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]

Download as PDF Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices jlentini on PROD1PC65 with NOTICES 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; information that might appear in a cover letter should be included in the submission itself. Similarly, to the extent possible, any attachments to the submission should be included in the same file as the submission itself, and not as separate files. A person requesting that information contained in a comment submitted by that person be treated as confidential business information must certify that such information is business confidential and would not customarily be released to the public by the commenter. Confidential business information must be clearly designated as such and BUSINESS CONFIDENTIAL must be marked at the top and bottom of the cover page and each succeeding page. Information or advice contained in a comment submitted, other than business confidential information, may be determined by USTR to be confidential in accordance with section 135(g)(2) of the Trade Act of 1974 (19 U.S.C. 2155(g)(2)). If the submitter believes that information or advice may qualify as such, the submitter Mexico also challenges: (1) Must clearly so designate the information or advice; • 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 top and bottom of the cover page and that accompanied the Uruguay Round each succeeding page; and Agreements Act, H.R. Doc. No. 103–316, vol. I; (3) is encouraged to provide a non• USDOC regulations codified at Title 19 confidential summary of the of the United States Code of Federal information or advice. Regulations, sections 351.212(b), 351.414(c), (d) and (e); and Pursuant to section 127(e) of the • 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 received by USTR from the public with Public Comment: Requirements for respect to the dispute; if a dispute Submissions settlement panel is convened or in the Interested persons are invited to event of an appeal from such a panel, submit written comments concerning the U.S. submissions, the submissions, the issues raised in the dispute. or non-confidential summaries of Comments should be submitted (i) Electronically, to FR0620@ustr.eop.gov, submissions, received from other 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 confirmation copy sent electronically to to review the public file (Docket WTO/ the electronic mail address above. USTR DS–344 Mexico Zeroing II) may be made by calling the USTR Reading Room at encourages the submission of (202) 395–6186. The USTR Reading documents in Adobe PDF format as Room is open to the public from 9:30 attachments to an electronic mail. Interested persons who make submissions by electronic mail should VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 77823 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 (http:// 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 E:\FR\FM\27DEN1.SGM 27DEN1 77824 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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 VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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 (http:// 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. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 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). E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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. VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 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. E:\FR\FM\27DEN1.SGM 27DEN1 77826 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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. VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices jlentini on PROD1PC65 with NOTICES 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. VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 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. E:\FR\FM\27DEN1.SGM 27DEN1 jlentini on PROD1PC65 with NOTICES 77828 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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 VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 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 (http:// 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). E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices jlentini on PROD1PC65 with NOTICES 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 http://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 (http:// www.proshares.com or another relevant Internet Web site as determined by the Trust) and/or the Exchange (http:// 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. VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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 http:// www.proshares.com, and/or at the Exchange’s Internet Web site at http:// 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 http:// 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. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 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. E:\FR\FM\27DEN1.SGM 27DEN1 jlentini on PROD1PC65 with NOTICES 77830 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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 VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 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. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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. VerDate Aug<31>2005 20:43 Dec 26, 2006 Jkt 211001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\27DEN1.SGM 27DEN1 77832 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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. VerDate Aug<31>2005 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 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 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. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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). VerDate Aug<31>2005 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. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 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 E:\FR\FM\27DEN1.SGM 27DEN1 77834 Federal Register / Vol. 71, No. 248 / Wednesday, December 27, 2006 / Notices 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 (http://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 (http://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.
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    \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.
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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 (http://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.
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    \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 
(http://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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    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.
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    \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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    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.
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    \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).
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    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\
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    \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).
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    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.
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    \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.
---------------------------------------------------------------------------

    \33\ The shares of the iShares Russell 2000 Index Fund are 
traded on the Exchange.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \34\ The shares of the iShares Russell Midcap Index Fund are 
traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \35\ The shares of the iShares Russell Midcap Growth Index Fund 
are traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \36\ The shares of the iShares Russell Midcap Value Index Fund 
are traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \37\ The shares of the iShares Russell 1000 Index Fund are 
traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \38\ The shares of the iShares Russell 1000 Growth Index Fund 
are traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \39\ The shares of the iShares Russell 1000 Value Index Fund are 
traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \40\ The shares of the iShares Russell 2000 Growth Index Fund 
are traded on the Exchange.
---------------------------------------------------------------------------

    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 .
---------------------------------------------------------------------------

    \41\ The shares of the iShares Russell 2000 Value Index Fund are 
traded on the Exchange.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.

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

[[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 (http://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 http://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 (http://www.proshares.com or another 
relevant Internet Web site as determined by the Trust) and/or the 
Exchange (http://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 http://www.proshares.com, and/or at the Exchange's 
Internet Web site at http://www.amex.com.
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    \50\ The composition will be used to calculate the NAV later 
that day.
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    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 http://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.
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    \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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    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