units, Including World Equity Benchmark Shares (``WEBS'')

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40603; International Series Release No. 1165; File No.

SR-PCX-98-29]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Pacific Exchange, Inc. Relating to the Listing and

Trading of Investment Company Units, Including World Equity Benchmark

Shares (``WEBS'')

October 26, 1998.

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

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that

on June 18, 1998, the Pacific Exchange, Inc. (``Exchange'' or ``PCX'')

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 Exchange. The Commission is publishing

this notice to solicit comments on the proposed rule change from

interested persons.

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

\2\ 17 CFR 240.19b-4.

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

Substance of the Proposed Rule Change

The Exchange seeks to adopt new rules to accommodate the trading,

whether by listing or pursuant to unlisted trading privileges, of

Investment Company Units (``Units''), including World Equity Benchmark

Shares (``WEBS'').

The text of the proposed rule change is available at the Office of

the Secretary, the Exchange, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements

concerning the purpose of, and basis for, the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The Exchange 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

1. Purpose

The Exchange seeks to adopt new rules to accommodate the trading,

whether by listing or pursuant to unlisted trading privileges, of

Units. WEBS are among the Units which the Exchange may seek to

trade.\3\ WEBS are structured as shares of seventeen separate series

(``Index Series''), each of which invests primarily in equity

securities traded in a designated foreign market in an effort to track

the performance of a specified foreign equity market index. The

investment objective of each of the initial seventeen Index Series is

to provide investment results that correspond generally to the price

and yield performance of publicly traded securities in the aggregate in

particular markets, as represented by a particular foreign equity

securities index compiled by Morgan Stanley Capital International

(``MSCI'').

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\3\ The Commission notes that the Exchange intends to clarify

whether: (i) The Exchange seeks solely to establish rules to

accommodate the trading of Units, or (ii) the Exchange, in addition

to establishing such rules, seeks to trade WEBS pursuant to unlisted

trading privileges upon approval of the filing. This information

will be reflected in any final approval order.

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The Exchange notes that the Commission previously approved proposed

rule changes submitted by the American Stock Exchange (``Amex'') and

the Chicago Stock Exchange (``CHX'') to list and/or trade WEBS.\4\

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\4\ 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).

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a. Background & description. WEBS are issued by Foreign Fund, Inc.,

(``Fund'') and are based on seventeen MSCI Indices (collectively ``MSCI

Indices,'' individually ``MSCI Index''). The countries whose exchange

markets are represented by the MSCI Indices are: Australia, Austria,

Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia,

Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, and the

United Kingdom.

The investment objective of each WEBS series is to seek to provide

investment results that generally correspond to the price and yield

performance of public securities traded in the aggregate in particular

foreign markets, as represented by specific MSCI Indices. Each WEBS

series will use a ``passive'' or indexing investment approach which

attempts to

[[Page 59355]]

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 in 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 Union''). The number of shares per Creation

Unit will range from 40,000 to 600,000.\5\

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\5\ The Exchange notes that in the Amex's filing to list and

trade WEBS, the Amex anticipated that the value at a Creation Unit

at the start of trading would range from $450,000 to $10,000,000 and

the net asset value of an individual WEBS security would range from

$10 to $20. See Securities Exchange Act Release Nos. 36947 (Mar. 8,

1996), 61 FR 10606 (Mar. 14, 1996).

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b. The MSCI Indices. MSCI generally seeks to have 60% of the

capitalization of a country's stock market index reflected in the MSCI

Index for such country. Thus, 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 Indices and additional indices called ``Free

Indices.'' The Free Indices exclude 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 Mexico and

Singapore 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 local currency and in U.S. dollars, without

dividends and with gross dividends reinvested.

Prices used to calculate the MSCI Indices are official exchange

closing prices. All prices are taken from the predominant exchange in

each market. To calculate the applicable foreign currency exchange

rate, 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

exceptional circumstances MSCI may elect to use an alternative exchange

rate for any country if the WM/Ruters rate is believed not to be

representative for a given currency on a particular day.

Each MSCI Index underlying a WEBS series is calculated by MSCI for

each trading day in the applicable foreign exchange market based on

official closing prices in such exchange 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, as well as 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, other

investors can request such information directly from the Fund

distributor. The net asset value (``NAV'') for each WEBS series will be

calculated directly by the Fund administrator, PFPC, Inc. The NAVs will

be made available to the public from the Fund distributor by means of a

toll-free number, and also will be available to NSCC participants

through data made available from NSCC.\6\

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\6\ The Exchange notes that in the Amex's WEBS filing, the Amex

anticipated that it would provide current WEBS pricing information

by disseminating through the facilities of the Consolidated Tape

Association an indicative optimized portfolio value (``Value'') for

each WEBS series as calculated by Bloomberg, L.P. The Value was to

be disseminated on a per WEBS basis every fifteen seconds during

regular Amex trading hours of 9:30 A.M. to 4:00 P.M. Eastern

Standard Time. Id.

The Exchange believes such Value is unlikely to reflect the

value of all securities included in the applicable benchmark MSCI

Index. In addition, the Exchange believes the Value would not

necessarily reflect the precise composition of the current portfolio

of securities held by the Fund for each WEBS series disseminated

during Amex 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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The Exchange will distribute an information circular to its members

in connection with the trading of WEBS. The circular will discuss the

special characteristics and risks of trading this type of security. The

following are among the items to be discussed in the circular: what

WEBS are, how WEBS are created and redeemed, the requirement that

members and member firms deliver a WEBS prospectus to investors

purchasing WEBS prior to or concurrently with the confirmation of a

WEBS transaction, applicable Exchange rules, dissemination information,

trading information, and the applicability of suitability rules. The

Exchange also intends to utilize its existing surveillance procedures

to surveillance trading in WEBS, including surveilling specialist

compliance with Exchange Rule 5.33(a), which contemplates specialists

engaging in transactions with the issuer of WEBS under certain

circumstances.

c. Proposed rule. The Exchange seeks to adopt new rules to

accommodate the trading, whether by listing or pursuant to unlisted

trading privileges, of Units that meet certain criteria. A Unit is a

security that represents an interest in a registered investment company

(``Investment Company'') which Investment Company could be organized as

a unit investment trust, an open-end management investment company, or

similar entity.

The Exchange proposes that the Investment Company must hold

securities comprising, or otherwise based on or representing an

interest in an index or portfolio or securities; or hold securities in

another registered investment company that holds securities 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.

Under the proposed rule change, the Investment Company must also

issue Units in a specified aggregate number in return for a deposit

(``Deposit'') consisting of either 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 shares of a registered investment

company based on or representing an interest in, an index or portfolio

or

[[Page 59356]]

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. 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, and there must be at least 300,000

Units outstanding prior to the commencement of trading of a series of

Units on the Exchange.

The proposed rule change would allow the Exchange to trade, whether

by listing or pursuant to unlisted trading privileges, specified series

of Units, with each series 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; provided

that, 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, then the value of the index or portfolio may be

calculated and disseminated to the public at least once per day in that

country. Units may be either certified or issued in the form of a

single global certificate.

Under the proposal, the Exchange may consider suspending trading

and delisting (if applicable) a series of Units if after the initial

twelve-month period beginning upon the commencement of trading of a

series of Units: (i) 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 that, in the opinion of the Exchange, makes

further dealings on the Exchange inadvisable. In addition, the Exchange

will 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.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with

Section 6(b) of the Act,\7\ in general, and with Section 6(b)(5),\8\ in

particular, in that it is designed to 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 protect

investors and the public interest.

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\7\ 15 U.S.C. 78f(b).

\8\ 15 U.S.C. 78f(b)(5).

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

The Exchange does not believe the proposed rule change will impose

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

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

Rule Change Received From Members, Participants, or Others

The Exchange did not solicit or receive written comments with

respect to the proposed rule change.

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 Exchange consents, the Commission will:

(A) by order approve the 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, including whether the proposed rule

change is consistent with the Act. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

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 Room, 450 Fifth Street, N.W., Washington,

D.C. 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 24, 1998.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Jonathan G. Katz,

Secretary.

[FR Doc. 98-29338 Filed 11-2-98; 8:45 am]

BILLING CODE 8010-01-M