SEC Approves Changes to Merrill Lynch HOLDRS


A ruling handed down by the Securities and Exchange Commission (SEC) should prove to be a boon to HOLDRS investors.

"For many investors, corporate action treatment was the primary reason they avoided HOLDRs. With this announcement, we expect the liquidity of HOLDRs to increase dramatically. As the market, particularly technology, sells off, these become the hedging vehicle of choice," said Diane Garnick, Equity Derivatives Strategist at Merrill Lynch.

HOLDRS are fixed baskets of stocks which trade as individual shares on the stock market. The new vehicles were unveiled by Merrill Lynch late last year, and have attracted vast amounts of capital into hot sector funds. HOLDRS are created in round lots of 100, and the investor actually owns the underlying stocks and can buy and sell them as he wishes. A charge of $0.08 per share per year is charged for management. For a fund with a share value of $50, for example, this amounts to an annual expense ratio of 16 basis points (0.16%).

The new rules governing the HOLDRS remove some significant quirks which had made the baskets awkward to manage and sometimes expensive to trade. Previous to the SEC ruling, the HOLDRS trust was forced to distribute shares, or portions of shares outside the trust any time a corporate action such as a merger, consolidation, spinoff or other action added shares or portions of shares of stocks outside the original basket. Investors were then forced to pay significant additional transaction costs to trade these odd pieces.

Now these pieces can be held in the trust and liquidated with the basket if the investor decides to redeem it, with no additional cost, save the cancellation fee (up to $10 - the custodian bank also charges an issuance fee of up to $10 per round lot). To put that into perspective, that would amount to 20 basis points in and out based on a $50 share price ($5000 round lot price).

The ruling effectively approves a Merrill Lych prospectus supplement that was filed earlier this year. The new rules took effect immediatly as of the SEC ruling on November 28, 2000. Under the new regimen, the HOLDRS will only be forced to distribute shares if they fall outside Standard and Poor's broad classification for the stocks in that fund. The prospectus supplements call this an unlikely event.