Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of a Proposed Rule Change and Amendments No. 1 and 2 Thereto Relating to the Listing and Trading of Shares of Funds of the ProShares Trust, 77823-77834 [E6-22093]
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Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices
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determination of duties 1999–2000) and its
amendments, 67 FR 15542 of 2 April 2002);
• Final results of the determination of antidumping duties for the period from July 2000
to June 2001, entitled ‘‘Final Results of
Antidumping Duty Administrative Review:
Stainless Steel Sheet And Strip In Coils From
Mexico,’’ published in 68 FR 6889 of 11
February 2003 (final results of the
determination of duties 2000–2001), and
amendments, 68 FR 13686 of 20 March 2003.
• Final results of the determination of antidumping duties for the period from July 2001
to June 2002, entitled ‘‘Final Results of
Antidumping Duty Administrative Review:
Stainless Steel Sheet And Strip In Coils From
Mexico,’’ published in 69 FR 6259 of 10
February 2004 (final results of the
determination of duties 2001–2002);
• Final results of the determination of antidumping duties for the period from July 2002
to June 2003, entitled ‘‘Final Results Of
Antidumping Duty Administrative Review:
Stainless Steel Sheet And Strip In Coils From
Mexico,’’ published in 69 FR 3677 of 26
January 2005 (final results of the
determination of duties 2002–2003);
• Final results of the determination of antidumping duties for the period from July 2003
to June 2004, entitled ‘‘Final Results Of
Antidumping Duty Administrative Review:
Stainless Steel Sheet And Strip In Coils From
Mexico,’’ published in 70 FR 73444 of 12
December 2005 (final results of the
determination of duties 2003–2004).
not provide separate cover letters;
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submission itself. Similarly, to the
extent possible, any attachments to the
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2155(g)(2)). If the submitter believes that
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• Sections 736, 751, 771(35)(A) and (B),
and section 777A(c) and (d) of The Tariff Act
(2) must clearly mark the material as
of 1930, as amended;
SUBMITTED IN CONFIDENCE at the
• The Statement of Administrative Action
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I;
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• The Import Administration Antidumping URAA (19 U.S.C. 3537(e)), USTR will
Manual (1997 edition), including the
maintain a file on this dispute
computer program(s) to which it refers.
settlement proceeding, accessible to the
In addition, Mexico challenges the
public, in the USTR Reading Room,
methodologies used to calculate
which is located at 1724 F Street, NW.,
dumping margins in original
Washington, DC 20508. The public file
investigations and periodic reviews.
will include non-confidential comments
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respect to the dispute; if a dispute
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or non-confidential summaries of
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with ‘‘Mexico Zeroing II (DS344)’’ in the participants in the dispute; the report of
the panel, and, if applicable, the report
subject line, or (ii) by fax, to Sandy
of the Appellate Body. An appointment
McKinzy at (202) 395–3640, with a
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the electronic mail address above. USTR DS–344 Mexico Zeroing II) may be made
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Interested persons who make
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a.m. to noon and 1 p.m. to 4 p.m.,
Monday through Friday.
Daniel Brinza,
Assistant United States Trade Representative
for Monitoring and Enforcement.
[FR Doc. E6–22186 Filed 12–26–06; 8:45 am]
BILLING CODE 3190–W7–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54961; File No. SR–Amex–
2006–101]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing of a Proposed Rule Change
and Amendments No. 1 and 2 Thereto
Relating to the Listing and Trading of
Shares of Funds of the ProShares
Trust
December 18, 2006.
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 October
24, 2006, the American Stock Exchange
LLC (‘‘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 substantially prepared by the
Exchange. On November 22, 2006,
Amex submitted Amendment No. 1 to
the proposed rule change.3 On
December 8, 2006, Amex submitted
Amendment No. 2 to the proposed rule
change.4 The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade the shares (the ‘‘Shares’’) of eightyone (81) funds of the ProShares Trust
(the ‘‘Trust’’) based on numerous
underlying securities indexes. The text
of the proposal is available on Amex’s
Internet Web site (https://
www.amex.com), at Amex’s principal
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, Amex proposed to list and
trade the shares of twenty-four (24) additional funds
of the Trust (as defined herein) and made certain
clarifying changes with respect to the trading of the
Shares (as defined herein). Amendment No. 1
replaced the original filing in its entirety.
4 In Amendment No. 2, Amex made additional
changes to clarify certain defined terms, the
creation and redemption of the Shares, and the
criteria for continued listing of the Shares.
Amendment No. 2 replaced Amendment No. 1 in
its entirety.
2 17
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office, and at the Commission’s Public
Reference Room.
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, as amended. 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
jlentini on PROD1PC65 with NOTICES
1. Purpose
Amex Rules 1000A et seq. provide
standards for the listing of Index Fund
Shares, which are securities issued by
an open-end management investment
company for exchange trading. These
securities are registered under the
Investment Company Act of 1940
(‘‘1940 Act’’), as well as under the Act.
Index Fund Shares are defined in Amex
Rule 1000A(b)(1) as securities based on
a portfolio of stocks or fixed income
securities that seek to provide
investment results that correspond
generally to the price and yield of a
specified foreign or domestic stock
index or fixed income securities index.
Recent amendments adopting Amex
Rule 1000A(b)(2) now permit the
Exchange to list and trade Index Fund
Shares that seek to provide investment
results that exceed the performance of
an underlying securities index by a
specified multiple or that seek to
provide investment results that
correspond to a specified multiple of the
inverse or opposite of the index’s
performance.
The Exchange proposes to list under
amended Amex Rule 1000A the Shares
of eighty-one (81) new funds of the
Trust that are designated as Ultra Funds,
Short Funds, and UltraShort Funds (the
‘‘Funds’’). Each of the Funds will have
a distinct investment objective. Each
Fund will attempt, on a daily basis, to
achieve its investment objective by
corresponding to a specified multiple of
the performance, or the inverse
performance, of a particular equity
securities index as briefly described
below. The Funds are based on the
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following benchmark indexes: 5 (1) S&P
Small Cap 600 Index, (2) S&P500/
Citigroup Value Index, (3) S&P500/
Citigroup Growth Index, (4) S&P
MidCap 400/Citigroup Value Index, (5)
S&P MidCap 400/Citigroup Growth
Index, (6) S&P SmallCap 600/Citigroup
Value Index, (7) S&P SmallCap 600/
Citigroup Growth Index, (8) Dow Jones
U.S. Basic Materials Index, (9) Dow
Jones U.S. Consumer Services Index,
(10) Dow Jones U.S. Consumer Goods
Index, (11) Dow Jones U.S. Oil and Gas
Index, (12) Dow Jones U.S. Financials
Index, (13) Dow Jones U.S. Health Care
Index, (14) Dow Jones U.S. Industrials
Index, (15) Dow Jones U.S. Real Estate
Index, (16) Dow Jones U.S.
Semiconductor Index (17) Dow Jones
U.S. Technology Index, (18) Dow Jones
U.S. Utilities Index (19) Russell 2000
Index, (20) Russell Midcap Index, (21)
Russell Midcap Growth Index, (22)
Russell Midcap Value Index, (23)
Russell 1000 Index, (24) Russell 1000
Growth Index, (25) Russell 1000 Value
Index, (26) Russell 2000 Growth Index,
and (27) Russell 2000 Value Index
(each index individually referred to as
the ‘‘Underlying Index,’’ and all
Underlying Indexes collectively referred
to as the ‘‘Underlying Indexes’’).6
Certain Funds (the ‘‘Ultra Funds’’ or
‘‘Bullish Funds’’) seek daily investment
results, before fees and expenses that
correspond to twice (200%) the daily
performance of the Underlying Indexes.
The net asset value (‘‘NAV’’) of the
Shares of each of these Ultra Funds, if
successful in meeting its objective,
should increase, on a percentage basis,
approximately twice as much as the
respective Fund’s Underlying Index
gains when the prices of the securities
in such Underlying Index increase on a
given day, and should decrease
approximately twice as much as the
5 A complete list of the Funds is set forth in
Exhibit A to Amendment No. 2, which is available
on Amex’s Internet Web site (https://
www.amex.com).
6 The Statement of Additional Information
(‘‘SAI’’) for the Funds discloses that each Fund
reserves the right to substitute a different
Underlying Index. Substitutions can occur if an
Underlying Index becomes unavailable, no longer
serves the investment needs of shareholders, the
Fund experiences difficulty in achieving
investment results that correspond to the applicable
Underlying Index, or for any other reason
determined in good faith by the Board (as defined
herein). In such instance, the substitute index will
attempt to measure the same general market as the
current Underlying Index. Shareholders will be
notified (either directly or through their
intermediary) if a Fund’s current Underlying Index
is replaced. In the event a Fund substitutes an
Underlying Index with another, different index, the
Exchange will file with the Commission a Form
19b–4, which the Commission would have to
approve to permit continued trading of the product
based on the substitute index. See infra note 63 and
accompanying text.
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respective Underlying Index loses when
such prices decline on a given day.
In addition, the Exchange proposes to
list and trade Shares of certain Funds
(the ‘‘Short Funds’’) that seek daily
investment results, before fees and
expenses, that correspond to the inverse
or opposite of the daily performance
(¥100%) of the Underlying Indexes. If
each of these Short Funds is successful
in meeting its objective, the NAV of the
Shares of each Short Fund should
increase approximately as much, on a
percentage basis, as the respective
Underlying Index loses when the prices
of the securities in the Underlying Index
decline on a given day, or should
decrease approximately as much as the
respective Underlying Index gains when
the prices of the securities in the
Underlying Index rise on a given day.
Finally, the Exchange proposes to list
and trade Shares of certain Funds (the
‘‘UltraShort Funds’’) that seek daily
investment results, before fees and
expenses, that correspond to twice the
inverse (¥200%) of the daily
performance of the Underlying Indexes.
If each of these UltraShort Funds is
successful in meeting its objective, the
NAV of the Shares of each UltraShort
Fund should increase approximately
twice as much, on a percentage basis, as
the respective Underlying Index loses
when the prices of the securities in the
Underlying Index decline on a given
day, or should decrease approximately
twice as much as the respective
Underlying Index gains when the prices
of the securities in the Underlying Index
rise on a given day. The Short Funds
and UltraShort Funds each have
investment objectives that seek
investment results corresponding to an
inverse performance of the Underlying
Indexes and are collectively referred to
as the ‘‘Bearish Funds.’’
The Commission recently approved
the listing and trading of certain Ultra
Funds, Short Funds, and UltraShort
Funds based on the S&P 500 Index,
Nasdaq-100 Index, Dow Jones Industrial
Average Index, and S&P MidCap 400
Index.7 Each of the existing Ultra Funds
is expected to gain, on a percentage
basis, approximately twice as much as
the benchmark Underlying Index and
should lose approximately twice as
much as the Underlying Index when
such prices decline. Each of the existing
Short Funds is expected to achieve
investment results, before fees and
7 See Securities Exchange Act Release No. 52553
(October 3, 2005), 70 FR 59100 (October 11, 2005).
See also Securities Exchange Act Release No. 54040
(June 23, 3006), 71 FR 37629 (June 30, 2006)
(approving Amex’s proposal to list and trade shares
of funds of the Trust based on certain other
benchmark indexes).
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expenses, that correspond to the inverse
or opposite of the daily performance
(¥100%) of an Underlying Index. In
addition, each of the existing UltraShort
Funds is expected to achieve investment
results, before fees and expenses, that
correspond to twice the inverse or
opposite of the daily performance
(¥200%) of an Underlying Index.
ProShare Advisors LLC is the
investment advisor (the ‘‘Advisor’’) to
each Fund. The Advisor is registered
under the Investment Advisers Act of
1940.8 While the Advisor will manage
each Fund, the Trust’s Board of Trustees
(the ‘‘Board’’) will have overall
responsibility for the Funds’’
operations. The composition of the
Board is, and will be, in compliance
with the requirements of Section 10 of
the 1940 Act.
SEI Investments Distribution
Company (the ‘‘Distributor’’), a brokerdealer registered under the Act, will act
as the distributor and principal
underwriter of the Shares. JPMorgan
Chase Bank, N.A. will act as the index
receipt agent (‘‘Index Receipt Agent’’)
for which it will receive fees. The Index
Receipt Agent will be responsible for
transmitting the Deposit List (as defined
herein) to the National Securities
Clearing Corporation (‘‘NSCC’’) and for
the processing, clearance, and
settlement of purchase and redemption
orders through the facilities of the
Depository Trust Company (‘‘DTC’’) and
NSCC on behalf of the Trust. The Index
Receipt Agent will also be responsible
for the coordination and transmission of
files and purchase and redemption
orders between the Distributor and the
NSCC.
Shares of the Funds issued by the
Trust will be a class of exchange-traded
securities that represent an interest in
the portfolio of a particular Fund.9 The
Shares will be registered in book-entry
form only, and the Trust will not issue
individual share certificates. The DTC
or its nominee will be the record or
registered owner of all outstanding
Shares. Beneficial ownership of Shares
will be shown on the records of DTC or
DTC participants.
Underlying Indexes
The Exchange represents that the
Underlying Index components comply
with the generic listing standards set
forth in Commentary .02 to Amex Rule
1000A.
S&P SmallCap 600 Index. The S&P
SmallCap 600 Index is a measure of
small-cap company U.S. stock market
performance. It is a float-adjusted,
market capitalization-weighted index of
600 U.S. operating companies.
Securities are selected for inclusion in
the index by a committee of Standard &
Poor’s through a non-mechanical
process that factors criteria such as
liquidity, price, market capitalization,
financial viability, and public float. This
Underlying Index 10 has been approved
for options trading and is also the basis
for an exchange traded fund (‘‘ETF’’).11
S&P 500/Citigroup Value Index. The
S&P 500/Citigroup Value Index is
designed to provide a comprehensive
measure of large-cap U.S. equity
‘‘value’’ performance. It is an
unmanaged, float-adjusted, and market
capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P 500 Index that
have been identified as being on the
value end of the growth-value spectrum.
This Underlying Index 12 is the basis for
an ETF.
S&P 500/Citigroup Growth Index. The
S&P 500/Citigroup Growth Index is
designed to provide a comprehensive
measure of large-cap U.S. equity
‘‘growth’’ performance. It is an
unmanaged, float-adjusted, and market
capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P 500 Index that
have been identified as being on the
growth end of the growth-value
spectrum. This Underlying Index 13 is
the basis for an ETF.
S&P MidCap 400/Citigroup Value
Index. The S&P MidCap 400/Citigroup
Value Index is designed to provide a
comprehensive measure of mid-cap U.S.
equity ‘‘value’’ performance. It is an
unmanaged, float-adjusted, and market
capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P MidCap 400
Index that have been identified as being
on the value end of the growth-value
spectrum. This Underlying Index 14 has
jlentini on PROD1PC65 with NOTICES
10 The
8 The Trust, Advisor, and Distributor
(‘‘Applicants’’) have filed with the Commission an
Amended Application for an Order under Sections
6(c) and 17(b) of the 1940 Act (the ‘‘Application’’)
for the purpose of exempting the Funds of the Trust
from various provisions of the 1940 Act (File No.
812–12354).
9 The Trust is registered as a business trust under
the Delaware Corporate Code.
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shares of the iShares S&P SmallCap 600
Index Fund are traded on the Exchange.
11 See Securities Exchange Act Release No. 35532
(March 24, 1995), 60 FR 16518 (March 30, 1995).
12 12 The shares of the iShares S&P 500 Value
Index Fund are traded on the Exchange.
13 The shares of the iShares S&P 500 Growth
Index Fund are traded on the Exchange.
14 The shares of the iShares S&P MidCap 400
Value Index Fund are traded on the Exchange.
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77825
been approved for options trading and
is also the basis for an ETF.15
S&P MidCap 400/Citigroup Growth
Index. The S&P MidCap 400/Citigroup
Growth Index is designed to provide a
comprehensive measure of mid-cap U.S.
equity ‘‘growth’’ performance. It is an
unmanaged, float-adjusted, and market
capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P MidCap 400
Index that have been identified as being
on the growth end of the growth-value
spectrum. This Underlying Index 16 has
been approved for options trading and
is also the basis for an ETF.17
S&P Small Cap 600/Citigroup Value
Index. The S&P SmallCap 600/Citigroup
Value Index is designed to provide a
comprehensive measure of small-cap
U.S. equity ‘‘value’’ performance. It is
an unmanaged, float-adjusted, and
market capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P SmallCap 600
Index that have been identified as being
on the value end of the growth-value
spectrum. This Underlying Index 18 has
been approved for options trading and
is also the basis for an ETF.19
S&P SmallCap 600/Citigroup Growth
Index. The S&P SmallCap 600/Citigroup
Growth Index is designed to provide a
comprehensive measure of small-cap
U.S. equity ‘‘growth’’ performance. It is
an unmanaged, float-adjusted, and
market capitalization-weighted index
comprised of stocks representing
approximately half the market
capitalization of the S&P SmallCap 600
Index that have been identified as being
on the growth end of the growth-value
spectrum. This Underlying Index 20has
been approved for options trading and
is also the basis for an exchange-traded
fund ETF.21
Dow Jones U.S. Basic Materials Index.
The Dow Jones U.S. Basic Materials
Index measures the performance of the
basic materials industry of the U.S.
equity market. Component companies
are involved in the production of
aluminum, steel, non ferrous metals,
commodity chemicals, specialty
chemicals, forest products, paper
products, as well as the mining of
15 See Securities Exchange Act Release 30290
(January 27, 1992), 57 FR 4072 (February 3, 1992).
16 The shares of the iShares S&P MidCap 400
Growth Index Fund are traded on the Exchange.
17 See supra note 15.
18 The shares of the iShares S&P SmallCap 600
Value Index Fund are traded on the Exchange.
19 See supra note 11.
20 The shares of the iShares S&P SmallCap 600
Growth Index Fund are traded on the Exchange.
21 See supra note 11.
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jlentini on PROD1PC65 with NOTICES
precious metals and coal. This
Underlying Index 22 has been approved
for options trading and is also the basis
for an ETF.
Dow Jones U.S. Consumer Goods
Index. The Dow Jones U.S. Consumer
Goods Index measures the performance
of consumer spending in the goods
industry of the U.S. equity market.
Component companies include
manufacturers of automobiles and
automobile parts and tires, brewers and
distillers, farming and fishing
operations, durable and non-durable
household product manufacturers,
cosmetic companies, and companies
related to food and tobacco products,
clothing, accessories, and footwear. This
Underlying Index 23 is the basis for an
ETF.
Dow Jones U.S. Consumer Services
Index. The Dow Jones U.S. Consumer
Services Index measures the
performance of consumer spending in
the services industry of the U.S. equity
market. Component companies include
airlines, broadcasting and entertainment
companies, apparel and broadline
retailers, food and drug retailers, media
agencies, publishing companies,
gambling companies, hotels, restaurants
and bars, and travel and tourism
companies. This Underlying Index 24 is
the basis for an ETF.
Dow Jones U.S. Financials Index. The
Dow Jones U.S. Financials Index
measures the performance of the
financial services industry of the U.S.
equity market. Component companies
include regional banks, major U.S.
domiciled international banks, full line,
life, and property and casualty
insurance companies, companies that
invest, directly or indirectly, in real
estate, diversified financial companies
such as Fannie Mae, credit card issuers,
check cashing companies, mortgage
lenders, and investment advisers,
securities brokers and dealers, including
investment banks, merchant banks, and
online brokers, and publicly traded
stock exchanges. This Underlying
Index 25 is the basis for an ETF.
Dow Jones U.S. Health Care Index.
The Dow Jones U.S. Health Care Index
measures the performance of the
healthcare industry of the U.S. equity
market. Component companies include
health care providers, biotechnology
companies, medical supply companies,
and companies related to advanced
medical devices and pharmaceuticals.
This Underlying Index 26 is the basis for
an ETF.
Dow Jones U.S. Industrials Index. The
Dow Jones U.S. Industrials Index
measures the performance of the
industrial industry of the U.S. equity
market. This Underlying Index includes
component companies in sectors related
to building materials, heavy
construction, factory equipment, heavy
machinery, industrial services,
pollution control, containers and
packaging, industrial diversified, air
freight, marine transportation, railroads,
trucking, land-transportation
equipment, shipbuilding, transportation
services, advanced industrial
equipment, electronic components and
equipment, and aerospace. This
Underlying Index 27 is the basis for an
ETF.
Dow Jones U.S. Oil & Gas Index. The
Dow Jones U.S. Oil & Gas Index
measures the performance of the oil and
gas industry of the U.S. equity market.
Component companies include oil
drilling equipment and service
companies, oil companies-major, oil
companies-secondary, pipeline
companies, liquid, solid, or gaseous
fossil fuel producers, and related service
companies. This Underlying Index 28 is
the basis for an ETF.
Dow Jones U.S. Real Estate Index. The
Dow Jones U.S. Real Estate Index
measures the performance of the real
estate sector of the U.S. equity market.
Component companies include those
that invest directly or indirectly in the
development, management, or
ownership of shopping malls, apartment
buildings and housing developments,
and real estate investment trusts
(‘‘REITs’’), which invest in apartments
and office and retail properties. REITs
are passive investment vehicles that
invest primarily in income-producing
real estate or real estate related loans or
interests. This Underlying Index 29 has
been approved for options trading and
is also the basis for an ETF.
Dow Jones U.S. Semiconductor Index.
The Dow Jones U.S. Semiconductor
Index measures the performance of the
semiconductor sub-sector of the U.S.
equity market. Component companies
are engaged in the production of
semiconductors and other integrated
chips, as well as other related products
such as semiconductor capital
equipment and mother-boards.30
Dow Jones U.S. Technology Index.
The Dow Jones U.S. Technology Index
measures the performance of the
technology industry of the U.S. equity
market. Component companies include
those involved in computers and office
equipment, software, communications
technology, semiconductors, diversified
technology services, and Internet
services. This Underlying Index 31 is the
basis for an ETF.
Dow Jones U.S. Utilities Index. The
Dow Jones U.S. Utilities Index measures
the performance of the utilities industry
of the U.S. equity market. Component
companies include electric utilities, gas
utilities, and water utilities. This
Underlying Index 32 is the basis for an
ETF.
Russell 2000 Index. The Russell
2000 Index is a measure of small-cap
U.S. stock market performance. It is an
adjusted, market capitalizationweighted index containing
approximately 2,000 of the smallest
companies in the Russell 3000 Index
or approximately 8% of the total market
capitalization of the Russell 3000
Index, which in turn represents
approximately 98% of the investable
U.S. equity market. All U.S. companies
listed on the New York Stock Exchange
(‘‘NYSE’’), Amex, or The Nasdaq Stock
Market meeting an initial minimum ($1)
price are considered for inclusion.
Reconstitution occurs annually.
Securities are not replaced if they leave
the index; however, new issue securities
meeting other membership requirements
may be added on a quarterly basis. This
Underlying Index 33 has been approved
for options trading and is also the basis
for an ETF.
Russell Midcap Index. The Russell
Midcap Index measures the
performance of the 800 smallest
companies in the Russell 1000 Index,
which represent approximately 30% of
the total market capitalization of the
Russell 1000 Index. As of the latest
reconstitution, the average market
22 The shares of the iShares Dow Jones U.S. Basic
Materials Sector Index Fund are traded on the
Exchange.
23 The shares of the iShares Dow Jones U.S.
Consumer Goods Sector Index Fund are traded on
the Exchange.
24 The shares of the iShares Dow Jones U.S.
Consumer Services Sector Index Fund are traded on
the Exchange.
25 The shares of the iShares Dow Jones U.S.
Financial Services Index Fund are traded on the
Exchange.
26 The shares of the iShares Dow Jones U.S.
Healthcare Sector Index Fund are traded on the
Exchange.
27 The shares of the iShares Dow Jones U.S.
Industrial Sector Index Fund are traded on the
Exchange.
28 The shares of the iShares Dow Jones U.S.
Energy Sector Index Fund are listed and traded on
the Exchange.
29 The shares of the iShares Dow Jones U.S. Real
Estate Index Fund are listed and traded on the
Exchange.
30 Amex represents that the Dow Jones U.S.
Semiconductor Index meets the Exchange’s generic
standards under Amex Rule 1000A, Commentary
.02.
31 The shares of the iShares Dow Jones U.S.
Technology Sector Index Fund are listed and traded
on the Exchange.
32 The shares of the iShares Dow Jones U.S.
Utilities Sector Index Fund are traded on the
Exchange.
33 The shares of the iShares Russell 2000 Index
Fund are traded on the Exchange.
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capitalization was approximately $5.2
billion; the median market
capitalization was approximately $3.9
billion. The largest company in the
index had an approximate market
capitalization of $14.8 billion. This
Underlying Index is the basis for an
ETF.34
Russell Midcap Growth Index. The
Russell Midcap Growth Index
measures the performance of those
Russell Midcap companies with higher
price-to-book ratios and higher
forecasted growth values. The stocks are
also members of the Russell 1000
Growth Index. This Underlying Index 35
is the basis for an ETF .
Russell Midcap Value Index. The
Russell Midcap Value Index measures
the performance of those Russell
Midcap companies with lower price-tobook ratios and lower forecasted growth
values. The stocks are also members of
the Russell 1000 Value Index. This
Underlying Index 36 is the basis for an
ETF .
Russell 1000 Index. The Russell
1000 Index measures the performance
of the 1,000 largest companies in the
Russell 3000 Index, which represents
approximately 92% of the total market
capitalization of the Russell 3000
Index. As of the latest reconstitution,
the average market capitalization was
approximately $13.8 billion; the median
market capitalization was
approximately $4.9 billion. The smallest
company in the index had an
approximate market capitalization of
$1.9 billion. This Underlying Index 37 is
the basis for an ETF .
Russell 1000 Growth Index. The
Russell 1000 Growth Index measures
the performance of those Russell 1000
companies with higher price-to-book
ratios and higher forecasted growth
values. This Underlying Index 38 is the
basis for an ETF .
Russell 1000 Value Index. The
Russell 1000 Value Index measures
the performance of those Russell 1000
companies with lower price-to-book
ratios and lower forecasted growth
values. This Underlying Index 39 is the
basis for an ETF .
Russell 2000 Growth Index. The
Russell 2000 Growth Index measures
34 The shares of the iShares Russell Midcap Index
Fund are traded on the Exchange.
35 The shares of the iShares Russell Midcap
Growth Index Fund are traded on the Exchange.
36 The shares of the iShares Russell Midcap Value
Index Fund are traded on the Exchange.
37 The shares of the iShares Russell 1000 Index
Fund are traded on the Exchange.
38 The shares of the iShares Russell 1000 Growth
Index Fund are traded on the Exchange.
39 The shares of the iShares Russell 1000 Value
Index Fund are traded on the Exchange.
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the performance of those Russell 2000
companies with higher price-to-book
ratios and higher forecasted growth
values. This Underlying Index 40 is the
basis for an ETF .
Russell 2000 Value Index. The
Russell 2000 Value Index measures
the performance of those Russell 2000
companies with lower price-to-book
ratios and lower forecasted growth
values. This Underlying Index 41 is the
basis for an ETF .
Investment Objective of the Funds
Each Bullish Fund will seek
investment results that correspond,
before fees and expenses, to twice
(200%) the daily performance of an
Underlying Index and will invest its
assets based upon the same strategies as
conventional index funds. Rather than
holding positions in equity securities
and certain financial instruments
intended to create exposure to 100% of
the daily performance of an Underlying
Index, these Funds will hold positions
in equity securities and certain financial
instruments designed to create exposure
equal to twice (200%), before fees and
expenses, the daily performance of an
Underlying Index. These Bullish Funds
generally will hold at least 85% of their
assets in the component equity
securities of the relevant Underlying
Index. The remainder of assets will be
devoted to certain financial
instruments 42 and money market
instruments 43 that are intended to
create the additional needed exposure to
such Underlying Index necessary to
pursue its investment objective.
The Bearish Funds will seek daily
investment results, before fees and
expenses, of the inverse or opposite
(¥100%) of the Underlying Index, in
the case of the Short Funds, or twice the
inverse or opposite (¥200%) of the
daily performance of the Underlying
Index, in the case of the UltraShort
Funds. Each of these Bearish Funds will
not invest directly in the component
securities of the relevant Underlying
40 The shares of the iShares Russell 2000 Growth
Index Fund are traded on the Exchange.
41 The shares of the iShares Russell 2000 Value
Index Fund are traded on the Exchange.
42 The financial instruments to be held by any of
the Funds may include stock index futures
contracts, options on futures contracts, options on
securities and indices, equity caps, collars and
floors, as well as swap agreements, forward
contracts, repurchase agreements, and reverse
repurchase agreements (the ‘‘Financial
Instruments’’).
43 Money market instruments include U.S.
government securities and repurchase agreements
(the ‘‘Money Market Instruments’’). Repurchase
agreements held by the Funds will be consistent
with Rule 2a–7 of the 1940 Act, i.e., remaining
maturities of 397 days or less and rated investmentgrade.
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77827
Index, but instead, will create short
exposure to such Underlying Index.
Each Bearish Fund will rely on
establishing positions in Financial
Instruments that provide, on a daily
basis, the inverse or opposite of, or
twice the inverse or opposite of, as the
case may be, the performance of the
relevant Underlying Index. Normally,
100% of the value of the portfolios of
each Bearish Fund will be devoted to
Financial Instruments and Money
Market Instruments.
While the Advisor will attempt to
minimize any ‘‘tracking error’’ between
the investment results of a particular
Fund and the performance (and
specified multiple thereof) or the
inverse performance (and specified
multiple thereof) of its Underlying
Index, certain factors may tend to cause
the investment results of a Fund to vary
from such relevant Underlying Index or
specified multiple thereof.44 The
Bullish Funds are expected to be highly
correlated to each respective Underlying
Index and investment objective (0.95 or
greater). The Bearish Funds are
expected to be highly inversely
correlated to each respective Underlying
Index and investment objective (¥0.95
or greater).45 In each case, the Funds are
expected to have a daily tracking error
of less than 5% (500 basis points)
relative to the specified multiple or
inverse multiple of the performance of
the relevant Underlying Index.
44 Several factors may cause a Fund to vary from
the relevant Underlying Index and investment
objective including: (1) A Fund’s expenses,
including brokerage fees (which may be increased
by high portfolio turnover) and the cost of the
investment techniques employed by that Fund; (2)
less than all of the securities in the benchmark
index being held by a Fund and securities not
included in the benchmark index being held by a
Fund; (3) an imperfect correlation between the
performance of instruments held by a Fund, such
as futures contracts, and the performance of the
underlying securities in the cash market; (4) bid-ask
spreads (the effect of which may be increased by
portfolio turnover); (5) holding instruments traded
in a market that has become illiquid or disrupted;
(6) a Fund’s share prices being rounded to the
nearest cent; (7) changes to the benchmark
Underlying Index that are not disseminated in
advance; (8) the need to conform a Fund’s portfolio
holdings to comply with investment restrictions or
policies or regulatory or tax law requirements; and
(9) early and unanticipated closings of the markets
on which the holdings of a Fund trade, resulting in
the inability of the Fund to execute intended
portfolio transactions.
45 Correlation is the strength of the relationship
between (1) the change in a Fund’s NAV and (2) the
change in the benchmark Underlying Index
(investment objective). The statistical measure of
correlation is known as the ‘‘correlation
coefficient.’’ A correlation coefficient of +1
indicates a perfect positive correlation while a
value of ¥1 indicates a perfect negative (inverse)
correlation. A value of zero would mean that there
is no correlation between the two variables.
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The Portfolio Investment Methodology
The Advisor will seek to establish an
investment exposure in each portfolio
corresponding to each Fund’s
investment objective based on its
‘‘Portfolio Investment Methodology,’’ as
described below. The Exchange states
that the Portfolio Investment
Methodology is a mathematical model
based on well-established principles of
finance that are widely used by
investment practitioners, including
conventional index fund managers.
As set forth in the Application, the
Portfolio Investment Methodology was
designed to determine for each Fund the
portfolio investments needed to achieve
its stated investment objectives. The
Portfolio Investment Methodology takes
into account a variety of specified
criteria and data, the most important of
which are: (1) Net assets (taking into
account creations and redemptions) in
each Fund’s portfolio at the end of each
trading day, (2) the amount of required
exposure to the Underlying Index, and
(3) the positions in equity securities,
Financial Instruments, and/or Money
Market Instruments at the beginning of
each trading day. The Advisor pursuant
to the methodology will then
mathematically determine the end-ofday positions to establish the required
amount of exposure to the Underlying
Index (the ‘‘Solution’’), which will
consist of equity securities, Financial
Instruments, and/or Money Market
Instruments. The difference between the
start-of-day positions and the required
end-of-day positions is the actual
amount of equity securities, Financial
Instruments, and/or Money Market
Instruments that must be bought or sold
for the day. The Solution represents the
required exposure and, when necessary,
is converted into an order or orders to
be filled that same day.
Generally, portfolio trades effected
pursuant to the Solution are reflected in
the NAV on the first business day (T+1)
after the date the relevant trade is made.
Therefore, the NAV calculated for a
Fund on a given day should reflect the
trades executed pursuant to the prior
day’s Solution. For example, trades
pursuant to the Solution calculated on
a Monday afternoon are executed on
behalf of the Fund in question on that
day. These trades will then be reflected
in the NAV for that Fund that is
calculated as of 4 p.m. Eastern Time
(‘‘ET’’) on Tuesday.
The timeline for the Portfolio
Investment Methodology is as follows.
Authorized Participants (‘‘APs’’ or
‘‘Authorized Participants’’) 46 have a 3
46 An Authorized Participant is either (1) a
broker-dealer or other participant in the continuous
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p.m. ET cut-off for orders submitted by
telephone, facsimile, and other
electronic means of communication and
a 4 p.m. ET cut-off for orders received
via mail. AP orders by mail are
exceedingly rare. Orders are received by
the Distributor and relayed to the
Advisor within ten (10) minutes. The
Advisor will know by 3:10 p.m. ET the
number of creation/redemption orders
by APs for that day. Orders are then
placed at approximately 3:40 p.m. ET as
market-on-close orders. At 4 p.m. ET,
the Advisor will again look at the
exposure to make sure that the orders
placed are consistent with the Solution,
and as described above, the Advisor will
execute any other transactions in
Financial Instruments to assure that the
Fund’s exposure is consistent with the
Solution.
Description of Investment Techniques
In attempting to achieve its individual
investment objectives, a Fund may
invest its assets in equity securities,
Financial Instruments, and Money
Market Instruments. The Bullish Funds
will hold between 85–100% of their
total assets in the equity securities
contained in the relevant Underlying
Index. The remainder of assets, if any,
will be devoted to Financial Instruments
and Money Market Instruments that are
intended to create additional needed
exposure to such Underlying Index
necessary to pursue the Bullish Funds’
investment objectives. The Bearish
Funds generally will not invest in
equity securities related to the
applicable Underlying Index, but rather
will hold only Financial Instruments
and Money Market Instruments. To the
extent, applicable, each Fund will
comply with the requirements of the
1940 Act with respect to ‘‘cover’’ for
Financial Instruments and thus may
hold a significant portion of its assets in
liquid instruments in segregated
accounts.
Each Fund may engage in transactions
in futures contracts on designated
contract markets where such contracts
trade and will only purchase and sell
futures contracts traded on a U.S.
futures exchange or board of trade. Each
Fund will comply with the
requirements of Rule 4.5 of the
regulations promulgated by the
Commodity Futures Trading
Commission (the ‘‘CFTC’’).47
net settlement system of the NSCC or (2) a DTC
participant who has entered into a participant
agreement with the Distributor.
47 The CFTC Rule 4.5 provides an exclusion for
investment companies registered under the 1940
Act from the definition of the term ‘‘commodity
pool operator’’ upon the filing of a notice of
eligibility with the National Futures Association.
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Each Fund may enter into swap
agreements and/or forward contracts for
the purposes of attempting to gain
exposure to the equity securities of its
Underlying Index without actually
transacting such securities. The
Exchange states that the counterparties
to the swap agreements and/or forward
contracts will be major broker-dealers
and banks. The creditworthiness of each
potential counterparty is assessed by the
Advisor’s credit committee pursuant to
guidelines approved by the Board.
Existing counterparties are reviewed
periodically by the Board. Each Fund
may also enter into repurchase and
reverse repurchase agreements with
terms of less than one year and will only
enter into such agreements with (i)
members of the Federal Reserve System,
(ii) primary dealers in U.S. government
securities, or (iii) major broker-dealers.
Each Fund may also invest in Money
Market Instruments, in pursuit of its
investment objectives, as ‘‘cover’’ for
Financial Instruments, as described
above, or to earn interest.
The Trust will adopt certain
fundamental policies consistent with
the 1940 Act, and each Fund will be
classified as ‘‘non-diversified’’ under
the 1940 Act. Each Fund, however,
intends to maintain the required level of
diversification and otherwise conduct
its operations so as to qualify as a
‘‘regulated investment company’’ or
‘‘RIC’’ for purposes of the Internal
Revenue Code (the ‘‘Code’’), in order to
relieve the Trust and the Funds of any
liability for Federal income tax to the
extent that its earnings are distributed to
shareholders.48
Availability of Information about the
Shares and Underlying Indexes
The Trust’s Internet Web site (https://
www.proshares.com), which is and will
be publicly accessible at no charge, will
contain the following information for
each Fund’s Shares: (a) The prior
business day’s closing NAV, the
reported closing price, and a calculation
48 In order for a Fund to qualify for tax treatment
as a RIC, it must meet several requirements under
the Code. Among these is the requirement that, at
the close of each quarter of the Fund’s taxable year,
(i) at least 50% of the market value of the Fund’s
total assets must be represented by cash items, U.S.
government securities, securities of other RICs, and
other securities, with such other securities limited
for purposes of this calculation in respect of any
one issuer to an amount not greater than 5% of the
value of the Fund’s assets and not greater than 10%
of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its total
assets may be invested in the securities of any one
issuer, or two or more issuers that are controlled by
the Fund (within the meaning of Section 851
(b)(4)(B) of the Code) and that are engaged in the
same or similar trades or businesses or related
trades or businesses (other than U.S. government
securities or the securities of other RICs).
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of the premium or discount of such
price in relation to the closing NAV; (b)
data for a period covering at least the
four previous calendar quarters (or the
life of a Fund, if shorter) indicating how
frequently each Fund’s Shares traded at
a premium or discount to NAV based on
the daily closing price and the closing
NAV, and the magnitude of such
premiums and discounts, (c) its
prospectus and product description, and
(d) other quantitative information, such
as daily trading volume. The prospectus
and/or product description for each
Fund will inform investors that the
Trust’s Internet Web site has
information about the premiums and
discounts at which the Fund’s Shares
have traded.49
The Amex will disseminate for each
Fund on a daily basis by means of the
Consolidated Tape Association (‘‘CT’’)
and CQ High Speed Lines information
with respect to an Indicative Intra-Day
Value (the ‘‘IIV’’) (as defined and
discussed herein), recent NAV, shares
outstanding, and the estimated cash
amount and total cash amount per
Creation Unit. The Exchange will make
available on its Internet Web site at
https://www.amex.com daily trading
volume, the closing price, the NAV, and
the final dividend amounts to be paid
for each Fund.
Each Fund’s total portfolio
composition will be disclosed on the
Internet Web site of the Trust (https://
www.proshares.com or another relevant
Internet Web site as determined by the
Trust) and/or the Exchange (https://
www.amex.com). The Trust expects that
Internet Web site disclosure of portfolio
holdings will be made daily and will
include, as applicable, the names and
number of shares held of each specific
equity security, the specific types of
Financial Instruments and
characteristics of such Financial
Instruments, and the cash equivalents
and amount of cash held in the portfolio
of each Fund. This public Internet Web
site disclosure of the portfolio
composition of each Fund will coincide
49 The Application requests relief from Section
24(d) of the 1940 Act, which would permit dealers
to sell Shares in the secondary market
unaccompanied by a statutory prospectus when
prospectus delivery is not required by the Securities
Act of 1933. Additionally, if a product description
is being provided in lieu of a prospectus,
Commentary .03 of Amex Rule 1000A requires that
Amex members and member organizations provide
to all purchasers of a series of Index Fund Shares
a written description of the terms and
characteristics of such securities, in a form prepared
by the open-end management investment company
issuing such securities, not later than the time of
confirmation of the first transaction in such series
is delivered to such purchaser. Furthermore, any
sales material will reference the availability of such
circular and the prospectus.
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with the disclosure by the Advisor of
the ‘‘IIV File’’ (as described below) and
the portfolio composition file or ‘‘PCF’’
(as described below). Therefore, the
same portfolio information (including
accrued expenses and dividends) will
be provided on the public Internet Web
site as well as in the IIV File and PCF
provided to Authorized Participants.
The format of the public Internet Web
site disclosure and the IIV File and PCF
will differ because the public Internet
Web site will list all portfolio holdings,
while the IIV File and PCF will
similarly provide the portfolio holdings,
but in a format appropriate for
Authorized Participants, i.e., the exact
components of a Creation Unit.50
Accordingly, each investor will have
access to the current portfolio
composition of each Fund through the
Trust’s Internet Web site, at https://
www.proshares.com, and/or at the
Exchange’s Internet Web site at https://
www.amex.com.
Beneficial owners of Shares
(‘‘Beneficial Owners’’) will receive all of
the statements, notices, and reports
required under the 1940 Act and other
applicable laws. They will receive, for
example, annual and semi-annual Fund
reports, written statements
accompanying dividend payments,
proxy statements, annual notifications
detailing the tax status of Fund
distributions, and Form 1099–DIVs.
Some of these documents will be
provided to Beneficial Owners by their
brokers, while others will be provided
by the Fund through the brokers.
The daily closing index value and the
percentage change in the daily closing
index value for each Underlying Index
will be publicly available on various
Internet Web sites, such as at https://
www.bloomberg.com. Data regarding
each Underlying Index is also available
from the respective Underlying Index
provider to subscribers. Several
independent data vendors also package
and disseminate Underlying Index data
in various value-added formats
(including vendors displaying both
securities and index levels and vendors
displaying index levels only). The value
of each Underlying Index will be
updated intra-day on a real time basis as
its individual component securities
change in price. These intra-day values
of each Underlying Index will be
disseminated at least every 15 seconds
throughout the trading day by Amex or
another organization authorized by the
relevant Underlying Index provider in
accordance with Commentary .02(c) to
Amex Rule 1000A.
50 The composition will be used to calculate the
NAV later that day.
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77829
Creation and Redemption of Shares
Each Fund will issue and redeem
Shares only in aggregations of at least
50,000 (‘‘Creation Units’’). Purchasers of
Creation Units will be able to separate
the Creation Units into individual
Shares. Once the number of Shares in a
Creation Unit is determined, it will not
change thereafter (except in the event of
a stock split or similar revaluation). The
initial value of a Share for each of the
Bullish Funds and Bearish Funds is
expected to be in the range of $50–$250.
At the end of each business day, the
Trust will prepare the list of names and
the required number of shares of each
Deposit Security (as defined herein) to
be included in the next trading day’s
Creation Unit for each Bullish Fund (the
‘‘Deposit List’’). The Trust will then add
to the Deposit List the cash information
effective as of the close of business on
that business day and create a PCF for
each Fund, which it will transmit to
NSCC before the open of business the
next business day. The information in
the PCF will be available to all
participants in the NSCC system.
Because the NSCC’s system for the
receipt and dissemination to its
participants of the PCF is not currently
capable of processing information with
respect to Financial Instruments, the
Advisor has developed an ‘‘IIV File,’’
which it will use to disclose the Funds’’
holdings of Financial Instruments.51
The IIV File will contain, for each
Bullish Fund (to the extent that it holds
Financial Instruments) and Bearish
Fund, information sufficient by itself or
in connection with the PCF and other
available information for market
participants to calculate a Fund’s IIV
and effectively arbitrage such Fund.
For example, the following
information would be provided in the
IIV File for a Bullish Fund holding
equity securities and Financial
Instruments such as swaps and futures
contracts and a Bearish Fund holding
swaps and futures contracts: (A) The
total value of the equity securities held
by the Bullish Fund, (B) the notional
value of the swaps held by such Funds
(together with an indication of the
Underlying Index on which such swap
is based and whether the Funds’
position is long or short), (C) the most
51 The Trust or the Advisor will post the IIV File
to a password-protected Internet Web site before the
opening of business on each business day, and all
Authorized Participants and the Exchange will have
access to a password and the Internet Web site
containing the IIV File. The Funds, however, will
disclose each business day to the public identical
information, but in a format appropriate to public
investors, at the same time the Funds disclose the
IIV File and PCF, as applicable, to industry
participants.
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recent valuation of the swaps held by
the Funds, (D) the notional value of any
futures contracts (together with an
indication of the Underlying Index on
which such contract is based, whether
the Funds’ position is long or short and
the contract’s expiration date) held by
the Funds, (E) the number of futures
contracts held by the Funds (together
with an indication of the Underlying
Index on which such contract is based,
whether the Funds’ position is long or
short and the contract’s expiration date),
(F) the most recent valuation of the
futures contracts held by the Funds, (G)
the total assets and total shares
outstanding of each Fund, and (H) a
‘‘net other assets’’ figure reflecting
expenses and income of the Funds to be
accrued during and through the
following business day and
accumulated gains or losses on the
Funds’ Financial Instruments through
the end of the business day immediately
preceding the publication of the IIV
File. To the extent that any Bullish or
Bearish Fund holds cash or cash
equivalents about which information is
not available in a PCF, information
regarding such Fund’s cash and cash
equivalent positions will be disclosed in
the IIV File for such Fund.
The information in the IIV File will be
sufficient for participants in the NSCC
system to calculate the IIV for Bearish
Funds and, together with the
information on equity securities
contained in the PCF, will be sufficient
for calculation of the IIV for Bullish
Funds, during such next business day.
The IIV File, together with the
applicable information in the PCF in the
case of Bullish Funds, will also be the
basis for the next business day’s NAV
calculation.
Under normal circumstances, the
Bullish Funds will be created and
redeemed either entirely for cash and/or
for a deposit basket of equity securities
(‘‘Deposit Securities’’), plus a Balancing
Amount (as defined herein), as
described below. Under normal
circumstances, the Bearish Funds will
be created and redeemed entirely for
cash. The IIV File published before the
open of business on a business day will,
however, permit NSCC participants to
calculate (by means of calculating the
IIV) the amount of cash required to
create a Creation Unit , and the amount
of cash that will be paid upon
redemption of a Creation Unit, for each
Bearish Fund for that business day.
For the Bullish Funds, the PCF will be
prepared by the Trust after 4 p.m. ET
and transmitted by the Index Receipt
Agent to the NSCC by 6:30 p.m. ET. All
Authorized Participants and the
Exchange will have access to the
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Internet Web site containing the IIV
File. The IIV File will reflect the trades
made on behalf of a Bullish Fund that
business day and the creation/
redemption orders for that business day.
Accordingly, by 6:30 p.m. ET,
Authorized Participants will know the
composition of the Bullish Fund’s
portfolio for the next trading day.
Creation of the Bullish Funds.
Typically, persons 52 purchasing
Creation Units from a Bullish Fund
must make an in-kind deposit of a
basket of Deposit Securities consisting
of the securities selected by the Advisor
from among those securities contained
in the Fund’s portfolio, together with an
amount of cash specified by the Advisor
(the ‘‘Balancing Amount’’), plus the
applicable transaction fee (the
‘‘Transaction Fee’’). The Deposit
Securities and the Balancing Amount
collectively are referred to as the
‘‘Creation Deposit.’’ The Balancing
Amount is a cash payment designed to
ensure that the value of a Creation
Deposit is identical to the value of the
Creation Unit. The Balancing Amount is
an amount equal to the difference
between the NAV of a Creation Unit and
the market value of the Deposit
Securities.53
The Balancing Amount will be
determined shortly after 4 p.m. ET each
business day. Although the Balancing
Amount for most exchange-traded funds
is a small amount reflecting accrued
dividends and other distributions, for
the Bullish Funds it is expected to be
larger due to changes in the value of the
Financial Instruments, i.e., daily markto-market. For example, assuming a
basket of Deposit Securities is valued at
$5 million for a Bullish Fund, if the
market increases 10%, such basket of
Deposit Securities would be equal to
$5.5 million at 4 p.m. ET. The value of
the Bullish Fund shares would increase
by 20% or $1 million to equal $6
million total. With such basket of
Deposit Securities valued at $5.5
million, the Balancing Amount would
be $500,000. The values of the next
day’s basket of Deposit Securities and
Balancing Amount are announced
between 5:30 p.m. ET and 6 p.m. ET
each business day.
The Balancing Amount may, at times,
represent a significant portion of the
aggregate purchase price (or in the case
of redemptions, the redemption
proceeds). This may occur because the
mark-to-market value of the Financial
Instruments held by the Bullish Funds,
if any, is included in the Balancing
Amount. The Transaction Fee is a fee
imposed by the Bullish Funds on
investors purchasing (or redeeming)
Creation Units.
The Trust will make available through
the DTC or the Distributor on each
business day, prior to the opening of
trading on the Exchange, the Deposit
List indicating the Deposit Securities to
be included in the Creation Deposit for
each Bullish Fund.54 The Trust also will
make available on a daily basis
information about the previous day’s
Balancing Amount.
The Bullish Funds reserve the right to
permit or require an Authorized
Participant to substitute an amount of
cash and/or a different security to
replace any prescribed Deposit
Security.55 Substitutions might be
permitted or required, for example,
because one or more Deposit Securities
may be unavailable, or may not be
available in the quantity needed to make
a Creation Deposit. Brokerage
commissions incurred by a Fund to
acquire any Deposit Security not part of
a Creation Deposit are expected to be
immaterial, and in any event, the
Adviser may adjust the relevant
Transaction Fee to ensure that the Fund
collects the extra expense from the
purchaser. Orders to create or redeem
Shares of the Bullish Funds must be
placed through an Authorized
Participant.
As noted below, the Exchange will
disseminate through the facilities of the
CT, at least every 15 seconds during the
Exchange’s regular trading hours, the
IIV on a per Fund Share basis. The
Exchange states that the Funds will not
be involved in, or responsible for, the
calculation or dissemination of any such
amount and will make no warranty as
to its accuracy.
52 Authorized Participants are the only persons
who may place orders to create and redeem
Creation Units. Authorized Participants must be
registered broker-dealers or other securities market
participants, such as banks and other financial
institutions, that are exempt from registration as
broker-dealers to engage in securities transactions
and who are participants in DTC. See supra note
46.
53 While not typical, if the market value of the
Deposit Securities is greater than the NAV of a
Creation Unit, then the Balancing Amount will be
a negative number, in which case the Balancing
Amount will be paid by the Bullish Fund to the
purchaser, rather than vice-versa.
54 In accordance with the Advisor’s Code of
Ethics, personnel of the Advisor with knowledge
about the composition of a Creation Deposit will be
prohibited from disclosing such information to any
other person, except as authorized in the course of
their employment, until such information is made
public.
55 In certain limited instances, a Bullish Fund
may require a purchasing investor to purchase a
Creation Unit entirely for cash. For example, on
days when a substantial rebalancing of a Fund’s
portfolio is required, the Advisor might prefer to
receive cash rather than in-kind stocks so that it has
liquid resources on hand to make the necessary
purchases.
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77831
the purchaser will make an in-kind
payment and/or all cash payment
generally on the third business day
following the date on which the request
was made (T+3). Purchasers of either
Fund in Creation Unit aggregations must
satisfy certain creditworthiness criteria
established by the Advisor and
approved by the Board, as provided in
the participation agreement
(‘‘Participation Agreement’’) between
the Trust and Authorized Participants.
Creation Unit aggregations of the
Bullish Funds will be redeemable either
in-kind or all in cash equal to the NAV,
less the Redemption Transaction Fee.
Creation Unit aggregations of the
Bearish Funds will be redeemable for an
All-Cash Payment equal to the NAV,
less the Redemption Transaction Fee. A
Bullish Fund has the right to make
redemption payments in cash, in kind,
or a combination of each, provided that
the value of its redemption payments
equals the NAV of the Shares tendered
for redemption at the time of tender.59
jlentini on PROD1PC65 with NOTICES
Redemption of the Bullish Funds.
Bullish Fund Shares in Creation Unitsize aggregations will be redeemable on
any day on which the NYSE is open in
exchange for a basket of securities
(‘‘Redemption Securities’’). As it does
for Deposit Securities, the Trust will
make available to Authorized
Participants on each business day prior
to the opening of trading a list of the
names and number of shares of
Redemption Securities for each Fund.
The Redemption Securities given to
redeeming investors in most cases will
be the same as the Deposit Securities
required of investors purchasing
Creation Units on the same day.56
Depending on whether the NAV of a
Creation Unit is higher or lower than the
market value of the Redemption
Securities, the redeemer of a Creation
Unit will either receive from or pay to
the Bullish Fund a cash amount equal
to the difference (the ‘‘Redemption
Balancing Amount’’). In the typical
situation where the Redemption
Securities are the same as the Deposit
Securities, this cash amount will be
equal to the Balancing Amount
described above in the creation process
involving Deposit Securities. The
redeeming investor also must pay to the
Bullish Fund a transaction fee
(‘‘Redemption Transaction Fee’’) to
cover transaction costs.57
A Bullish Fund has the right to make
redemption payments in cash, in kind,
or a combination of each, provided that
the value of its redemption payments
equals the NAV of the Shares tendered
at the time of tender, and the
Redemption Balancing Amount. The
Adviser currently contemplates that
Creation Units of each Bullish Fund will
be redeemed principally in kind with
respect to the Redemption Securities
and the Redemption Balancing Amount
in cash largely resulting from the value
of the Financial Instruments included in
the Bullish Fund.
In order to facilitate delivery of
Redemption Securities, each redeeming
Authorized Participant, acting on behalf
of a Beneficial Owner or a DTC
participant, must have arrangements
with a broker-dealer, bank, or other
custody provider in each jurisdiction in
which any of the Redemption Securities
are customarily traded. If neither the
redeeming Beneficial Owner nor the
Authorized Participant has such
arrangements, and it is not otherwise
possible to make other arrangements,
the Bullish Fund may, in its discretion,
redeem the Bullish Fund Shares for
cash.
Creation and Redemption of the
Bearish Funds. The Bearish Funds will
be purchased and redeemed entirely for
cash (‘‘All-Cash Payments’’). The use of
an All-Cash Payment for the purchase
and redemption of Creation Unit
aggregations of the Bearish Funds is due
to the limited transferability of
Financial Instruments.
The Exchange believes that Shares
will not trade at a material discount or
premium to the underlying securities
held by a Fund based on potential
arbitrage opportunities. The arbitrage
process, which provides the opportunity
to profit from differences in prices of the
same or similar securities, increases the
efficiency of the markets and serves to
prevent potentially manipulative efforts.
If the price of a Share deviates enough
from the Creation Unit, on a per share
basis, to create a material discount or
premium, an arbitrage opportunity is
created allowing the arbitrageur to
either buy Shares at a discount,
immediately cancel them in exchange
for the Creation Unit, and sell the
underlying securities in the cash market
at a profit, or sell Shares short at a
premium and buy the Creation Unit in
exchange for the Shares to deliver
against the short position. In both
instances the arbitrageur locks in a
profit and the markets move back into
line.58
Placement of Creation Unit Purchases
and Redemption Orders. Creation Unit
aggregations of the Funds will be
purchased at NAV, plus a Transaction
Fee. For the Bearish Funds, the
purchaser will make a cash payment by
12 p.m. ET on the third business day
following the date on which the request
was made (T+3). For the Bullish Funds,
Dividends
Dividends, if any, from net
investment income will be declared and
paid at least annually by each Fund in
the same manner as by other open-end
investment companies. Certain Funds
may pay dividends on a semi-annual or
more frequent basis. Distributions of
realized securities gains, if any,
generally will be declared and paid once
a year.
Dividends and other distributions on
the Shares of each Fund will be
distributed, on a pro rata basis to
Beneficial Owners of such Shares.
Dividend payments will be made
through the DTC and the DTC
participants to Beneficial Owners then
of record with proceeds received from
each Fund.
The Trust will not make the DTC
book-entry Dividend Reinvestment
Service (the ‘‘Dividend Reinvestment
Service’’) available for use by Beneficial
Owners for reinvestment of their cash
proceeds, but certain individual brokers
may make a Dividend Reinvestment
Service available to Beneficial Owners.
56 There may be circumstances, however, where
the Deposit Securities and Redemption Securities
could differ. For example, if ABC stock were
replacing XYZ stock in a Fund’s Underlying Index
at the close of a day’s trading session, the day’s
prescribed Deposit Securities might include ABC,
but not XYZ, while the day’s prescribed
Redemption Securities might include XYZ but not
ABC.
57 Redemptions in which cash is substituted for
one or more Redemption Securities may be assessed
a higher Redemption Transaction Fee to offset the
transaction cost to the Fund of selling those
particular Redemption Securities. This Redemption
Transaction Fee is expected to be between $500 and
$1,000.
58 In their 1940 Act Application, the Applicants
stated that they do not believe that All-Cash
Payments will affect arbitrage efficiency. This is
because the Applicants believe it makes little
difference to an arbitrageur whether Creation Unit
aggregations are purchased in exchange for a basket
of securities or cash. The important function of the
arbitrageur is to bid the share price of any Fund up
or down until it converges with the NAV.
Applicants note that this can occur regardless of
whether the arbitrageur is allowed to create in cash
or with a basket of Deposit Securities. In either case,
the arbitrageur can effectively hedge a position in
a Fund in a variety of ways, including the use of
market-on-close contracts to buy or sell the
Financial Instruments.
59 The Exchange states that, in the event an
Authorized Participant has submitted a redemption
request in good order and is unable to transfer all
or part of a Creation Unit aggregation for
redemption, a Fund may nonetheless accept the
redemption request in reliance on the Authorized
Participant’s undertaking to deliver the missing
Fund Shares as soon as possible, which undertaking
shall be secured by the Authorized Participant’s
delivery and maintenance of collateral. The
Authorized Participant’s Participation Agreement
will permit the Fund to buy the missing Shares at
any time and will subject the Authorized
Participant to liability for any shortfall between the
cost to the Fund of purchasing the Shares and the
value of the collateral.
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The SAI will inform investors of this
fact and direct interested investors to
contact such investor’s broker to
ascertain the availability and a
description of such a service through
such broker. The SAI will also caution
interested Beneficial Owners that they
should note that each broker may
require investors to adhere to specific
procedures and timetables in order to
participate in the service, and such
investors should ascertain from their
broker such necessary details. Shares
acquired pursuant to such service will
be held by the Beneficial Owners in the
same manner and subject to the same
terms and conditions as for original
ownership of Shares. Brokerage
commissions, charges, and other costs,
if any, incurred in purchasing Shares in
the secondary market with the cash
from the distributions generally will be
an expense borne by the individual
Beneficial Owners participating in
reinvestment through such service.
jlentini on PROD1PC65 with NOTICES
Dissemination of Indicative Intra-Day
Value (IIV)
In order to provide updated
information relating to each Fund for
use by investors, professionals, and
persons wishing to create or redeem
Shares, the Exchange will disseminate
through the facilities of the CT: (i)
Continuously throughout the trading
day, the market value of a Share, and (ii)
at least every 15 seconds throughout the
trading day, a calculation of the
Indicative Intra-Day Value or ‘‘IIV’’ 60 as
calculated by the Exchange (the ‘‘IIV
Calculator’’). 61 Comparing these two
figures helps an investor to determine
whether, and to what extent, the Shares
may be selling at a premium or a
discount to NAV.
The IIV Calculator (the Exchange) will
calculate an IIV for each Fund in the
manner discussed below. The IIV is
designed to provide investors with a
reference value that can be used in
connection with other related market
information. The IIV does not
necessarily reflect the precise
composition of the current portfolio
held by each Fund at a particular point
in time. Therefore, the IIV on a per
Share basis disseminated during Amex
trading hours should not be viewed as
a real time update of the NAV of a
particular Fund, which is calculated
only once a day. While the IIV that will
60 The IIV is also referred to by other issuers as
an ‘‘Estimated NAV,’’ ‘‘Underlying Trading Value,’’
‘‘Indicative Optimized Portfolio Value (IOPV),’’ and
‘‘Intraday Value’’ in various places such as the
prospectus and marketing materials for different
exchange-traded funds.
61 The Exchange will calculate the IIV for each
Fund.
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20:43 Dec 26, 2006
Jkt 211001
be disseminated by Amex is expected to
be close to the most recently calculated
Fund NAV on a per share basis, it is
possible that the value of the portfolio
held by a Fund may diverge from the IIV
during any trading day. In such case, the
IIV will not precisely reflect the value
of the Fund portfolio.
IIV Calculation for the Bullish Funds.
The IIV Calculator (the Exchange) will
disseminate the IIV throughout the
trading day for the Bullish Funds
holding equity securities and Financial
Instruments, if any. The IIV Calculator
(the Exchange) will determine such IIV
by: (i) Calculating the estimated current
value of equity securities held by such
Fund by (a) calculating the percentage
change in the value of the Deposit
Securities indicated on the Deposit List
(as provided by the Trust) and applying
that percentage value to the total value
of the equity securities in the Fund as
of the close of trading on the prior
trading day (as provided by the Trust)
or (b) calculating the current value of all
of the equity securities held by the Fund
(as provided by the Trust); (ii)
calculating the mark-to-market gains or
losses from the Fund’s total return
equity swap exposure based on the
percentage change to the Underlying
Index and the previous day’s notional
values of the swap contracts, if any,
held by such Fund (which previous
day’s notional value will be provided by
the Trust); (iii) calculating the mark-tomarket gains or losses from futures,
options, and other Financial Instrument
positions by taking the difference
between the current value of those
positions held by the Fund, if any (as
provided by the Trust), and the previous
day’s value of such positions; (iv)
adding the values from (i), (ii), and (iii)
above to an estimated cash amount
provided by the Trust (which cash
amount will include the swap costs), to
arrive at a value; and (v) dividing that
value by the total shares outstanding (as
provided by the Trust) to obtain current
IIV.
IIV Calculation for the Bearish Funds.
The IIV Calculator (the Exchange) will
disseminate the IIV throughout the
trading day for the Bearish Funds. The
IIV Calculator (the Exchange) will
determine such IIV by: (i) Calculating
the mark-to-market gains or losses from
the Fund’s total return equity swap
exposure based on the percentage
change to the Underlying Index and the
previous day’s notional values of the
swap contracts, if any, held by such
Fund (which previous day’s notional
value will be provided by the Trust); (ii)
calculating the mark-to-market gains or
losses from futures, options, and other
Financial Instrument positions by taking
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the difference between the current value
of those positions held by the Fund, if
any (as provided by the Trust), and the
previous day’s value of such positions;
(iii) adding the values from (i) and (ii)
above to an estimated cash amount
provided by the Trust (which cash
amount will include the swap costs), to
arrive at a value; and (iv) dividing that
value by the total shares outstanding (as
provided by the Trust) to obtain current
IIV.
Criteria for Initial and Continued Listing
The Shares are subject to the criteria
for initial and continued listing of Index
Fund Shares under Amex Rule 1002A.
A minimum of two Creation Units (at
least 100,000 Shares) will be required to
be outstanding at the start of trading.
This minimum number of Shares
required to be outstanding at the start of
trading will be comparable to
requirements that have been applied to
previously listed series of Portfolio
Depositary Receipts and Index Fund
Shares. The Exchange believes that the
proposed minimum number of Shares
outstanding at the start of trading is
sufficient to provide market liquidity.
The Exchange, pursuant to Amex Rule
1002A(a)(ii), will obtain a
representation from the Trust (for each
Fund), prior to listing, that the NAV per
share for each Fund will be calculated
daily and made available to all market
participants at the same time.
The continued listing criteria
provides for the delisting or removal
from listing of the Shares under any of
the following circumstances:
• If, following the initial twelvemonth period after commencement of
trading on the Exchange of a series of
Index Fund Shares, there are fewer than
50 beneficial holders of the series of
Index Fund Shares for 30 or more
consecutive trading days; or
• If the value of the applicable
Underlying Index or portfolio is no
longer calculated or available on at least
a 15-second delayed basis through one
or more major market data vendors
during the time the Shares trade on the
Exchange; or
• The IIV is no longer made available
on at least a 15-second delayed basis;62
or
• If such other event shall occur or
condition exists which, in the opinion
of the Exchange, makes further dealings
on the Exchange inadvisable.
Additionally, the Exchange will file a
proposed rule change pursuant to Rule
62 In the event an IIV is no longer calculated or
disseminated by one or more major market data
vendors, the Exchange will immediately contact the
Commission.
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19b–4 under the Act seeking approval to
continue trading the Shares of a Fund
and, unless approved, the Exchange will
commence delisting the Shares of such
Fund if:
• The Underlying Index provider
substantially changes either the
Underlying Index component selection
methodology or the weighting
methodology; or
• A successor or substitute index is
used in connection with the Shares.63
Furthermore, Amex Rule 1002A(b)(ii)
establishes that, if the IIV or the
Underling Index value applicable to that
series of Index Fund Shares is not being
disseminated as required, the Exchange
may halt trading during the day in
which the interruption to the
dissemination of the IIV or the
Underlying Index value occurs. If the
interruption to the dissemination of the
IIV or the Underlying Index value
persists past the trading day in which it
occurred, the Exchange will halt trading
no later than the beginning of the
trading day following the interruption.
The Exchange represents the Trust is
required to comply with Rule 10A–3
under the Act for the initial and
continued listing of the Shares.
Original and Annual Listing Fees
The Amex original listing fee
applicable to the listing of the Funds is
$5,000 for each Fund. In addition, the
annual listing fee applicable to the
Funds under Section 141 of the Amex
Company Guide will be based upon the
year-end aggregate number of
outstanding shares in all Funds of the
Trust listed on the Exchange.
jlentini on PROD1PC65 with NOTICES
Amex Trading Rules
The Shares are equity securities
subject to Amex rules governing the
trading of equity securities, including,
among others, rules governing priority,
parity and precedence of orders,
specialist responsibilities, and account
opening and customer suitability (Amex
Rule 411). 64
Stop and Stop Limit Orders. Amex
Rule 154, Commentary .04(c), provides
that stop and stop limit orders to buy or
sell a security (other than an option,
which is covered by Amex Rule 950(f)
and Commentary thereto) the price of
63 If the Trust uses a successor or substitute index,
the Exchange’s filing will address, among other
things, the listing and trading characteristics of the
successor or substitute index and the Exchange’s
surveillance procedures applicable thereto.
64 Telephone conversation between Jeffrey P.
Burns, Associate General Counsel, Amex, Nyieri
Nazarian, Assistant General Counsel, Amex, and
Edward Cho, Special Counsel, Division of Market
Regulation, Commission, on December 14, 2006
(clarifying Amex trading rules applicable to the
Shares).
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20:43 Dec 26, 2006
Jkt 211001
which is derivatively priced based upon
another security or index of securities,
may, with the prior approval of a floor
official, be elected by a quotation, as set
forth in Commentary .04(c)(i)–(v). The
Exchange has designated Index Fund
Shares, including the Shares, as eligible
for this treatment.65
Amex Rule 190. Amex Rule 190,
Commentary .04, applies to Index Fund
Shares listed on the Exchange,
including the Shares. Commentary .04
states that nothing in Rule 190(a) should
be construed to restrict a specialist
registered in a security issued by an
investment company from purchasing
and redeeming the listed security or
securities that can be subdivided or
converted into the listed security from
the issuer as appropriate to facilitate the
maintenance of a fair and orderly
market.
Prospectus Delivery
The Exchange, in an Information
Circular to Exchange members and
member organizations, prior to the
commencement of trading, will inform
members and member organizations of
the application of Commentary .03 of
Amex Rule 1000A to the Funds. The
Circular will further inform members
and member organizations of the
prospectus and/or product description
delivery requirements that apply to the
Funds. The Application included a
request that the exemptive order also
grant relief from Section 24(d) of the
1940 Act. Any product description used
in reliance on Section 24(d) exemptive
relief will comply with all
representations and conditions set forth
in the Application.66
Trading Halts
In addition to other factors that may
be relevant, the Exchange may consider
factors such as those set forth in Amex
Rule 918C(b) in exercising its discretion
to halt or suspend trading in Index Fund
Shares. These factors include, but are
not limited to, (1) the extent to which
trading is not occurring in securities
comprising an Underlying Index and/or
the Financial Instruments of a Fund; or
(2) whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. In the case of the
Financial Instruments held by a Fund,
the Exchange represents that a
notification procedure will be
65 See Securities Exchange Act Release No. 29063
(April 10, 1991), 56 FR 15652 (April 17, 1991) at
note 9, regarding the Exchange’s designation of
equity derivative securities as eligible for such
treatment under Amex Rule 154, Commentary
.04(c).
66 See supra note 49 and accompanying text.
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77833
implemented so that timely notice from
the Advisor is received by the Exchange
when a particular Financial Instrument
is in default or shortly to be in default.
Notification from the Advisor will be
made by phone, facsimile, or e-mail.
The Exchange would then determine on
a case-by-case basis whether a default of
a particular Financial Instrument
justifies a trading halt of the Shares.
Trading in shares of the Funds will also
be halted if the circuit breaker
parameters under Amex Rule 117 have
been reached.
As noted above, Amex Rule
1002A(b)(ii) sets forth the trading halt
parameters with respect to Index Fund
Shares. If the IIV or the Underlying
Index value applicable to that series of
Index Fund Shares is not being
disseminated as required, the Exchange
may halt trading during the day in
which the interruption to the
dissemination of the IIV or the
Underlying Index value occurs. If the
interruption to the dissemination of the
IIV or the Underlying Index value
persists past the trading day in which it
occurred, the Exchange will halt trading
no later than the beginning of the
trading day following the interruption.
Suitability and Information Circular
Prior to commencement of trading,
the Exchange will issue an Information
Circular to its members and member
organizations providing guidance with
regard to member firm compliance
responsibilities (including suitability
obligations) when effecting transactions
in the Shares and highlighting the
special risks and characteristics of the
Funds and Shares as well as applicable
Exchange rules.
This Information Circular will set
forth the requirements relating to
Commentary .05 to Amex Rule 411
(Duty to Know and Approve
Customers). Specifically, the
Information Circular will remind
members of their obligations in
recommending transactions in the
Shares so that members have a
reasonable basis to believe that (1) the
recommendation is suitable for a
customer given reasonable inquiry
concerning the customer’s investment
objectives, financial situation, needs,
and any other information known by
such member, and (2) that the customer
can evaluate the special characteristics,
and is able to bear the financial risks, of
such investment. In connection with the
suitability obligation, the Information
Circular will also provide that members
make reasonable efforts to obtain the
following information: (a) The
customer’s financial status; (b) the
customer’s tax status; (c) the customer’s
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investment objectives; and (d) such
other information used or considered to
be reasonable by such member or
registered representative in making
recommendations to the customer.
Purchases and Redemptions in Creation
Unit Size
In the Information Circular referenced
above, Amex members and member
organizations will be informed that
procedures for purchases and
redemptions of Shares in Creation Units
are described in each Fund’s prospectus
and SAI, and that Shares are not
individually redeemable, but are
redeemable only in Creation Unit
aggregations or multiples thereof.
Surveillance
The Exchange represents that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares. Specifically, Amex will rely on
its existing surveillance procedures
governing Index Fund Shares, which
have been deemed adequate under the
Act. In addition, the Exchange also has
a general policy prohibiting the
distribution of material, non-public
information by its employees.
Hours of Trading/Minimum Price
Variation
The Funds will trade on the Exchange
until 4:15 p.m. ET each business day.
Shares will trade with a minimum price
variation of $.01.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,67 in general, and
furthers the objectives of Section
6(b)(5),68 in particular, 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 transaction in securities,
and, in general, to protect investors and
the public interest.
jlentini on PROD1PC65 with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes the proposed
rule change, as amended, will impose
no burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
67 15
U.S.C. 78f(b).
68 15 U.S.C. 78f(b)(5).
VerDate Aug<31>2005
20:43 Dec 26, 2006
Jkt 211001
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange did not receive any
written comments on the proposed rule
change, as amended.
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 Amex 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.
The Commission is considering
granting accelerated approval of the
proposed rule change, as amended, at
the end of a 15-day comment period.69
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Amex–2006–101 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Amex–2006–101. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
69 Amex has requested accelerated approval of
this proposed rule change, as amended, prior to the
30th day after the date of publication of the notice
of the filing thereof, following the conclusion of a
15-day comment period.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
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
Room. Copies of the filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Amex–2006–101 and
should be submitted on or before
January 11, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.70
Nancy M. Morris,
Secretary.
[FR Doc. E6–22093 Filed 12–26–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54963; File No. SR–CHX–
2006–30]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Order
Approving Proposed Rule Change To
Permit Routing From the Matching
System to a Destination Selected by a
Participant
December 19, 2006.
I. Introduction
On October 19, 2006, the Chicago
Stock Exchange, Inc. (‘‘CHX’’ or
‘‘Exchange’’) filed with 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 to
permit CHX participants to identify a
destination to which an order should be
routed when its execution would
improperly trade through other markets
or its display would improperly lock or
cross other markets. The proposed rule
change was published for comment in
70 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\27DEN1.SGM
27DEN1
]]>Agencies
[Federal Register Volume 71, Number 248 (Wednesday, December 27, 2006)]
[Notices]
[Pages 77823-77834]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-22093]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54961; File No. SR-Amex-2006-101]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of a Proposed Rule Change and Amendments No. 1 and 2
Thereto Relating to the Listing and Trading of Shares of Funds of the
ProShares Trust
December 18, 2006.
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 October 24, 2006, the American Stock Exchange LLC (``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 substantially prepared by the
Exchange. On November 22, 2006, Amex submitted Amendment No. 1 to the
proposed rule change.\3\ On December 8, 2006, Amex submitted Amendment
No. 2 to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, Amex proposed to list and trade the
shares of twenty-four (24) additional funds of the Trust (as defined
herein) and made certain clarifying changes with respect to the
trading of the Shares (as defined herein). Amendment No. 1 replaced
the original filing in its entirety.
\4\ In Amendment No. 2, Amex made additional changes to clarify
certain defined terms, the creation and redemption of the Shares,
and the criteria for continued listing of the Shares. Amendment No.
2 replaced Amendment No. 1 in its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade the shares (the ``Shares'')
of eighty-one (81) funds of the ProShares Trust (the ``Trust'') based
on numerous underlying securities indexes. The text of the proposal is
available on Amex's Internet Web site (https://www.amex.com), at Amex's
principal
[[Page 77824]]
office, and at the Commission's Public Reference Room.
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, as
amended. 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
Amex Rules 1000A et seq. provide standards for the listing of Index
Fund Shares, which are securities issued by an open-end management
investment company for exchange trading. These securities are
registered under the Investment Company Act of 1940 (``1940 Act''), as
well as under the Act. Index Fund Shares are defined in Amex Rule
1000A(b)(1) as securities based on a portfolio of stocks or fixed
income securities that seek to provide investment results that
correspond generally to the price and yield of a specified foreign or
domestic stock index or fixed income securities index.
Recent amendments adopting Amex Rule 1000A(b)(2) now permit the
Exchange to list and trade Index Fund Shares that seek to provide
investment results that exceed the performance of an underlying
securities index by a specified multiple or that seek to provide
investment results that correspond to a specified multiple of the
inverse or opposite of the index's performance.
The Exchange proposes to list under amended Amex Rule 1000A the
Shares of eighty-one (81) new funds of the Trust that are designated as
Ultra Funds, Short Funds, and UltraShort Funds (the ``Funds''). Each of
the Funds will have a distinct investment objective. Each Fund will
attempt, on a daily basis, to achieve its investment objective by
corresponding to a specified multiple of the performance, or the
inverse performance, of a particular equity securities index as briefly
described below. The Funds are based on the following benchmark
indexes: \5\ (1) S&P Small Cap 600 Index, (2) S&P500/Citigroup Value
Index, (3) S&P500/Citigroup Growth Index, (4) S&P MidCap 400/Citigroup
Value Index, (5) S&P MidCap 400/Citigroup Growth Index, (6) S&P
SmallCap 600/Citigroup Value Index, (7) S&P SmallCap 600/Citigroup
Growth Index, (8) Dow Jones U.S. Basic Materials Index, (9) Dow Jones
U.S. Consumer Services Index, (10) Dow Jones U.S. Consumer Goods Index,
(11) Dow Jones U.S. Oil and Gas Index, (12) Dow Jones U.S. Financials
Index, (13) Dow Jones U.S. Health Care Index, (14) Dow Jones U.S.
Industrials Index, (15) Dow Jones U.S. Real Estate Index, (16) Dow
Jones U.S. Semiconductor Index (17) Dow Jones U.S. Technology Index,
(18) Dow Jones U.S. Utilities Index (19) Russell 2000[supreg] Index,
(20) Russell Midcap[supreg] Index, (21) Russell Midcap[supreg] Growth
Index, (22) Russell Midcap[supreg] Value Index, (23) Russell
1000[supreg] Index, (24) Russell 1000[supreg] Growth Index, (25)
Russell 1000[supreg] Value Index, (26) Russell 2000[supreg] Growth
Index, and (27) Russell 2000[supreg] Value Index (each index
individually referred to as the ``Underlying Index,'' and all
Underlying Indexes collectively referred to as the ``Underlying
Indexes'').\6\ Certain Funds (the ``Ultra Funds'' or ``Bullish Funds'')
seek daily investment results, before fees and expenses that correspond
to twice (200%) the daily performance of the Underlying Indexes. The
net asset value (``NAV'') of the Shares of each of these Ultra Funds,
if successful in meeting its objective, should increase, on a
percentage basis, approximately twice as much as the respective Fund's
Underlying Index gains when the prices of the securities in such
Underlying Index increase on a given day, and should decrease
approximately twice as much as the respective Underlying Index loses
when such prices decline on a given day.
---------------------------------------------------------------------------
\5\ A complete list of the Funds is set forth in Exhibit A to
Amendment No. 2, which is available on Amex's Internet Web site
(https://www.amex.com).
\6\ The Statement of Additional Information (``SAI'') for the
Funds discloses that each Fund reserves the right to substitute a
different Underlying Index. Substitutions can occur if an Underlying
Index becomes unavailable, no longer serves the investment needs of
shareholders, the Fund experiences difficulty in achieving
investment results that correspond to the applicable Underlying
Index, or for any other reason determined in good faith by the Board
(as defined herein). In such instance, the substitute index will
attempt to measure the same general market as the current Underlying
Index. Shareholders will be notified (either directly or through
their intermediary) if a Fund's current Underlying Index is
replaced. In the event a Fund substitutes an Underlying Index with
another, different index, the Exchange will file with the Commission
a Form 19b-4, which the Commission would have to approve to permit
continued trading of the product based on the substitute index. See
infra note 63 and accompanying text.
---------------------------------------------------------------------------
In addition, the Exchange proposes to list and trade Shares of
certain Funds (the ``Short Funds'') that seek daily investment results,
before fees and expenses, that correspond to the inverse or opposite of
the daily performance (-100%) of the Underlying Indexes. If each of
these Short Funds is successful in meeting its objective, the NAV of
the Shares of each Short Fund should increase approximately as much, on
a percentage basis, as the respective Underlying Index loses when the
prices of the securities in the Underlying Index decline on a given
day, or should decrease approximately as much as the respective
Underlying Index gains when the prices of the securities in the
Underlying Index rise on a given day.
Finally, the Exchange proposes to list and trade Shares of certain
Funds (the ``UltraShort Funds'') that seek daily investment results,
before fees and expenses, that correspond to twice the inverse (-200%)
of the daily performance of the Underlying Indexes. If each of these
UltraShort Funds is successful in meeting its objective, the NAV of the
Shares of each UltraShort Fund should increase approximately twice as
much, on a percentage basis, as the respective Underlying Index loses
when the prices of the securities in the Underlying Index decline on a
given day, or should decrease approximately twice as much as the
respective Underlying Index gains when the prices of the securities in
the Underlying Index rise on a given day. The Short Funds and
UltraShort Funds each have investment objectives that seek investment
results corresponding to an inverse performance of the Underlying
Indexes and are collectively referred to as the ``Bearish Funds.''
The Commission recently approved the listing and trading of certain
Ultra Funds, Short Funds, and UltraShort Funds based on the S&P 500
Index, Nasdaq-100 Index, Dow Jones Industrial Average Index, and S&P
MidCap 400 Index.\7\ Each of the existing Ultra Funds is expected to
gain, on a percentage basis, approximately twice as much as the
benchmark Underlying Index and should lose approximately twice as much
as the Underlying Index when such prices decline. Each of the existing
Short Funds is expected to achieve investment results, before fees and
[[Page 77825]]
expenses, that correspond to the inverse or opposite of the daily
performance (-100%) of an Underlying Index. In addition, each of the
existing UltraShort Funds is expected to achieve investment results,
before fees and expenses, that correspond to twice the inverse or
opposite of the daily performance (-200%) of an Underlying Index.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 52553 (October 3,
2005), 70 FR 59100 (October 11, 2005). See also Securities Exchange
Act Release No. 54040 (June 23, 3006), 71 FR 37629 (June 30, 2006)
(approving Amex's proposal to list and trade shares of funds of the
Trust based on certain other benchmark indexes).
---------------------------------------------------------------------------
ProShare Advisors LLC is the investment advisor (the ``Advisor'')
to each Fund. The Advisor is registered under the Investment Advisers
Act of 1940.\8\ While the Advisor will manage each Fund, the Trust's
Board of Trustees (the ``Board'') will have overall responsibility for
the Funds'' operations. The composition of the Board is, and will be,
in compliance with the requirements of Section 10 of the 1940 Act.
---------------------------------------------------------------------------
\8\ The Trust, Advisor, and Distributor (``Applicants'') have
filed with the Commission an Amended Application for an Order under
Sections 6(c) and 17(b) of the 1940 Act (the ``Application'') for
the purpose of exempting the Funds of the Trust from various
provisions of the 1940 Act (File No. 812-12354).
---------------------------------------------------------------------------
SEI Investments Distribution Company (the ``Distributor''), a
broker-dealer registered under the Act, will act as the distributor and
principal underwriter of the Shares. JPMorgan Chase Bank, N.A. will act
as the index receipt agent (``Index Receipt Agent'') for which it will
receive fees. The Index Receipt Agent will be responsible for
transmitting the Deposit List (as defined herein) to the National
Securities Clearing Corporation (``NSCC'') and for the processing,
clearance, and settlement of purchase and redemption orders through the
facilities of the Depository Trust Company (``DTC'') and NSCC on behalf
of the Trust. The Index Receipt Agent will also be responsible for the
coordination and transmission of files and purchase and redemption
orders between the Distributor and the NSCC.
Shares of the Funds issued by the Trust will be a class of
exchange-traded securities that represent an interest in the portfolio
of a particular Fund.\9\ The Shares will be registered in book-entry
form only, and the Trust will not issue individual share certificates.
The DTC or its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on the
records of DTC or DTC participants.
---------------------------------------------------------------------------
\9\ The Trust is registered as a business trust under the
Delaware Corporate Code.
---------------------------------------------------------------------------
Underlying Indexes
The Exchange represents that the Underlying Index components comply
with the generic listing standards set forth in Commentary .02 to Amex
Rule 1000A.
S&P SmallCap 600 Index. The S&P SmallCap 600 Index is a measure of
small-cap company U.S. stock market performance. It is a float-
adjusted, market capitalization-weighted index of 600 U.S. operating
companies. Securities are selected for inclusion in the index by a
committee of Standard & Poor's through a non-mechanical process that
factors criteria such as liquidity, price, market capitalization,
financial viability, and public float. This Underlying Index \10\ has
been approved for options trading and is also the basis for an exchange
traded fund (``ETF'').\11\
---------------------------------------------------------------------------
\10\ The shares of the iShares S&P SmallCap 600 Index Fund are
traded on the Exchange.
\11\ See Securities Exchange Act Release No. 35532 (March 24,
1995), 60 FR 16518 (March 30, 1995).
---------------------------------------------------------------------------
S&P 500/Citigroup Value Index. The S&P 500/Citigroup Value Index is
designed to provide a comprehensive measure of large-cap U.S. equity
``value'' performance. It is an unmanaged, float-adjusted, and market
capitalization-weighted index comprised of stocks representing
approximately half the market capitalization of the S&P 500 Index that
have been identified as being on the value end of the growth-value
spectrum. This Underlying Index \12\ is the basis for an ETF.
---------------------------------------------------------------------------
\12\ 12 The shares of the iShares S&P 500 Value Index Fund are
traded on the Exchange.
---------------------------------------------------------------------------
S&P 500/Citigroup Growth Index. The S&P 500/Citigroup Growth Index
is designed to provide a comprehensive measure of large-cap U.S. equity
``growth'' performance. It is an unmanaged, float-adjusted, and market
capitalization-weighted index comprised of stocks representing
approximately half the market capitalization of the S&P 500 Index that
have been identified as being on the growth end of the growth-value
spectrum. This Underlying Index \13\ is the basis for an ETF.
---------------------------------------------------------------------------
\13\ The shares of the iShares S&P 500 Growth Index Fund are
traded on the Exchange.
---------------------------------------------------------------------------
S&P MidCap 400/Citigroup Value Index. The S&P MidCap 400/Citigroup
Value Index is designed to provide a comprehensive measure of mid-cap
U.S. equity ``value'' performance. It is an unmanaged, float-adjusted,
and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
MidCap 400 Index that have been identified as being on the value end of
the growth-value spectrum. This Underlying Index \14\ has been approved
for options trading and is also the basis for an ETF.\15\
---------------------------------------------------------------------------
\14\ The shares of the iShares S&P MidCap 400 Value Index Fund
are traded on the Exchange.
\15\ See Securities Exchange Act Release 30290 (January 27,
1992), 57 FR 4072 (February 3, 1992).
---------------------------------------------------------------------------
S&P MidCap 400/Citigroup Growth Index. The S&P MidCap 400/Citigroup
Growth Index is designed to provide a comprehensive measure of mid-cap
U.S. equity ``growth'' performance. It is an unmanaged, float-adjusted,
and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
MidCap 400 Index that have been identified as being on the growth end
of the growth-value spectrum. This Underlying Index \16\ has been
approved for options trading and is also the basis for an ETF.\17\
---------------------------------------------------------------------------
\16\ The shares of the iShares S&P MidCap 400 Growth Index Fund
are traded on the Exchange.
\17\ See supra note 15.
---------------------------------------------------------------------------
S&P Small Cap 600/Citigroup Value Index. The S&P SmallCap 600/
Citigroup Value Index is designed to provide a comprehensive measure of
small-cap U.S. equity ``value'' performance. It is an unmanaged, float-
adjusted, and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
SmallCap 600 Index that have been identified as being on the value end
of the growth-value spectrum. This Underlying Index \18\ has been
approved for options trading and is also the basis for an ETF.\19\
---------------------------------------------------------------------------
\18\ The shares of the iShares S&P SmallCap 600 Value Index Fund
are traded on the Exchange.
\19\ See supra note 11.
---------------------------------------------------------------------------
S&P SmallCap 600/Citigroup Growth Index. The S&P SmallCap 600/
Citigroup Growth Index is designed to provide a comprehensive measure
of small-cap U.S. equity ``growth'' performance. It is an unmanaged,
float-adjusted, and market capitalization-weighted index comprised of
stocks representing approximately half the market capitalization of the
S&P SmallCap 600 Index that have been identified as being on the growth
end of the growth-value spectrum. This Underlying Index \20\has been
approved for options trading and is also the basis for an exchange-
traded fund ETF.\21\
---------------------------------------------------------------------------
\20\ The shares of the iShares S&P SmallCap 600 Growth Index
Fund are traded on the Exchange.
\21\ See supra note 11.
---------------------------------------------------------------------------
Dow Jones U.S. Basic Materials Index. The Dow Jones U.S. Basic
Materials Index measures the performance of the basic materials
industry of the U.S. equity market. Component companies are involved in
the production of aluminum, steel, non ferrous metals, commodity
chemicals, specialty chemicals, forest products, paper products, as
well as the mining of
[[Page 77826]]
precious metals and coal. This Underlying Index \22\ has been approved
for options trading and is also the basis for an ETF.
---------------------------------------------------------------------------
\22\ The shares of the iShares Dow Jones U.S. Basic Materials
Sector Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Consumer Goods Index. The Dow Jones U.S. Consumer
Goods Index measures the performance of consumer spending in the goods
industry of the U.S. equity market. Component companies include
manufacturers of automobiles and automobile parts and tires, brewers
and distillers, farming and fishing operations, durable and non-durable
household product manufacturers, cosmetic companies, and companies
related to food and tobacco products, clothing, accessories, and
footwear. This Underlying Index \23\ is the basis for an ETF.
---------------------------------------------------------------------------
\23\ The shares of the iShares Dow Jones U.S. Consumer Goods
Sector Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Consumer Services Index. The Dow Jones U.S. Consumer
Services Index measures the performance of consumer spending in the
services industry of the U.S. equity market. Component companies
include airlines, broadcasting and entertainment companies, apparel and
broadline retailers, food and drug retailers, media agencies,
publishing companies, gambling companies, hotels, restaurants and bars,
and travel and tourism companies. This Underlying Index \24\ is the
basis for an ETF.
---------------------------------------------------------------------------
\24\ The shares of the iShares Dow Jones U.S. Consumer Services
Sector Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Financials Index. The Dow Jones U.S. Financials
Index measures the performance of the financial services industry of
the U.S. equity market. Component companies include regional banks,
major U.S. domiciled international banks, full line, life, and property
and casualty insurance companies, companies that invest, directly or
indirectly, in real estate, diversified financial companies such as
Fannie Mae, credit card issuers, check cashing companies, mortgage
lenders, and investment advisers, securities brokers and dealers,
including investment banks, merchant banks, and online brokers, and
publicly traded stock exchanges. This Underlying Index \25\ is the
basis for an ETF.
---------------------------------------------------------------------------
\25\ The shares of the iShares Dow Jones U.S. Financial Services
Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Health Care Index. The Dow Jones U.S. Health Care
Index measures the performance of the healthcare industry of the U.S.
equity market. Component companies include health care providers,
biotechnology companies, medical supply companies, and companies
related to advanced medical devices and pharmaceuticals. This
Underlying Index \26\ is the basis for an ETF.
---------------------------------------------------------------------------
\26\ The shares of the iShares Dow Jones U.S. Healthcare Sector
Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Industrials Index. The Dow Jones U.S. Industrials
Index measures the performance of the industrial industry of the U.S.
equity market. This Underlying Index includes component companies in
sectors related to building materials, heavy construction, factory
equipment, heavy machinery, industrial services, pollution control,
containers and packaging, industrial diversified, air freight, marine
transportation, railroads, trucking, land-transportation equipment,
shipbuilding, transportation services, advanced industrial equipment,
electronic components and equipment, and aerospace. This Underlying
Index \27\ is the basis for an ETF.
---------------------------------------------------------------------------
\27\ The shares of the iShares Dow Jones U.S. Industrial Sector
Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Oil & Gas Index. The Dow Jones U.S. Oil & Gas Index
measures the performance of the oil and gas industry of the U.S. equity
market. Component companies include oil drilling equipment and service
companies, oil companies-major, oil companies-secondary, pipeline
companies, liquid, solid, or gaseous fossil fuel producers, and related
service companies. This Underlying Index \28\ is the basis for an ETF.
---------------------------------------------------------------------------
\28\ The shares of the iShares Dow Jones U.S. Energy Sector
Index Fund are listed and traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Real Estate Index. The Dow Jones U.S. Real Estate
Index measures the performance of the real estate sector of the U.S.
equity market. Component companies include those that invest directly
or indirectly in the development, management, or ownership of shopping
malls, apartment buildings and housing developments, and real estate
investment trusts (``REITs''), which invest in apartments and office
and retail properties. REITs are passive investment vehicles that
invest primarily in income-producing real estate or real estate related
loans or interests. This Underlying Index \29\ has been approved for
options trading and is also the basis for an ETF.
---------------------------------------------------------------------------
\29\ The shares of the iShares Dow Jones U.S. Real Estate Index
Fund are listed and traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Semiconductor Index. The Dow Jones U.S.
Semiconductor Index measures the performance of the semiconductor sub-
sector of the U.S. equity market. Component companies are engaged in
the production of semiconductors and other integrated chips, as well as
other related products such as semiconductor capital equipment and
mother-boards.\30\
---------------------------------------------------------------------------
\30\ Amex represents that the Dow Jones U.S. Semiconductor Index
meets the Exchange's generic standards under Amex Rule 1000A,
Commentary .02.
---------------------------------------------------------------------------
Dow Jones U.S. Technology Index. The Dow Jones U.S. Technology
Index measures the performance of the technology industry of the U.S.
equity market. Component companies include those involved in computers
and office equipment, software, communications technology,
semiconductors, diversified technology services, and Internet services.
This Underlying Index \31\ is the basis for an ETF.
---------------------------------------------------------------------------
\31\ The shares of the iShares Dow Jones U.S. Technology Sector
Index Fund are listed and traded on the Exchange.
---------------------------------------------------------------------------
Dow Jones U.S. Utilities Index. The Dow Jones U.S. Utilities Index
measures the performance of the utilities industry of the U.S. equity
market. Component companies include electric utilities, gas utilities,
and water utilities. This Underlying Index \32\ is the basis for an
ETF.
---------------------------------------------------------------------------
\32\ The shares of the iShares Dow Jones U.S. Utilities Sector
Index Fund are traded on the Exchange.
---------------------------------------------------------------------------
Russell 2000[reg] Index. The Russell 2000[reg] Index is a measure
of small-cap U.S. stock market performance. It is an adjusted, market
capitalization-weighted index containing approximately 2,000 of the
smallest companies in the Russell 3000[reg] Index or approximately 8%
of the total market capitalization of the Russell 3000[reg] Index,
which in turn represents approximately 98% of the investable U.S.
equity market. All U.S. companies listed on the New York Stock Exchange
(``NYSE''), Amex, or The Nasdaq Stock Market meeting an initial minimum
($1) price are considered for inclusion. Reconstitution occurs
annually. Securities are not replaced if they leave the index; however,
new issue securities meeting other membership requirements may be added
on a quarterly basis. This Underlying Index \33\ has been approved for
options trading and is also the basis for an ETF.
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\33\ The shares of the iShares Russell 2000 Index Fund are
traded on the Exchange.
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Russell Midcap[reg] Index. The Russell Midcap[reg] Index measures
the performance of the 800 smallest companies in the Russell 1000[reg]
Index, which represent approximately 30% of the total market
capitalization of the Russell 1000[reg] Index. As of the latest
reconstitution, the average market
[[Page 77827]]
capitalization was approximately $5.2 billion; the median market
capitalization was approximately $3.9 billion. The largest company in
the index had an approximate market capitalization of $14.8 billion.
This Underlying Index is the basis for an ETF.\34\
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\34\ The shares of the iShares Russell Midcap Index Fund are
traded on the Exchange.
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Russell Midcap[reg] Growth Index. The Russell Midcap[reg] Growth
Index measures the performance of those Russell Midcap companies with
higher price-to-book ratios and higher forecasted growth values. The
stocks are also members of the Russell 1000[reg] Growth Index. This
Underlying Index \35\ is the basis for an ETF .
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\35\ The shares of the iShares Russell Midcap Growth Index Fund
are traded on the Exchange.
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Russell Midcap[reg] Value Index. The Russell Midcap[reg] Value
Index measures the performance of those Russell Midcap companies with
lower price-to-book ratios and lower forecasted growth values. The
stocks are also members of the Russell 1000[reg] Value Index. This
Underlying Index \36\ is the basis for an ETF .
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\36\ The shares of the iShares Russell Midcap Value Index Fund
are traded on the Exchange.
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Russell 1000[reg] Index. The Russell 1000[reg] Index measures the
performance of the 1,000 largest companies in the Russell 3000[reg]
Index, which represents approximately 92% of the total market
capitalization of the Russell 3000[reg] Index. As of the latest
reconstitution, the average market capitalization was approximately
$13.8 billion; the median market capitalization was approximately $4.9
billion. The smallest company in the index had an approximate market
capitalization of $1.9 billion. This Underlying Index \37\ is the basis
for an ETF .
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\37\ The shares of the iShares Russell 1000 Index Fund are
traded on the Exchange.
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Russell 1000[reg] Growth Index. The Russell 1000[reg] Growth Index
measures the performance of those Russell 1000 companies with higher
price-to-book ratios and higher forecasted growth values. This
Underlying Index \38\ is the basis for an ETF .
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\38\ The shares of the iShares Russell 1000 Growth Index Fund
are traded on the Exchange.
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Russell 1000[reg] Value Index. The Russell 1000[reg] Value Index
measures the performance of those Russell 1000 companies with lower
price-to-book ratios and lower forecasted growth values. This
Underlying Index \39\ is the basis for an ETF .
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\39\ The shares of the iShares Russell 1000 Value Index Fund are
traded on the Exchange.
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Russell 2000[reg] Growth Index. The Russell 2000[reg] Growth Index
measures the performance of those Russell 2000 companies with higher
price-to-book ratios and higher forecasted growth values. This
Underlying Index \40\ is the basis for an ETF .
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\40\ The shares of the iShares Russell 2000 Growth Index Fund
are traded on the Exchange.
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Russell 2000[reg] Value Index. The Russell 2000[reg] Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. This
Underlying Index \41\ is the basis for an ETF .
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\41\ The shares of the iShares Russell 2000 Value Index Fund are
traded on the Exchange.
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Investment Objective of the Funds
Each Bullish Fund will seek investment results that correspond,
before fees and expenses, to twice (200%) the daily performance of an
Underlying Index and will invest its assets based upon the same
strategies as conventional index funds. Rather than holding positions
in equity securities and certain financial instruments intended to
create exposure to 100% of the daily performance of an Underlying
Index, these Funds will hold positions in equity securities and certain
financial instruments designed to create exposure equal to twice
(200%), before fees and expenses, the daily performance of an
Underlying Index. These Bullish Funds generally will hold at least 85%
of their assets in the component equity securities of the relevant
Underlying Index. The remainder of assets will be devoted to certain
financial instruments \42\ and money market instruments \43\ that are
intended to create the additional needed exposure to such Underlying
Index necessary to pursue its investment objective.
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\42\ The financial instruments to be held by any of the Funds
may include stock index futures contracts, options on futures
contracts, options on securities and indices, equity caps, collars
and floors, as well as swap agreements, forward contracts,
repurchase agreements, and reverse repurchase agreements (the
``Financial Instruments'').
\43\ Money market instruments include U.S. government securities
and repurchase agreements (the ``Money Market Instruments'').
Repurchase agreements held by the Funds will be consistent with Rule
2a-7 of the 1940 Act, i.e., remaining maturities of 397 days or less
and rated investment-grade.
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The Bearish Funds will seek daily investment results, before fees
and expenses, of the inverse or opposite (-100%) of the Underlying
Index, in the case of the Short Funds, or twice the inverse or opposite
(-200%) of the daily performance of the Underlying Index, in the case
of the UltraShort Funds. Each of these Bearish Funds will not invest
directly in the component securities of the relevant Underlying Index,
but instead, will create short exposure to such Underlying Index. Each
Bearish Fund will rely on establishing positions in Financial
Instruments that provide, on a daily basis, the inverse or opposite of,
or twice the inverse or opposite of, as the case may be, the
performance of the relevant Underlying Index. Normally, 100% of the
value of the portfolios of each Bearish Fund will be devoted to
Financial Instruments and Money Market Instruments.
While the Advisor will attempt to minimize any ``tracking error''
between the investment results of a particular Fund and the performance
(and specified multiple thereof) or the inverse performance (and
specified multiple thereof) of its Underlying Index, certain factors
may tend to cause the investment results of a Fund to vary from such
relevant Underlying Index or specified multiple thereof.\44\ The
Bullish Funds are expected to be highly correlated to each respective
Underlying Index and investment objective (0.95 or greater). The
Bearish Funds are expected to be highly inversely correlated to each
respective Underlying Index and investment objective (-0.95 or
greater).\45\ In each case, the Funds are expected to have a daily
tracking error of less than 5% (500 basis points) relative to the
specified multiple or inverse multiple of the performance of the
relevant Underlying Index.
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\44\ Several factors may cause a Fund to vary from the relevant
Underlying Index and investment objective including: (1) A Fund's
expenses, including brokerage fees (which may be increased by high
portfolio turnover) and the cost of the investment techniques
employed by that Fund; (2) less than all of the securities in the
benchmark index being held by a Fund and securities not included in
the benchmark index being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund,
such as futures contracts, and the performance of the underlying
securities in the cash market; (4) bid-ask spreads (the effect of
which may be increased by portfolio turnover); (5) holding
instruments traded in a market that has become illiquid or
disrupted; (6) a Fund's share prices being rounded to the nearest
cent; (7) changes to the benchmark Underlying Index that are not
disseminated in advance; (8) the need to conform a Fund's portfolio
holdings to comply with investment restrictions or policies or
regulatory or tax law requirements; and (9) early and unanticipated
closings of the markets on which the holdings of a Fund trade,
resulting in the inability of the Fund to execute intended portfolio
transactions.
\45\ Correlation is the strength of the relationship between (1)
the change in a Fund's NAV and (2) the change in the benchmark
Underlying Index (investment objective). The statistical measure of
correlation is known as the ``correlation coefficient.'' A
correlation coefficient of +1 indicates a perfect positive
correlation while a value of -1 indicates a perfect negative
(inverse) correlation. A value of zero would mean that there is no
correlation between the two variables.
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[[Page 77828]]
The Portfolio Investment Methodology
The Advisor will seek to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective based on
its ``Portfolio Investment Methodology,'' as described below. The
Exchange states that the Portfolio Investment Methodology is a
mathematical model based on well-established principles of finance that
are widely used by investment practitioners, including conventional
index fund managers.
As set forth in the Application, the Portfolio Investment
Methodology was designed to determine for each Fund the portfolio
investments needed to achieve its stated investment objectives. The
Portfolio Investment Methodology takes into account a variety of
specified criteria and data, the most important of which are: (1) Net
assets (taking into account creations and redemptions) in each Fund's
portfolio at the end of each trading day, (2) the amount of required
exposure to the Underlying Index, and (3) the positions in equity
securities, Financial Instruments, and/or Money Market Instruments at
the beginning of each trading day. The Advisor pursuant to the
methodology will then mathematically determine the end-of-day positions
to establish the required amount of exposure to the Underlying Index
(the ``Solution''), which will consist of equity securities, Financial
Instruments, and/or Money Market Instruments. The difference between
the start-of-day positions and the required end-of-day positions is the
actual amount of equity securities, Financial Instruments, and/or Money
Market Instruments that must be bought or sold for the day. The
Solution represents the required exposure and, when necessary, is
converted into an order or orders to be filled that same day.
Generally, portfolio trades effected pursuant to the Solution are
reflected in the NAV on the first business day (T+1) after the date the
relevant trade is made. Therefore, the NAV calculated for a Fund on a
given day should reflect the trades executed pursuant to the prior
day's Solution. For example, trades pursuant to the Solution calculated
on a Monday afternoon are executed on behalf of the Fund in question on
that day. These trades will then be reflected in the NAV for that Fund
that is calculated as of 4 p.m. Eastern Time (``ET'') on Tuesday.
The timeline for the Portfolio Investment Methodology is as
follows. Authorized Participants (``APs'' or ``Authorized
Participants'') \46\ have a 3 p.m. ET cut-off for orders submitted by
telephone, facsimile, and other electronic means of communication and a
4 p.m. ET cut-off for orders received via mail. AP orders by mail are
exceedingly rare. Orders are received by the Distributor and relayed to
the Advisor within ten (10) minutes. The Advisor will know by 3:10 p.m.
ET the number of creation/redemption orders by APs for that day. Orders
are then placed at approximately 3:40 p.m. ET as market-on-close
orders. At 4 p.m. ET, the Advisor will again look at the exposure to
make sure that the orders placed are consistent with the Solution, and
as described above, the Advisor will execute any other transactions in
Financial Instruments to assure that the Fund's exposure is consistent
with the Solution.
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\46\ An Authorized Participant is either (1) a broker-dealer or
other participant in the continuous net settlement system of the
NSCC or (2) a DTC participant who has entered into a participant
agreement with the Distributor.
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Description of Investment Techniques
In attempting to achieve its individual investment objectives, a
Fund may invest its assets in equity securities, Financial Instruments,
and Money Market Instruments. The Bullish Funds will hold between 85-
100% of their total assets in the equity securities contained in the
relevant Underlying Index. The remainder of assets, if any, will be
devoted to Financial Instruments and Money Market Instruments that are
intended to create additional needed exposure to such Underlying Index
necessary to pursue the Bullish Funds' investment objectives. The
Bearish Funds generally will not invest in equity securities related to
the applicable Underlying Index, but rather will hold only Financial
Instruments and Money Market Instruments. To the extent, applicable,
each Fund will comply with the requirements of the 1940 Act with
respect to ``cover'' for Financial Instruments and thus may hold a
significant portion of its assets in liquid instruments in segregated
accounts.
Each Fund may engage in transactions in futures contracts on
designated contract markets where such contracts trade and will only
purchase and sell futures contracts traded on a U.S. futures exchange
or board of trade. Each Fund will comply with the requirements of Rule
4.5 of the regulations promulgated by the Commodity Futures Trading
Commission (the ``CFTC'').\47\
---------------------------------------------------------------------------
\47\ The CFTC Rule 4.5 provides an exclusion for investment
companies registered under the 1940 Act from the definition of the
term ``commodity pool operator'' upon the filing of a notice of
eligibility with the National Futures Association.
---------------------------------------------------------------------------
Each Fund may enter into swap agreements and/or forward contracts
for the purposes of attempting to gain exposure to the equity
securities of its Underlying Index without actually transacting such
securities. The Exchange states that the counterparties to the swap
agreements and/or forward contracts will be major broker-dealers and
banks. The creditworthiness of each potential counterparty is assessed
by the Advisor's credit committee pursuant to guidelines approved by
the Board. Existing counterparties are reviewed periodically by the
Board. Each Fund may also enter into repurchase and reverse repurchase
agreements with terms of less than one year and will only enter into
such agreements with (i) members of the Federal Reserve System, (ii)
primary dealers in U.S. government securities, or (iii) major broker-
dealers. Each Fund may also invest in Money Market Instruments, in
pursuit of its investment objectives, as ``cover'' for Financial
Instruments, as described above, or to earn interest.
The Trust will adopt certain fundamental policies consistent with
the 1940 Act, and each Fund will be classified as ``non-diversified''
under the 1940 Act. Each Fund, however, intends to maintain the
required level of diversification and otherwise conduct its operations
so as to qualify as a ``regulated investment company'' or ``RIC'' for
purposes of the Internal Revenue Code (the ``Code''), in order to
relieve the Trust and the Funds of any liability for Federal income tax
to the extent that its earnings are distributed to shareholders.\48\
---------------------------------------------------------------------------
\48\ In order for a Fund to qualify for tax treatment as a RIC,
it must meet several requirements under the Code. Among these is the
requirement that, at the close of each quarter of the Fund's taxable
year, (i) at least 50% of the market value of the Fund's total
assets must be represented by cash items, U.S. government
securities, securities of other RICs, and other securities, with
such other securities limited for purposes of this calculation in
respect of any one issuer to an amount not greater than 5% of the
value of the Fund's assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets may be invested in the
securities of any one issuer, or two or more issuers that are
controlled by the Fund (within the meaning of Section 851 (b)(4)(B)
of the Code) and that are engaged in the same or similar trades or
businesses or related trades or businesses (other than U.S.
government securities or the securities of other RICs).
---------------------------------------------------------------------------
Availability of Information about the Shares and Underlying Indexes
The Trust's Internet Web site (https://www.proshares.com), which is
and will be publicly accessible at no charge, will contain the
following information for each Fund's Shares: (a) The prior business
day's closing NAV, the reported closing price, and a calculation
[[Page 77829]]
of the premium or discount of such price in relation to the closing
NAV; (b) data for a period covering at least the four previous calendar
quarters (or the life of a Fund, if shorter) indicating how frequently
each Fund's Shares traded at a premium or discount to NAV based on the
daily closing price and the closing NAV, and the magnitude of such
premiums and discounts, (c) its prospectus and product description, and
(d) other quantitative information, such as daily trading volume. The
prospectus and/or product description for each Fund will inform
investors that the Trust's Internet Web site has information about the
premiums and discounts at which the Fund's Shares have traded.\49 \
---------------------------------------------------------------------------
\49\ The Application requests relief from Section 24(d) of the
1940 Act, which would permit dealers to sell Shares in the secondary
market unaccompanied by a statutory prospectus when prospectus
delivery is not required by the Securities Act of 1933.
Additionally, if a product description is being provided in lieu of
a prospectus, Commentary .03 of Amex Rule 1000A requires that Amex
members and member organizations provide to all purchasers of a
series of Index Fund Shares a written description of the terms and
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later
than the time of confirmation of the first transaction in such
series is delivered to such purchaser. Furthermore, any sales
material will reference the availability of such circular and the
prospectus.
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The Amex will disseminate for each Fund on a daily basis by means
of the Consolidated Tape Association (``CT'') and CQ High Speed Lines
information with respect to an Indicative Intra-Day Value (the ``IIV'')
(as defined and discussed herein), recent NAV, shares outstanding, and
the estimated cash amount and total cash amount per Creation Unit. The
Exchange will make available on its Internet Web site at https://www.amex.com daily trading volume, the closing price, the NAV, and the
final dividend amounts to be paid for each Fund.
Each Fund's total portfolio composition will be disclosed on the
Internet Web site of the Trust (https://www.proshares.com or another
relevant Internet Web site as determined by the Trust) and/or the
Exchange (https://www.amex.com). The Trust expects that Internet Web
site disclosure of portfolio holdings will be made daily and will
include, as applicable, the names and number of shares held of each
specific equity security, the specific types of Financial Instruments
and characteristics of such Financial Instruments, and the cash
equivalents and amount of cash held in the portfolio of each Fund. This
public Internet Web site disclosure of the portfolio composition of
each Fund will coincide with the disclosure by the Advisor of the ``IIV
File'' (as described below) and the portfolio composition file or
``PCF'' (as described below). Therefore, the same portfolio information
(including accrued expenses and dividends) will be provided on the
public Internet Web site as well as in the IIV File and PCF provided to
Authorized Participants. The format of the public Internet Web site
disclosure and the IIV File and PCF will differ because the public
Internet Web site will list all portfolio holdings, while the IIV File
and PCF will similarly provide the portfolio holdings, but in a format
appropriate for Authorized Participants, i.e., the exact components of
a Creation Unit.\50\ Accordingly, each investor will have access to the
current portfolio composition of each Fund through the Trust's Internet
Web site, at https://www.proshares.com, and/or at the Exchange's
Internet Web site at https://www.amex.com.
---------------------------------------------------------------------------
\50\ The composition will be used to calculate the NAV later
that day.
---------------------------------------------------------------------------
Beneficial owners of Shares (``Beneficial Owners'') will receive
all of the statements, notices, and reports required under the 1940 Act
and other applicable laws. They will receive, for example, annual and
semi-annual Fund reports, written statements accompanying dividend
payments, proxy statements, annual notifications detailing the tax
status of Fund distributions, and Form 1099-DIVs. Some of these
documents will be provided to Beneficial Owners by their brokers, while
others will be provided by the Fund through the brokers.
The daily closing index value and the percentage change in the
daily closing index value for each Underlying Index will be publicly
available on various Internet Web sites, such as at https://www.bloomberg.com. Data regarding each Underlying Index is also
available from the respective Underlying Index provider to subscribers.
Several independent data vendors also package and disseminate
Underlying Index data in various value-added formats (including vendors
displaying both securities and index levels and vendors displaying
index levels only). The value of each Underlying Index will be updated
intra-day on a real time basis as its individual component securities
change in price. These intra-day values of each Underlying Index will
be disseminated at least every 15 seconds throughout the trading day by
Amex or another organization authorized by the relevant Underlying
Index provider in accordance with Commentary .02(c) to Amex Rule 1000A.
Creation and Redemption of Shares
Each Fund will issue and redeem Shares only in aggregations of at
least 50,000 (``Creation Units''). Purchasers of Creation Units will be
able to separate the Creation Units into individual Shares. Once the
number of Shares in a Creation Unit is determined, it will not change
thereafter (except in the event of a stock split or similar
revaluation). The initial value of a Share for each of the Bullish
Funds and Bearish Funds is expected to be in the range of $50-$250.
At the end of each business day, the Trust will prepare the list of
names and the required number of shares of each Deposit Security (as
defined herein) to be included in the next trading day's Creation Unit
for each Bullish Fund (the ``Deposit List''). The Trust will then add
to the Deposit List the cash information effective as of the close of
business on that business day and create a PCF for each Fund, which it
will transmit to NSCC before the open of business the next business
day. The information in the PCF will be available to all participants
in the NSCC system.
Because the NSCC's system for the receipt and dissemination to its
participants of the PCF is not currently capable of processing
information with respect to Financial Instruments, the Advisor has
developed an ``IIV File,'' which it will use to disclose the Funds''
holdings of Financial Instruments.\51\ The IIV File will contain, for
each Bullish Fund (to the extent that it holds Financial Instruments)
and Bearish Fund, information sufficient by itself or in connection
with the PCF and other available information for market participants to
calculate a Fund's IIV and effectively arbitrage such Fund.
---------------------------------------------------------------------------
\51\ The Trust or the Advisor will post the IIV File to a
password-protected Internet Web site before the opening of business
on each business day, and all Authorized Participants and the
Exchange will have access to a password and the Internet Web site
containing the IIV File. The Funds, however, will disclose each
business day to the public identical information, but in a format
appropriate to public investors, at the same time the Funds disclose
the IIV File and PCF, as applicable, to industry participants.
---------------------------------------------------------------------------
For example, the following information would be provided in the IIV
File for a Bullish Fund holding equity securities and Financial
Instruments such as swaps and futures contracts and a Bearish Fund
holding swaps and futures contracts: (A) The total value of the equity
securities held by the Bullish Fund, (B) the notional value of the
swaps held by such Funds (together with an indication of the Underlying
Index on which such swap is based and whether the Funds' position is
long or short), (C) the most
[[Page 77830]]
recent valuation of the swaps held by the Funds, (D) the notional value
of any futures contracts (together with an indication of the Underlying
Index on which such contract is based, whether the Funds' position is
long or short and the contract's expiration date) held by the Funds,
(E) the number of futures contracts held by the Funds (together with an
indication of the Underlying Index on which such contract is based,
whether the Funds' position is long or short and the contract's
expiration date), (F) the most recent valuation of the futures
contracts held by the Funds, (G) the total assets and total shares
outstanding of each Fund, and (H) a ``net other assets'' figure
reflecting expenses and income of the Funds to be accrued during and
through the following business day and accumulated gains or losses on
the Funds' Financial Instruments through the end of the business day
immediately preceding the publication of the IIV File. To the extent
that any Bullish or Bearish Fund holds cash or cash equivalents about
which information is not available in a PCF, information regarding such
Fund's cash and cash equivalent positions will be disclosed in the IIV
File for such Fund.
The information in the IIV File will be sufficient for participants
in the NSCC system to calculate the IIV for Bearish Funds and, together
with the information on equity securities contained in the PCF, will be
sufficient for calculation of the IIV for Bullish Funds, during such
next business day. The IIV File, together with the applicable
information in the PCF in the case of Bullish Funds, will also be the
basis for the next business day's NAV calculation.
Under normal circumstances, the Bullish Funds will be created and
redeemed either entirely for cash and/or for a deposit basket of equity
securities (``Deposit Securities''), plus a Balancing Amount (as
defined herein), as described below. Under normal circumstances, the
Bearish Funds will be created and redeemed entirely for cash. The IIV
File published before the open of business on a business day will,
however, permit NSCC participants to calculate (by means of calculating
the IIV) the amount of cash required to create a Creation Unit , and
the amount of cash that will be paid upon redemption of a Creation
Unit, for each Bearish Fund for that business day.
For the Bullish Funds, the PCF will be prepared by the Trust after
4 p.m. ET and transmitted by the Index Receipt Agent to the NSCC by
6:30 p.m. ET. All Authorized Participants and the Exchange will have
access to the Internet Web site containing the IIV File. The IIV File
will reflect the trades made on behalf of a Bullish Fund that business
day and the creation/redemption orders for that business day.
Accordingly, by 6:30 p.m. ET, Authorized Participants will know the
composition of the Bullish Fund's portfolio for the next trading day.
Creation of the Bullish Funds. Typically, persons \52\ purchasing
Creation Units from a Bullish Fund must make an in-kind deposit of a
basket of Deposit Securities consisting of the securities selected by
the Advisor from among those securities contained in the Fund's
portfolio, together with an amount of cash specified by the Advisor
(the ``Balancing Amount''), plus the applicable transaction fee (the
``Transaction Fee''). The Deposit Securities and the Balancing Amount
collectively are referred to as the ``Creation Deposit.'' The Balancing
Amount is a cash payment designed to ensure that the value of a
Creation Deposit is identical to the value of the Creation Unit. The
Balancing Amount is an amount equal to the difference between the NAV
of a Creation Unit and the market value of the Deposit Securities.\53\
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\52\ Authorized Participants are the only persons who may place
orders to create and redeem Creation Units. Authorized Participants
must be registered broker-dealers or other securities market
participants, such as banks and other financial institutions, that
are exempt from registration as broker-dealers to engage in
securities transactions and who are participants in DTC. See supra
note 46.
\53\ While not typical, if the market value of the Deposit
Securities is greater than the NAV of a Creation Unit, then the
Balancing Amount will be a negative number, in which case the
Balancing Amount will be paid by the Bullish Fund to the purchaser,
rather than vice-versa.
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The Balancing Amount will be determined shortly after 4 p.m. ET
each business day. Although the Balancing Amount for most exchange-
traded funds is a small amount reflecting accrued dividends and other
distributions, for the Bullish Funds it is expected to be larger due to
changes in the value of the Financial Instruments, i.e., daily mark-to-
market. For example, assuming a basket of Deposit Securities is valued
at $5 million for a Bullish Fund, if the market increases 10%, such
basket of Deposit Securities would be equal to $5.5 million at 4 p.m.
ET. The value of the Bullish Fund shares would increase by 20% or $1
million to equal $6 million total. With such basket of Deposit
Securities valued at $5.5 million, the Balancing Amount would be
$500,000. The values of the next day's basket of Deposit Securities and
Balancing Amount are announced between 5:30 p.m. ET and 6 p.m. ET each
business day.
The Balancing Amount may, at times, represent a significant portion
of the aggregate purchase price (or in the case of redemptions, the
redemption proceeds). This may occur because the mark-to-market value
of the Financial Instruments held by the Bullish Funds, if any, is
included in the Balancing Amount. The Transaction Fee is a fee imposed
by the Bullish Funds on investors purchasing (or redeeming) Creation
Units.
The Trust will make available through the DTC or the Distributor on
each business day, prior to the opening of trading on the Exchange, the
Deposit List indicating the Deposit Securities to be included in the
Creation Deposit for each Bullish Fund.\54\ The Trust also will make
available on a daily basis information about the previous day's
Balancing Amount.
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\54\ In accordance with the Advisor's Code of Ethics, personnel
of the Advisor with knowledge about the composition of a Creation
Deposit will be prohibited from disclosing such information to any
other person, except as authorized in the course of their
employment, until such information is made public.
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The Bullish Funds reserve the right to permit or require an
Authorized Participant to substitute an amount of cash and/or a
different security to replace any prescribed Deposit Security.\55\
Substitutions might be permitted or required, for example, because one
or more Deposit Securities may be unavailable, or may not be available
in the quantity needed to make a Creation Deposit. Brokerage
commissions incurred by a Fund to acquire any Deposit Security not part
of a Creation Deposit are expected to be immaterial, and in any event,
the Adviser may adjust the relevant Transaction Fee to ensure that the
Fund collects the extra expense from the purchaser. Orders to create or
redeem Shares of the Bullish Funds must be placed through an Authorized
Participant.
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\55\ In certain limited instances, a Bullish Fund may require a
purchasing investor to purchase a Creation Unit entirely for cash.
For example, on days when a substantial rebalancing of a Fund's
portfolio is required, the Advisor might prefer to receive cash
rather than in-kind stocks so that it has liquid resources on hand
to make the necessary purchases.
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As noted below, the Exchange will disseminate through the
facilities of the CT, at least every 15 seconds during the Exchange's
regular trading hours, the IIV on a per Fund Share basis. The Exchange
state
