Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendments No. 1 and 2 Thereto Adopting Generic Listing Standards for Exchange-Traded Funds Based on International or Global Indexes or Indexes Previously Approved by the Commission as Underlying Benchmarks for Derivative Securities, 3179-3184 [E7-956]
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Federal Register / Vol. 72, No. 15 / Wednesday, January 24, 2007 / Notices
Act,6 in particular, in that the proposal
provides for the equitable allocation of
reasonable dues, fees, and other charges
among its members and issuers and
other persons using any facility or
system which Nasdaq operates or
controls.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change is
subject to Section 19(b)(3)(A)(ii) of the
Act 7 and subparagraph (f)(2) of Rule
19b–4 thereunder 8 because it
establishes or changes a due, fee, or
other charge applicable only to a
member imposed by the self-regulatory
organization. Accordingly, the proposal
is effective upon Commission receipt of
the filing. At any time within 60 days
of the filing of the proposed rule change,
the Commission may summarily
abrogate such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2006–059. This
file number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
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 Nasdaq. 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–NASDAQ–2006–059 and
should be submitted on or before
February 14, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 07–284 Filed 1–23–07; 8:45 am]
BILLING CODE 8011–01–M
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55113; File No. SR–NYSE–
2006–101]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Order Granting Accelerated
Approval of a Proposed Rule Change
as Modified by Amendments No. 1 and
2 Thereto Adopting Generic Listing
Standards for Exchange-Traded Funds
Based on International or Global
Indexes or Indexes Previously
Approved by the Commission as
Underlying Benchmarks for Derivative
Securities
January 17, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on November 21, 2006, the New York
Stock Exchange LLC (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by the Exchange.
On January 11, 2007, the Exchange filed
Amendment No. 1 to the proposal. On
January 16, 2007, the Exchange filed
Amendment No. 2 to the proposal. This
order provides notice of the proposed
rule change as amended and approves
the proposed rule change as amended
on an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The text of the proposed rule change
is available at the Exchange, from the
Commission’s Public Reference Room,
and on NYSE’s Web site (https://
www.nyse.com).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or Send an e-mail to
rule-comments@sec.gov. Please include
File Number SR–NASDAQ–2006–059
on the subject line.
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
U.S.C. 78f(b)(4).
U.S.C. 78s(b)(3)(A)(ii).
8 17 CFR 240.19b–4(f)(2).
6 15
7 15
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 72, No. 15 / Wednesday, January 24, 2007 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to revise
Section 703.16 of the NYSE Listed
Company Manual (‘‘Manual’’) to include
generic listing standards for series of
Investment Company Units (‘‘ICUs’’)
(which are also referred to herein as
‘‘exchange-traded funds’’ or ‘‘ETFs’’)
that are based on international or global
indexes, or on indexes described in
rules previously approved by the
Commission under Section 19(b)(2) of
the Exchange Act 3 for the trading of
ETFs, options, or other index-based
securities. This proposal would enable
the Exchange to list and trade ETFs
pursuant to Rule 19b–4(e) under the
Exchange Act 4 if each of the conditions
set forth in Section 703.16 of the
Manual is satisfied. Rule 19b–4(e)
provides that the listing and trading of
a new derivative securities product by a
self-regulatory organization (‘‘SRO’’)
shall not be deemed a proposed rule
change, pursuant to paragraph (c)(1) of
Rule 19b–4, if the Commission has
approved, pursuant to Section 19(b) of
the Exchange Act, the SRO’s trading
rules, procedures, and listing standards
for the product class that would include
the new derivatives securities product,
and the SRO has a surveillance program
for the product class.5
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Exchange-Traded Funds
NYSE Rule 1100 and Section 703.16
of the Manual provide standards for
listing ICUs, which are securities issued
by a unit investment trust, an open-end
management investment company (i.e.,
an open-end mutual fund), or similar
entity based on a portfolio of stocks or
fixed income securities that seeks to
provide investment results that
correspond generally to the price and
yield performance of a specified foreign
or domestic stock index or fixed income
securities index. Pursuant to Section
703.16 of the Manual, an ICU eligible for
listing on the Exchange must be issued
in a specified aggregate number in
return for a deposit of specified
securities and/or a cash amount, with a
value equal to the next determined net
asset value (‘‘NAV’’). When aggregated
in the same specified minimum number,
the ICU must be redeemable by the
3 15
U.S.C. 78s(b)(2).
CFR 240.19b–4(e).
5 When relying on Rule 19b–4(e), the SRO must
submit Form 19b–4(e) to the Commission within
five business days after the exchange begins trading
the new derivative securities products. See 17 CFR
240.19b–4(e)(2)(ii).
4 17
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issuer for the securities and/or cash,
with a value equal to the next
determined NAV. The NAV is
calculated once a day after the close of
the regular trading day.
To meet the investment objective of
providing investment returns that
correspond to the price and the
dividend and yield performance of the
underlying index, an ETF may use a
‘‘replication’’ strategy or a
‘‘representative sampling’’ strategy with
respect to the ETF portfolio.6 An ETF
using a replication strategy will invest
in each stock of the underlying index in
about the same proportion as that stock
is represented in the index itself. An
ETF using a representative sampling
strategy will generally invest in a
significant number but not all of the
component securities of the underlying
index, and will hold stocks that, in the
aggregate, are intended to approximate
the full index in terms of key
characteristics, such as price/earnings
ratio, earnings growth, and dividend
yield.
In addition, an ETF portfolio may be
adjusted in accordance with changes in
the composition of the underlying index
or to maintain compliance with
requirements applicable to a regulated
investment company under the Internal
Revenue Code (‘‘IRC’’).7
Generic Listing Standards for ExchangeTraded Funds
The Commission has previously
approved generic listing standards for
ETFs based on indexes that consist of
stocks listed on U.S. exchanges.8 In
6 In either case, an ETF, by its terms, may be
considered invested in the securities of the
underlying index to the extent the ETF invests in
sponsored American Depository Receipts (‘‘ADRs’’),
Global Depository Receipts (‘‘GDRs’’), or European
Depository Receipts (‘‘EDRs’’) that trade on
exchanges with last-sale reporting representing
securities in the underlying index.
7 For an ETF to qualify for tax treatment as a
regulated investment company, it must meet several
requirements under the IRC. Among these is the
requirement that, at the close of each quarter of the
ETF’s taxable year, (1) at least 50% of the market
value of the ETF’s total assets must be represented
by cash items, U.S. government securities,
securities of other regulated investment companies,
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 ETF’s assets and not greater than
10% of the outstanding voting securities of such
issuer; and (2) 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 ETF (within the meaning of
Section 851(b)(4)(B) of the IRC) 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
regulated investment companies).
8 In 1996, the Commission approved Section
703.16 of the Listed Company Manual, which sets
forth the rules related to the listing of ICUs. See
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general, the proposed criteria for the
underlying component securities in the
international and global indexes are
similar to those for the domestic
indexes, but with modifications as
appropriate for the issues and risks
associated with non-U.S. securities.
In addition, the Commission has
previously approved rules governing the
listing and trading of ETFs based on
international indexes—those based on
non-U.S. component stocks—as well as
global indexes—those based on nonU.S. and U.S. component stocks.9
The Commission also has approved
rules of other exchanges that permit the
listing pursuant to Rule 19b–4(e) of
index-based derivatives where the
Commission had previously approved
rules contemplating the trading of
specified index-based derivatives on the
same index, on the condition that all of
the standards set forth in those orders,
in particular with respect to
surveillance sharing agreements,
continued to be satisfied.10
In approving ETFs for Exchange
trading, the Commission thoroughly
considered the structure of the ETFs,
their usefulness to investors and to the
markets, and NYSE rules that govern
their trading. The Exchange believes
that adopting additional generic listing
standards for these securities and
applying Rule 19b–4(e) should fulfill
the intended objective of that rule by
allowing those ETFs that satisfy the
proposed generic listing standards to
commence trading, without the need for
the public comment period and
Commission approval. The proposed
rules have the potential to reduce the
time frame for bringing ETFs to market,
thereby reducing the burdens on issuers
and other market participants. The
failure of a particular index to comply
with the proposed generic listing
standards under Rule 19b–4(e) would
Securities Exchange Act Release No. 36923 (March
5, 1996), 61 FR 10410 (March 13, 1996) (SR–NYSE–
95–23). In 2000, the Commission approved the
Exchange’s generic listing standards for the listing
and trading, or the trading pursuant to unlisted
trading privileges, of ICUs under Section 703.16 of
the Manual and Exchange Rule 1100. See Securities
Exchange Act Release No. 43679 (December 5,
2000), 65 FR 77949 (December 13, 2000) (SR–
NYSE–00–46).
9 See, e.g., Securities Exchange Act Release No.
52178 (July 29, 2005), 70 FR 46244 (August 9, 2005)
(SR–NYSE–2005–41) (approving listing of iShares
MSCI EAFE Growth Fund and iShares MSCI EAFE
Value Fund); Securities Exchange Act Release No.
54458 (September 15, 2006), 71 FR 55248
(September 21, 2006) (SR–NYSE–2006–60)
(approving listing of iShares S&P Global Index
Funds).
10 See, e.g., Securities Exchange Act Release No.
51563 (April 15, 2005), 70 FR 21257 (April 25,
2005) (SR–Amex–2005–001); Securities Exchange
Act Release No. 52204 (August 3, 2005), 70 FR
46559 (August 10, 2005) (SR–PCX–2005–63).
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not, however, preclude the Exchange
from submitting a separate filing
pursuant to Section 19(b)(2) requesting
Commission approval to list and trade a
particular ETF.
Requirements for Listing and Trading
ETFs Based on International and Global
Indexes
Exchange-traded funds listed
pursuant to these generic listing
standards would be traded, in all other
respects, under the Exchange’s existing
trading rules and procedures that apply
to ETFs and would be covered under the
Exchange’s surveillance program for
ETFs.11
To list an ETF pursuant to the
proposed generic listing standards for
international and global indexes, the
index underlying an ETF must satisfy
all the conditions contained in proposed
Section 703.16(C)(2)(b) of the Manual.
As with the existing generic standards
for ETFs based on domestic indexes,
these generic listing standards are
intended to ensure that stocks with
substantial market capitalization and
trading volume account for a substantial
portion of the weight of an index or
portfolio. While the standards in this
proposal are based on the standards
contained in the current generic listing
standards for ETFs based on domestic
indexes, they have been adapted as
appropriate to apply to international
and global indexes.
As proposed, Section 703.16(B) of the
Manual would be amended to include
definitions of U.S. Component Stock
and Non-U.S. Component Stock. These
new definitions would provide the basis
for the standards for indexes with either
domestic or international stocks, or a
combination of both. A ‘‘Non-U.S.
Component Stock’’ would mean an
equity security that is not registered
under Section 12(b) or 12(g) of the
Exchange Act,12 and that is issued by an
entity that (1) is not organized,
domiciled, or incorporated in the
United States, and (2) is an operating
company (including a real estate
investment trust (REIT) or income trust,
but excluding an investment trust, unit
trust, mutual fund, or derivative). This
definition is designed to create a
category of component stocks that are
issued by companies that are not based
in the United States, are not subject to
oversight through Commission
registration, and would include
sponsored GDRs and EDRs. A ‘‘U.S.
Component Stock’’ would mean an
equity security that is registered under
Section 12(b) or 12(g) of the Exchange
11 See
12 15
e.g., NYSE Rule 1100.
U.S.C. 78l(b) or (g).
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Act or an ADR the underlying equity
security of which is registered under
Section 12(b) or 12(g) of the Exchange
Act. An ADR with an underlying equity
security that is registered pursuant to
the Exchange Act is considered a U.S.
Component Stock because the issuer of
that security is subject to Commission
jurisdiction and must comply with
Commission rules.
The Exchange proposes that, to list an
ICU based on an international or global
index or portfolio pursuant to the
generic listing standards, such index or
portfolio must meet the following
criteria:
• Component stocks that in the
aggregate account for at least 90% of the
weight of the index or portfolio each
must have a minimum market value of
at least $100 million (Section
703.16(C)(2)(b)(i));
• Component stocks representing at
least 90% of the weight of the index or
portfolio each must have a minimum
worldwide monthly trading volume
during each of the last six months of at
least 250,000 shares (Section
703.16(C)(2)(b)(ii));
• The most heavily weighted
component stock may not exceed 25%
of the weight of the index or portfolio
and the five most heavily weighted
component stocks may not exceed 60%
of the weight of the index or portfolio
(Section 703.16(C)(2)(b)(iii));
• The index or portfolio shall include
a minimum of 20 component stocks
(Section 703.16(C)(2)(b)(iv)); and
• Each U.S. Component Stock must
be listed on a national securities
exchange and an NMS stock as defined
in Rule 600 of Regulation NMS under
the Exchange Act, and each Non-U.S.
Component Stock must be listed on an
exchange that has last-sale reporting
(Section 703.16(C)(2)(b)(v)).
The Exchange believes that the
proposed standards are reasonable for
international and global indexes, and,
when applied in conjunction with the
other listing requirements, would result
in the listing and trading on the
Exchange of ETFs that are sufficiently
broad-based in scope and not readily
susceptible to manipulation. The
Exchange also believes that the
proposed standards would result in
ETFs that are adequately diversified in
weighting for any single security or
small group of securities to significantly
reduce concerns that trading in an ETF
based on an international or global
index could become a surrogate for
trading in unregistered securities.
The Exchange further notes that,
while these standards are similar to
those for indexes that include only U.S.
Component Stocks, they differ in certain
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3181
important respects and are generally
more restrictive, reflecting greater
concerns over portfolio diversification
with respect to ETFs investing in
components that are not individually
registered with the Commission. First,
in the proposed standards, component
stocks that in the aggregate account for
at least 90% of the weight of the index
or portfolio each shall have a minimum
market value of at least $100 million,
compared to a minimum market value
of at least $75 million for indexes with
only U.S. Component Stocks. (Market
value is calculated by multiplying the
total shares outstanding by the price per
share of the component stock.) Second,
in the proposed standards, the most
heavily weighted component stock
cannot exceed 25% of the weight of the
index or portfolio, in contrast to a 30%
standard for an index or portfolio
comprised of only U.S. Component
Stocks. Third, in the proposed
standards, the five most heavily
weighted component stocks shall not
exceed 60% of the weight of the index
or portfolio, compared to a 65%
standard for indexes comprised of only
U.S. Component Stocks. Fourth, the
minimum number of stocks in the
proposed standards is 20, in contrast to
a minimum of 13 in the standards for an
index or portfolio with only U.S.
Component Stocks. Finally, the
proposed standards require that each
Non-U.S. Component Stock included in
the index or portfolio be listed and
traded on an exchange that has last-sale
reporting.
The Exchange also proposes to modify
Section 703.16(C)(3) to require that the
index value for an ETF listed pursuant
to the proposed standards for
international and global indexes be
widely disseminated by one or more
major market data vendors at least every
60 seconds during the time when the
ETF shares trade on the Exchange. If the
index value does not change during
some or all of the period when trading
is occurring on the Exchange, the last
official calculated index value must
remain available throughout Exchange
trading hours. In contrast, the index
value for an ETF listed pursuant to the
existing standards for domestic indexes
must be disseminated at least every 15
seconds during the trading day. This
modification reflects limitations, in
some instances, on the frequency of
intra-day trading information with
respect to Non-U.S. Component Stocks
and that, in many cases, trading hours
for overseas markets overlap only in
part, or not at all, with Exchange trading
hours.
In addition, Section 703.16(C)(3)
would be modified to define the term
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‘‘Intraday Indicative Value’’ (‘‘IIV’’) as
the estimate, updated at least every 15
seconds, of the value of a share of each
ETF, for ease of reference. The Exchange
also proposes to clarify in Section
703.16(C)(3) that the IIV would be
updated during the hours the ETF
shares trade on the Exchange to reflect
changes in the exchange rate between
the U.S. dollar and the currency in
which any component stock is
denominated.
The Exchange is also proposing to add
a Section 703.16(C)(6) regarding the
creation and redemption process for
ETFs and compliance with federal
securities laws for, in particular, ETFs
listed pursuant to the new generic
listing standards. This new subsection
would apply to ICUs listed pursuant to
Section 703.16(C)(2)(b) or (c). It would
require that the statutory prospectus or
the application for exemption from
provisions of the Investment Company
Act of 1940 13 for the ETF being listed
pursuant to these new standards must
state that the ETF must comply with the
federal securities laws in accepting
securities for deposits and satisfying
redemptions with redemption
securities, including that the securities
accepted for deposits and the securities
used to satisfy redemption requests are
sold in transactions that would be
exempt from registration under the
Securities Act of 1933.14
The Commission has approved
generic standards providing for the
listing pursuant to Rule 19b–4(e) of
other derivative products based on
indexes described in rules previously
approved by the Commission under
Section 19(b)(2) of the Exchange Act.
The Exchange proposes to include in
the generic standards for the listing of
ICUs indexes that have been approved
by the Commission in connection with
the listing of options, ICUs, IndexLinked Exchangeable Notes, or IndexLinked Securities. The Exchange
believes that the application of that
standard to ETFs is appropriate because
the underlying index would have been
subject to detailed and specific
Commission review in the context of the
approval of listing of those other
derivatives.15
This new generic standard would be
limited to stock indexes and would
13 15
U.S.C. 80a et seq.
U.S.C. 77a et seq.
15 For example, rules of the American Stock
Exchange LLC (‘‘Amex’’) and NYSE Arca, Inc.
provide that one element of the standards for listing
Index-Linked Securities pursuant to Rule 19b–4(e)
is the previous review and approval for trading of
options or other derivatives by the Commission
under Section 19(b)(2) of the Exchange Act and
rules thereunder. See supra note 10.
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14 15
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require that each component stock be
either: (1) a U.S. Component Stock that
is listed on a national securities
exchange and is an NMS stock as
defined in Rule 600 of Regulation NMS;
or (2) a Non-U.S. Component Stock that
is listed and traded on an exchange that
has last-sale reporting.
The Exchange is also proposing to
include additional continued listing
standards relating to ETFs. The
Exchange would commence delisting
proceedings if the value of the index or
portfolio of securities on which the ETF
is based is no longer calculated or
disseminated.
The Exchange proposes to modify the
Original Unit Listing Standards in
Section 703.16(A) of the Manual to
formalize in the rules existing best
practices for providing equal access to
material information about the value of
ETFs. Pursuant to proposed Section
703.16(A)(6), prior to approving an ETF
for listing, the Exchange would obtain a
representation from the ETF issuer that
the NAV per share would be calculated
daily and made available to all market
participants at the same time.
Proposed Rule 1100(f) sets out the
trading halt parameters for ETFs. In
particular, proposed Rule 1100(f)(1) sets
out that, where the Exchange is the
listing market for an ICU, if the IIV or
the index value applicable to that series
of ICUs 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 index value occurs. If the
interruption to the dissemination of the
IIV or the index value persists past the
trading day in which it occurred, the
Exchange would halt trading no later
than the beginning of the trading day
following the interruption.
Proposed Rule 1100(f)(2) provides
that, for series of ICUs admitted to
dealings by the Exchange on the basis of
unlisted trading privileges (‘‘UTP’’),
during the hours for trading of ICUs on
the Exchange, if a temporary
interruption occurs in the calculation or
wide dissemination of the applicable IIV
or value of the underlying index by a
major market data vendor and the listing
market halts trading in a series of ICUs,
the Exchange, upon notification by the
listing market of such halt due to such
temporary interruption, also shall
immediately halt trading in the series of
ICUs on the Exchange. If the IIV or the
value of the underlying index continues
not to be calculated or widely available
as of the commencement of trading on
the Exchange on the next business day,
the Exchange shall not commence
trading of the series of ICUs that day. If
an interruption in the calculation or
PO 00000
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Fmt 4703
Sfmt 4703
wide dissemination of the IIV or the
value of the underlying index continues,
the Exchange may resume trading in the
series of ICUs only if calculation and
wide dissemination of the IIV or the
value of the underlying index resumes
or trading in such series resumes in the
listing market.
The Exchange is proposing other
minor and clarifying changes to Section
703.16. Section 703.16(C)(2)(a)(v) has
been modified to reflect the adoption of
Regulation NMS. Proposed Section
703.16(C)(4)(c) has been added to make
sure that an entity that advises index
providers or calculators and related
entities has in place procedures
designed to prevent the use and
dissemination of material non-public
information regarding the index
underlying the ETF.
The Exchange represents that its
surveillance procedures are adequate to
properly monitor the trading of ICUs
listed pursuant to the proposed new
listing standards or traded pursuant to
UTP. In addition, the Exchange has a
general policy prohibiting the
dissemination of material, non-public
information by its employees.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Exchange Act 16 in
general and furthers the objectives of
Section 6(b)(5) 17 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
facilitating transactions in securities,
and to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition.
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.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
16 15
17 15
E:\FR\FM\24JAN1.SGM
U.S.C. 78f.
U.S.C. 78f(b)(5).
24JAN1
Federal Register / Vol. 72, No. 15 / Wednesday, January 24, 2007 / Notices
exchange.18 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Exchange Act 19 in that it is designed to
prevent fraudulent and manipulative
Electronic Comments
acts and practices, to promote just and
equitable principles of trade, to foster
• Use the Commission’s Internet
cooperation and coordination with
comment form (https://www.sec.gov/
persons engaged in facilitating
rules/sro.shtml); or
transactions in securities, to remove
• Send an e-mail to ruleimpediments to and perfect the
comments@sec.gov. Please include File
mechanism of a free and open market
Number SR–NYSE–2006–101 on the
and a national market system, and, in
subject line.
general, to protect investors and the
public interest.
Paper Comments
Currently, the Exchange must file a
proposed rule change with the
• Send paper comments in triplicate
Commission pursuant to Section
to Nancy M. Morris, Secretary,
19(b)(1) of the Exchange Act 20 and Rule
Securities and Exchange Commission,
19b–4 thereunder 21 to list and trade any
100 F Street, NE., Washington, DC
ETF based on an index comprised of
20549–1090.
foreign securities. The Exchange also
All submissions should refer to File
must file a proposed rule change to list
Number SR–NYSE–2006–101. This file
and trade ETFs based on indexes or
number should be included on the
subject line if e-mail is used. To help the portfolios previously approved by the
Commission as underlying benchmarks
Commission process and review your
for derivative securities. However, Rule
comments more efficiently, please use
only one method. The Commission will 19b–4(e) provides that the listing and
post all comments on the Commission’s trading of a new derivative securities
product by an SRO will not be deemed
Internet Web site (https://www.sec.gov/
a proposed rule change pursuant to Rule
rules/sro.shtml). Copies of the
19b–4(c)(1) if the Commission has
submission, all subsequent
approved, pursuant to Section 19(b) of
amendments, all written statements
the Exchange Act, the SRO’s trading
with respect to the proposed rule
rules, procedures, and listing standards
change that are filed with the
for the product class that would include
Commission, and all written
the new derivative securities product,
communications relating to the
and the SRO has a surveillance program
proposed rule change between the
for the product class. The Exchange’s
Commission and any person, other than
proposed rules for the listing and
those that may be withheld from the
trading of ETFs pursuant to Rule 19b–
public in accordance with the
4(e) based on (1) certain indexes with
provisions of 5 U.S.C. 552, will be
components that include foreign
available for inspection and copying in
securities or (2) indexes or portfolios
the Commission’s Public Reference
previously approved by the Commission
Room. Copies of such filing also will be as underlying benchmarks for derivative
available for inspection and copying at
securities fulfill these requirements. Use
the principal office of NYSE. All
of Rule 19b–4(e) by NYSE to list and
comments received will be posted
trade such ETFs should promote
without change; the Commission does
competition, reduce burdens on issuers
not edit personal identifying
and other market participants, and make
information from submissions. You
such ETFs available to investors more
should submit only information that
quickly.22
you wish to make available publicly. All
The Commission previously has
submissions should refer to File
approved generic listing standards for
Number SR–NYSE–2006–101 and
another exchange, Amex, that are
should be submitted on or before
substantially similar to those proposed
February 14, 2007.
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
pwalker on PROD1PC71 with NOTICES
IV. Commission’s Findings and Order
Granting Accelerated Approval of the
Proposed Rule Change
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
VerDate Aug<31>2005
17:44 Jan 23, 2007
Jkt 211001
18 In approving this rule change, the Commission
notes that it has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
19 15 U.S.C. 78f(b)(5).
20 15 U.S.C. 78s(b)(1).
21 17 CFR 240.19b–4.
22 The Commission notes, however, that the
failure of a particular ETF to meet these generic
listing standards would not preclude the Exchange
from submitting a separate proposed rule change to
list and trade the ETF.
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
3183
here by NYSE.23 This proposal does not
appear to raise any novel regulatory
issues. Therefore, the Commission finds
that NYSE’s proposal is consistent with
the Exchange Act on the same basis that
it approved Amex’s generic listing
standards for ETFs based on
international or global indexes or on
indexes or portfolios previously
approved by the Commission as
underlying benchmarks for derivative
securities.
Proposed Section 703.16(C)(2)(b) of
the Manual establishes standards for the
composition of an index or portfolio
underlying an ETF. These requirements
are designed, among other things, to
require that components of an index or
portfolio underlying the ETF are
adequately capitalized and sufficiently
liquid, and that no one security
dominates the index. The Commission
believes that, taken together, these
standards are reasonably designed to
ensure that securities with substantial
market capitalization and trading
volume account for a substantial portion
of any underlying index or portfolio,
and that when applied in conjunction
with the other applicable listing
requirements, will permit the listing and
trading only of ETFs that are sufficiently
broad-based in scope to minimize
potential manipulation. The
Commission further believes that the
proposed listing standards are
reasonably designed to preclude NYSE
from listing and trading ETFs that might
be used as surrogate for trading in
unregistered securities. The requirement
that each component security
underlying an ETF be an NMS stock (in
the case of a U.S. Component Stock) or
listed on an exchange and subject to
last-sale reporting (in the case of a NonU.S. Component Stock) should
contribute to the transparency of the
market for these ETFs.
The proposed generic listing
standards also will permit NYSE to list
and trade an ETF if the Commission has
previously approved an SRO rule
change that contemplates listing and
trading a derivative product based on
the same underlying index. NYSE
would be able to rely on that earlier
approval order, provided that (1) the
securities comprising the underlying
index consist of U.S. Component Stocks
or Non-U.S. Component Stocks as set
23 See Securities Exchange Act Release No. 54739
(November 9, 2006), 71 FR 66993 (November 17,
2006) (SR–Amex–2006–78) (approving generic
listing standards for series of portfolio depositary
receipts and index fund shares based on
international or global indexes); Securities
Exchange Act Release No. 55018 (December 28,
2006), 72 FR 1040 (January 9, 2007) (SR–Amex–
2006–109) (making clarifying changes to the generic
listing standards set forth in SR–Amex–2006–78).
E:\FR\FM\24JAN1.SGM
24JAN1
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Federal Register / Vol. 72, No. 15 / Wednesday, January 24, 2007 / Notices
forth in Section 703.16(B) of the Manual
and (2) NYSE complies with the
commitments undertaken by the other
SRO set forth in the prior order,
including any surveillance-sharing
arrangements with a foreign market.
The Commission believes that NYSE’s
proposal is consistent with Section
11A(a)(1)(C)(iii) of the Exchange Act,24
which sets forth Congress’ finding that
it is in the public interest and
appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure the
availability to brokers, dealers, and
investors of information with respect to
quotations for and transactions in
securities. The Exchange’s proposal also
requires the value of the index or
portfolio underlying an ETF based on a
global or international index to be
disseminated at least once every 60
seconds during Exchange trading
hours.25 In addition, an IIV, which
represents an estimate of the value of a
share of each ETF, must be updated and
disseminated at least once every 15
seconds during the time an ETF trades
on the Exchange.26 The IIV will be
updated to reflect changes in the
exchange rate between the U.S. dollar
and the currency in which any index or
portfolio component stock is
denominated. In the event that an
underlying index or portfolio value is
no longer calculated or disseminated,
the Exchange has represented that it
would commence delisting proceedings
for the associated ETF. Furthermore, the
issuer of an ETF listed under the
proposed rules will be required to
represent that it will calculate the NAV
and make it available daily to all market
participants at the same time.27
The Exchange’s trading halt rules are
reasonably designed to prevent trading
in an ETF when transparency cannot be
assured. Proposed NYSE Rule 1100(f)(1)
provides that, when the Exchange is the
listing market, if the IIV or index value
applicable to an ETF is not
disseminated as required, the Exchange
may halt trading during the day in
which the interruption occurs. If the
interruption continues, then the
Exchange will halt trading no later than
the beginning of the next trading day. In
addition, proposed NYSE Rule
1100(f)(2) sets forth trading halt
procedures when the Exchange trades
the ETF pursuant to UTP. This proposed
rule is substantially similar to that
recently adopted by another exchange,
NYSEArca.28
In approving this proposal, the
Commission relied on NYSE’s
representation that its surveillance
procedures are adequate to properly
monitor the trading of ICUs listed
pursuant to the proposed new listing
standards or traded pursuant to unlisted
trading privileges. This approval is
conditioned on the continuing accuracy
of that representation.
Acceleration
The Commission finds good cause for
approving the proposed rule change, as
amended, prior to the 30th day after the
date of publication of the notice of filing
thereof in the Federal Register. The
Commission notes that NYSE’s proposal
is substantially similar to an Amex
proposal that has been approved by the
Commission.29 The Commission does
not believe that NYSE’s proposal raises
any novel regulatory issues and,
therefore, that good cause exists for
approving the filing before the
conclusion of a notice-and-comment
period. Accelerated approval of the
proposal will expedite the listing and
trading of additional ETFs by the
Exchange, subject to consistent and
reasonable standards. Therefore, the
Commission finds good cause,
consistent with Section 19(b)(2) of the
Exchange Act,30 to approve the
proposed rule change, as amended, on
an accelerated basis.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,31
that the proposed rule change (SR–
NYSE–2006–101), as amended, be, and
it hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.32
Nancy M. Morris,
Secretary.
[FR Doc. E7–956 Filed 1–23–07; 8:45 am]
BILLING CODE 8011–01–P
VerDate Aug<31>2005
17:44 Jan 23, 2007
Jkt 211001
[Release No. 34–55120; File No. SR–NYSE–
2006–110]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving a Proposed Rule Change
Relating to Its Linkage Order Fee
January 18, 2007.
On December 6, 2006, the New York
Stock Exchange LLC (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 thereunder,2 a proposal to
retroactively apply an increase in the fee
(‘‘Linkage Order Fee’’) it charges its
member organizations in connection
with orders in equities executed in
another market pursuant to the Plan for
the Purpose of Creating and Operating
an Intermarket Communications
Linkage (‘‘Linkage Plan’’). The proposal
was published for comment in the
Federal Register on December 15,
2006.3 The Commission received no
comments on the proposal. This order
approves the proposed rule change.
The Exchange proposes to
retroactively apply, as of December 1,
2006, an increase from $0.00025 to
$0.000275 per share in the Linkage
Order Fee it charges its member
organizations in connection with orders
in equities executed in another market
pursuant to the Linkage Plan. This
increase in the Linkage Order Fee
became effective on Monday, December
4, 2006, pursuant to a previous rule
change submitted by the Exchange.4 The
Linkage Order Fee was increased to
$0.000275 to set it at the same level as
the regular equity transaction fee, which
was increased to that level as of
December 1, 2006.5 The current filing
simply applies the revised Linkage
Order Fee to transactions that occurred
on December 1, 2006, which is the only
business day with respect to which the
Linkage Order Fee and the regular
equity transaction fee were not
harmonized by the previous filing. The
Exchange wishes to harmonize the
Linkage Order Fee payable on
1 15
24 15
pwalker on PROD1PC71 with NOTICES
U.S.C. 78k–1(a)(1)(C)(iii).
25 See proposed Section 703.16(C)(3) of the
Manual. If an index or portfolio value does not
change for some of the time that the ETF trades on
the Exchange, the last official calculated value must
remain available throughout Exchange trading
hours.
26 See id.
27 See proposed Section 703.16(A)(6) of the
Manual.
SECURITIES AND EXCHANGE
COMMISSION
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54912
(December 11, 2006), 71 FR 75601.
4 See Securities Exchange Act Release No. 54911
(December 11, 2006), 71 FR 75603 (December 15,
2006) (notice of filing and immediate effectiveness
of SR–NYSE–2006–108).
5 See Exchange Act Release No. 54856 (December
1, 2006); 71 FR 71215 (December 8, 2006) (SR–
NYSE–2006–106).
2 17
28 See Securities Exchange Act Release No. 54997
(December 21, 2006), 71 FR 78501 (December 29,
2006) (SR–NYSEArca–2006–77).
29 See supra note 23.
30 15 U.S.C. 78s(b)(2).
31 Id.
32 17 CFR 200.30–3(a)(12).
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
E:\FR\FM\24JAN1.SGM
24JAN1
]]>Agencies
[Federal Register Volume 72, Number 15 (Wednesday, January 24, 2007)]
[Notices]
[Pages 3179-3184]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-956]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55113; File No. SR-NYSE-2006-101]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change as Modified by Amendments No. 1 and 2 Thereto Adopting
Generic Listing Standards for Exchange-Traded Funds Based on
International or Global Indexes or Indexes Previously Approved by the
Commission as Underlying Benchmarks for Derivative Securities
January 17, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on November 21, 2006, the New York Stock Exchange LLC
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
the Exchange. On January 11, 2007, the Exchange filed Amendment No. 1
to the proposal. On January 16, 2007, the Exchange filed Amendment No.
2 to the proposal. This order provides notice of the proposed rule
change as amended and approves the proposed rule change as amended on
an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The text of the proposed rule change is available at the Exchange,
from the Commission's Public Reference Room, and on NYSE's Web site
(https://www.nyse.com).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 3180]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to revise Section 703.16 of the NYSE Listed
Company Manual (``Manual'') to include generic listing standards for
series of Investment Company Units (``ICUs'') (which are also referred
to herein as ``exchange-traded funds'' or ``ETFs'') that are based on
international or global indexes, or on indexes described in rules
previously approved by the Commission under Section 19(b)(2) of the
Exchange Act \3\ for the trading of ETFs, options, or other index-based
securities. This proposal would enable the Exchange to list and trade
ETFs pursuant to Rule 19b-4(e) under the Exchange Act \4\ if each of
the conditions set forth in Section 703.16 of the Manual is satisfied.
Rule 19b-4(e) provides that the listing and trading of a new derivative
securities product by a self-regulatory organization (``SRO'') shall
not be deemed a proposed rule change, pursuant to paragraph (c)(1) of
Rule 19b-4, if the Commission has approved, pursuant to Section 19(b)
of the Exchange Act, the SRO's trading rules, procedures, and listing
standards for the product class that would include the new derivatives
securities product, and the SRO has a surveillance program for the
product class.\5\
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(2).
\4\ 17 CFR 240.19b-4(e).
\5\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange
begins trading the new derivative securities products. See 17 CFR
240.19b-4(e)(2)(ii).
---------------------------------------------------------------------------
Exchange-Traded Funds
NYSE Rule 1100 and Section 703.16 of the Manual provide standards
for listing ICUs, which are securities issued by a unit investment
trust, an open-end management investment company (i.e., an open-end
mutual fund), or similar entity based on a portfolio of stocks or fixed
income securities that seeks to provide investment results that
correspond generally to the price and yield performance of a specified
foreign or domestic stock index or fixed income securities index.
Pursuant to Section 703.16 of the Manual, an ICU eligible for listing
on the Exchange must be issued in a specified aggregate number in
return for a deposit of specified securities and/or a cash amount, with
a value equal to the next determined net asset value (``NAV''). When
aggregated in the same specified minimum number, the ICU must be
redeemable by the issuer for the securities and/or cash, with a value
equal to the next determined NAV. The NAV is calculated once a day
after the close of the regular trading day.
To meet the investment objective of providing investment returns
that correspond to the price and the dividend and yield performance of
the underlying index, an ETF may use a ``replication'' strategy or a
``representative sampling'' strategy with respect to the ETF
portfolio.\6\ An ETF using a replication strategy will invest in each
stock of the underlying index in about the same proportion as that
stock is represented in the index itself. An ETF using a representative
sampling strategy will generally invest in a significant number but not
all of the component securities of the underlying index, and will hold
stocks that, in the aggregate, are intended to approximate the full
index in terms of key characteristics, such as price/earnings ratio,
earnings growth, and dividend yield.
---------------------------------------------------------------------------
\6\ In either case, an ETF, by its terms, may be considered
invested in the securities of the underlying index to the extent the
ETF invests in sponsored American Depository Receipts (``ADRs''),
Global Depository Receipts (``GDRs''), or European Depository
Receipts (``EDRs'') that trade on exchanges with last-sale reporting
representing securities in the underlying index.
---------------------------------------------------------------------------
In addition, an ETF portfolio may be adjusted in accordance with
changes in the composition of the underlying index or to maintain
compliance with requirements applicable to a regulated investment
company under the Internal Revenue Code (``IRC'').\7\
---------------------------------------------------------------------------
\7\ For an ETF to qualify for tax treatment as a regulated
investment company, it must meet several requirements under the IRC.
Among these is the requirement that, at the close of each quarter of
the ETF's taxable year, (1) at least 50% of the market value of the
ETF's total assets must be represented by cash items, U.S.
government securities, securities of other regulated investment
companies, 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 ETF's assets and not
greater than 10% of the outstanding voting securities of such
issuer; and (2) 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 ETF (within the meaning of
Section 851(b)(4)(B) of the IRC) 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 regulated
investment companies).
---------------------------------------------------------------------------
Generic Listing Standards for Exchange-Traded Funds
The Commission has previously approved generic listing standards
for ETFs based on indexes that consist of stocks listed on U.S.
exchanges.\8\ In general, the proposed criteria for the underlying
component securities in the international and global indexes are
similar to those for the domestic indexes, but with modifications as
appropriate for the issues and risks associated with non-U.S.
securities.
---------------------------------------------------------------------------
\8\ In 1996, the Commission approved Section 703.16 of the
Listed Company Manual, which sets forth the rules related to the
listing of ICUs. See Securities Exchange Act Release No. 36923
(March 5, 1996), 61 FR 10410 (March 13, 1996) (SR-NYSE-95-23). In
2000, the Commission approved the Exchange's generic listing
standards for the listing and trading, or the trading pursuant to
unlisted trading privileges, of ICUs under Section 703.16 of the
Manual and Exchange Rule 1100. See Securities Exchange Act Release
No. 43679 (December 5, 2000), 65 FR 77949 (December 13, 2000) (SR-
NYSE-00-46).
---------------------------------------------------------------------------
In addition, the Commission has previously approved rules governing
the listing and trading of ETFs based on international indexes--those
based on non-U.S. component stocks--as well as global indexes--those
based on non-U.S. and U.S. component stocks.\9\
---------------------------------------------------------------------------
\9\ See, e.g., Securities Exchange Act Release No. 52178 (July
29, 2005), 70 FR 46244 (August 9, 2005) (SR-NYSE-2005-41) (approving
listing of iShares MSCI EAFE Growth Fund and iShares MSCI EAFE Value
Fund); Securities Exchange Act Release No. 54458 (September 15,
2006), 71 FR 55248 (September 21, 2006) (SR-NYSE-2006-60) (approving
listing of iShares S&P Global Index Funds).
---------------------------------------------------------------------------
The Commission also has approved rules of other exchanges that
permit the listing pursuant to Rule 19b-4(e) of index-based derivatives
where the Commission had previously approved rules contemplating the
trading of specified index-based derivatives on the same index, on the
condition that all of the standards set forth in those orders, in
particular with respect to surveillance sharing agreements, continued
to be satisfied.\10\
---------------------------------------------------------------------------
\10\ See, e.g., Securities Exchange Act Release No. 51563 (April
15, 2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001);
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR
46559 (August 10, 2005) (SR-PCX-2005-63).
---------------------------------------------------------------------------
In approving ETFs for Exchange trading, the Commission thoroughly
considered the structure of the ETFs, their usefulness to investors and
to the markets, and NYSE rules that govern their trading. The Exchange
believes that adopting additional generic listing standards for these
securities and applying Rule 19b-4(e) should fulfill the intended
objective of that rule by allowing those ETFs that satisfy the proposed
generic listing standards to commence trading, without the need for the
public comment period and Commission approval. The proposed rules have
the potential to reduce the time frame for bringing ETFs to market,
thereby reducing the burdens on issuers and other market participants.
The failure of a particular index to comply with the proposed generic
listing standards under Rule 19b-4(e) would
[[Page 3181]]
not, however, preclude the Exchange from submitting a separate filing
pursuant to Section 19(b)(2) requesting Commission approval to list and
trade a particular ETF.
Requirements for Listing and Trading ETFs Based on International and
Global Indexes
Exchange-traded funds listed pursuant to these generic listing
standards would be traded, in all other respects, under the Exchange's
existing trading rules and procedures that apply to ETFs and would be
covered under the Exchange's surveillance program for ETFs.\11\
---------------------------------------------------------------------------
\11\ See e.g., NYSE Rule 1100.
---------------------------------------------------------------------------
To list an ETF pursuant to the proposed generic listing standards
for international and global indexes, the index underlying an ETF must
satisfy all the conditions contained in proposed Section
703.16(C)(2)(b) of the Manual. As with the existing generic standards
for ETFs based on domestic indexes, these generic listing standards are
intended to ensure that stocks with substantial market capitalization
and trading volume account for a substantial portion of the weight of
an index or portfolio. While the standards in this proposal are based
on the standards contained in the current generic listing standards for
ETFs based on domestic indexes, they have been adapted as appropriate
to apply to international and global indexes.
As proposed, Section 703.16(B) of the Manual would be amended to
include definitions of U.S. Component Stock and Non-U.S. Component
Stock. These new definitions would provide the basis for the standards
for indexes with either domestic or international stocks, or a
combination of both. A ``Non-U.S. Component Stock'' would mean an
equity security that is not registered under Section 12(b) or 12(g) of
the Exchange Act,\12\ and that is issued by an entity that (1) is not
organized, domiciled, or incorporated in the United States, and (2) is
an operating company (including a real estate investment trust (REIT)
or income trust, but excluding an investment trust, unit trust, mutual
fund, or derivative). This definition is designed to create a category
of component stocks that are issued by companies that are not based in
the United States, are not subject to oversight through Commission
registration, and would include sponsored GDRs and EDRs. A ``U.S.
Component Stock'' would mean an equity security that is registered
under Section 12(b) or 12(g) of the Exchange Act or an ADR the
underlying equity security of which is registered under Section 12(b)
or 12(g) of the Exchange Act. An ADR with an underlying equity security
that is registered pursuant to the Exchange Act is considered a U.S.
Component Stock because the issuer of that security is subject to
Commission jurisdiction and must comply with Commission rules.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78l(b) or (g).
---------------------------------------------------------------------------
The Exchange proposes that, to list an ICU based on an
international or global index or portfolio pursuant to the generic
listing standards, such index or portfolio must meet the following
criteria:
Component stocks that in the aggregate account for at
least 90% of the weight of the index or portfolio each must have a
minimum market value of at least $100 million (Section
703.16(C)(2)(b)(i));
Component stocks representing at least 90% of the weight
of the index or portfolio each must have a minimum worldwide monthly
trading volume during each of the last six months of at least 250,000
shares (Section 703.16(C)(2)(b)(ii));
The most heavily weighted component stock may not exceed
25% of the weight of the index or portfolio and the five most heavily
weighted component stocks may not exceed 60% of the weight of the index
or portfolio (Section 703.16(C)(2)(b)(iii));
The index or portfolio shall include a minimum of 20
component stocks (Section 703.16(C)(2)(b)(iv)); and
Each U.S. Component Stock must be listed on a national
securities exchange and an NMS stock as defined in Rule 600 of
Regulation NMS under the Exchange Act, and each Non-U.S. Component
Stock must be listed on an exchange that has last-sale reporting
(Section 703.16(C)(2)(b)(v)).
The Exchange believes that the proposed standards are reasonable
for international and global indexes, and, when applied in conjunction
with the other listing requirements, would result in the listing and
trading on the Exchange of ETFs that are sufficiently broad-based in
scope and not readily susceptible to manipulation. The Exchange also
believes that the proposed standards would result in ETFs that are
adequately diversified in weighting for any single security or small
group of securities to significantly reduce concerns that trading in an
ETF based on an international or global index could become a surrogate
for trading in unregistered securities.
The Exchange further notes that, while these standards are similar
to those for indexes that include only U.S. Component Stocks, they
differ in certain important respects and are generally more
restrictive, reflecting greater concerns over portfolio diversification
with respect to ETFs investing in components that are not individually
registered with the Commission. First, in the proposed standards,
component stocks that in the aggregate account for at least 90% of the
weight of the index or portfolio each shall have a minimum market value
of at least $100 million, compared to a minimum market value of at
least $75 million for indexes with only U.S. Component Stocks. (Market
value is calculated by multiplying the total shares outstanding by the
price per share of the component stock.) Second, in the proposed
standards, the most heavily weighted component stock cannot exceed 25%
of the weight of the index or portfolio, in contrast to a 30% standard
for an index or portfolio comprised of only U.S. Component Stocks.
Third, in the proposed standards, the five most heavily weighted
component stocks shall not exceed 60% of the weight of the index or
portfolio, compared to a 65% standard for indexes comprised of only
U.S. Component Stocks. Fourth, the minimum number of stocks in the
proposed standards is 20, in contrast to a minimum of 13 in the
standards for an index or portfolio with only U.S. Component Stocks.
Finally, the proposed standards require that each Non-U.S. Component
Stock included in the index or portfolio be listed and traded on an
exchange that has last-sale reporting.
The Exchange also proposes to modify Section 703.16(C)(3) to
require that the index value for an ETF listed pursuant to the proposed
standards for international and global indexes be widely disseminated
by one or more major market data vendors at least every 60 seconds
during the time when the ETF shares trade on the Exchange. If the index
value does not change during some or all of the period when trading is
occurring on the Exchange, the last official calculated index value
must remain available throughout Exchange trading hours. In contrast,
the index value for an ETF listed pursuant to the existing standards
for domestic indexes must be disseminated at least every 15 seconds
during the trading day. This modification reflects limitations, in some
instances, on the frequency of intra-day trading information with
respect to Non-U.S. Component Stocks and that, in many cases, trading
hours for overseas markets overlap only in part, or not at all, with
Exchange trading hours.
In addition, Section 703.16(C)(3) would be modified to define the
term
[[Page 3182]]
``Intraday Indicative Value'' (``IIV'') as the estimate, updated at
least every 15 seconds, of the value of a share of each ETF, for ease
of reference. The Exchange also proposes to clarify in Section
703.16(C)(3) that the IIV would be updated during the hours the ETF
shares trade on the Exchange to reflect changes in the exchange rate
between the U.S. dollar and the currency in which any component stock
is denominated.
The Exchange is also proposing to add a Section 703.16(C)(6)
regarding the creation and redemption process for ETFs and compliance
with federal securities laws for, in particular, ETFs listed pursuant
to the new generic listing standards. This new subsection would apply
to ICUs listed pursuant to Section 703.16(C)(2)(b) or (c). It would
require that the statutory prospectus or the application for exemption
from provisions of the Investment Company Act of 1940 \13\ for the ETF
being listed pursuant to these new standards must state that the ETF
must comply with the federal securities laws in accepting securities
for deposits and satisfying redemptions with redemption securities,
including that the securities accepted for deposits and the securities
used to satisfy redemption requests are sold in transactions that would
be exempt from registration under the Securities Act of 1933.\14\
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\13\ 15 U.S.C. 80a et seq.
\14\ 15 U.S.C. 77a et seq.
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The Commission has approved generic standards providing for the
listing pursuant to Rule 19b-4(e) of other derivative products based on
indexes described in rules previously approved by the Commission under
Section 19(b)(2) of the Exchange Act. The Exchange proposes to include
in the generic standards for the listing of ICUs indexes that have been
approved by the Commission in connection with the listing of options,
ICUs, Index-Linked Exchangeable Notes, or Index-Linked Securities. The
Exchange believes that the application of that standard to ETFs is
appropriate because the underlying index would have been subject to
detailed and specific Commission review in the context of the approval
of listing of those other derivatives.\15\
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\15\ For example, rules of the American Stock Exchange LLC
(``Amex'') and NYSE Arca, Inc. provide that one element of the
standards for listing Index-Linked Securities pursuant to Rule 19b-
4(e) is the previous review and approval for trading of options or
other derivatives by the Commission under Section 19(b)(2) of the
Exchange Act and rules thereunder. See supra note 10.
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This new generic standard would be limited to stock indexes and
would require that each component stock be either: (1) a U.S. Component
Stock that is listed on a national securities exchange and is an NMS
stock as defined in Rule 600 of Regulation NMS; or (2) a Non-U.S.
Component Stock that is listed and traded on an exchange that has last-
sale reporting.
The Exchange is also proposing to include additional continued
listing standards relating to ETFs. The Exchange would commence
delisting proceedings if the value of the index or portfolio of
securities on which the ETF is based is no longer calculated or
disseminated.
The Exchange proposes to modify the Original Unit Listing Standards
in Section 703.16(A) of the Manual to formalize in the rules existing
best practices for providing equal access to material information about
the value of ETFs. Pursuant to proposed Section 703.16(A)(6), prior to
approving an ETF for listing, the Exchange would obtain a
representation from the ETF issuer that the NAV per share would be
calculated daily and made available to all market participants at the
same time.
Proposed Rule 1100(f) sets out the trading halt parameters for
ETFs. In particular, proposed Rule 1100(f)(1) sets out that, where the
Exchange is the listing market for an ICU, if the IIV or the index
value applicable to that series of ICUs 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 index value occurs.
If the interruption to the dissemination of the IIV or the index value
persists past the trading day in which it occurred, the Exchange would
halt trading no later than the beginning of the trading day following
the interruption.
Proposed Rule 1100(f)(2) provides that, for series of ICUs admitted
to dealings by the Exchange on the basis of unlisted trading privileges
(``UTP''), during the hours for trading of ICUs on the Exchange, if a
temporary interruption occurs in the calculation or wide dissemination
of the applicable IIV or value of the underlying index by a major
market data vendor and the listing market halts trading in a series of
ICUs, the Exchange, upon notification by the listing market of such
halt due to such temporary interruption, also shall immediately halt
trading in the series of ICUs on the Exchange. If the IIV or the value
of the underlying index continues not to be calculated or widely
available as of the commencement of trading on the Exchange on the next
business day, the Exchange shall not commence trading of the series of
ICUs that day. If an interruption in the calculation or wide
dissemination of the IIV or the value of the underlying index
continues, the Exchange may resume trading in the series of ICUs only
if calculation and wide dissemination of the IIV or the value of the
underlying index resumes or trading in such series resumes in the
listing market.
The Exchange is proposing other minor and clarifying changes to
Section 703.16. Section 703.16(C)(2)(a)(v) has been modified to reflect
the adoption of Regulation NMS. Proposed Section 703.16(C)(4)(c) has
been added to make sure that an entity that advises index providers or
calculators and related entities has in place procedures designed to
prevent the use and dissemination of material non-public information
regarding the index underlying the ETF.
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of ICUs listed pursuant to the
proposed new listing standards or traded pursuant to UTP. In addition,
the Exchange has a general policy prohibiting the dissemination of
material, non-public information by its employees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Exchange Act \16\ in general and furthers the
objectives of Section 6(b)(5) \17\ 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 facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system.
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\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition.
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.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing,
[[Page 3183]]
including whether the proposed rule change is consistent with the
Exchange Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-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-NYSE-2006-101. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the 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 such
filing also will be available for inspection and copying at the
principal office of NYSE. 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-NYSE-2006-101 and should be submitted on or before February 14,
2007.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\18\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Exchange Act \19\ 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 facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\18\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b)(5).
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Currently, the Exchange must file a proposed rule change with the
Commission pursuant to Section 19(b)(1) of the Exchange Act \20\ and
Rule 19b-4 thereunder \21\ to list and trade any ETF based on an index
comprised of foreign securities. The Exchange also must file a proposed
rule change to list and trade ETFs based on indexes or portfolios
previously approved by the Commission as underlying benchmarks for
derivative securities. However, Rule 19b-4(e) provides that the listing
and trading of a new derivative securities product by an SRO will not
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the
Commission has approved, pursuant to Section 19(b) of the Exchange Act,
the SRO's trading rules, procedures, and listing standards for the
product class that would include the new derivative securities product,
and the SRO has a surveillance program for the product class. The
Exchange's proposed rules for the listing and trading of ETFs pursuant
to Rule 19b-4(e) based on (1) certain indexes with components that
include foreign securities or (2) indexes or portfolios previously
approved by the Commission as underlying benchmarks for derivative
securities fulfill these requirements. Use of Rule 19b-4(e) by NYSE to
list and trade such ETFs should promote competition, reduce burdens on
issuers and other market participants, and make such ETFs available to
investors more quickly.\22\
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\20\ 15 U.S.C. 78s(b)(1).
\21\ 17 CFR 240.19b-4.
\22\ The Commission notes, however, that the failure of a
particular ETF to meet these generic listing standards would not
preclude the Exchange from submitting a separate proposed rule
change to list and trade the ETF.
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The Commission previously has approved generic listing standards
for another exchange, Amex, that are substantially similar to those
proposed here by NYSE.\23\ This proposal does not appear to raise any
novel regulatory issues. Therefore, the Commission finds that NYSE's
proposal is consistent with the Exchange Act on the same basis that it
approved Amex's generic listing standards for ETFs based on
international or global indexes or on indexes or portfolios previously
approved by the Commission as underlying benchmarks for derivative
securities.
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\23\ See Securities Exchange Act Release No. 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (approving
generic listing standards for series of portfolio depositary
receipts and index fund shares based on international or global
indexes); Securities Exchange Act Release No. 55018 (December 28,
2006), 72 FR 1040 (January 9, 2007) (SR-Amex-2006-109) (making
clarifying changes to the generic listing standards set forth in SR-
Amex-2006-78).
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Proposed Section 703.16(C)(2)(b) of the Manual establishes
standards for the composition of an index or portfolio underlying an
ETF. These requirements are designed, among other things, to require
that components of an index or portfolio underlying the ETF are
adequately capitalized and sufficiently liquid, and that no one
security dominates the index. The Commission believes that, taken
together, these standards are reasonably designed to ensure that
securities with substantial market capitalization and trading volume
account for a substantial portion of any underlying index or portfolio,
and that when applied in conjunction with the other applicable listing
requirements, will permit the listing and trading only of ETFs that are
sufficiently broad-based in scope to minimize potential manipulation.
The Commission further believes that the proposed listing standards are
reasonably designed to preclude NYSE from listing and trading ETFs that
might be used as surrogate for trading in unregistered securities. The
requirement that each component security underlying an ETF be an NMS
stock (in the case of a U.S. Component Stock) or listed on an exchange
and subject to last-sale reporting (in the case of a Non-U.S. Component
Stock) should contribute to the transparency of the market for these
ETFs.
The proposed generic listing standards also will permit NYSE to
list and trade an ETF if the Commission has previously approved an SRO
rule change that contemplates listing and trading a derivative product
based on the same underlying index. NYSE would be able to rely on that
earlier approval order, provided that (1) the securities comprising the
underlying index consist of U.S. Component Stocks or Non-U.S. Component
Stocks as set
[[Page 3184]]
forth in Section 703.16(B) of the Manual and (2) NYSE complies with the
commitments undertaken by the other SRO set forth in the prior order,
including any surveillance-sharing arrangements with a foreign market.
The Commission believes that NYSE's proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Exchange Act,\24\ which sets forth
Congress' finding that it is in the public interest and appropriate for
the protection of investors and the maintenance of fair and orderly
markets to assure the availability to brokers, dealers, and investors
of information with respect to quotations for and transactions in
securities. The Exchange's proposal also requires the value of the
index or portfolio underlying an ETF based on a global or international
index to be disseminated at least once every 60 seconds during Exchange
trading hours.\25\ In addition, an IIV, which represents an estimate of
the value of a share of each ETF, must be updated and disseminated at
least once every 15 seconds during the time an ETF trades on the
Exchange.\26\ The IIV will be updated to reflect changes in the
exchange rate between the U.S. dollar and the currency in which any
index or portfolio component stock is denominated. In the event that an
underlying index or portfolio value is no longer calculated or
disseminated, the Exchange has represented that it would commence
delisting proceedings for the associated ETF. Furthermore, the issuer
of an ETF listed under the proposed rules will be required to represent
that it will calculate the NAV and make it available daily to all
market participants at the same time.\27\
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\24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\25\ See proposed Section 703.16(C)(3) of the Manual. If an
index or portfolio value does not change for some of the time that
the ETF trades on the Exchange, the last official calculated value
must remain available throughout Exchange trading hours.
\26\ See id.
\27\ See proposed Section 703.16(A)(6) of the Manual.
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The Exchange's trading halt rules are reasonably designed to
prevent trading in an ETF when transparency cannot be assured. Proposed
NYSE Rule 1100(f)(1) provides that, when the Exchange is the listing
market, if the IIV or index value applicable to an ETF is not
disseminated as required, the Exchange may halt trading during the day
in which the interruption occurs. If the interruption continues, then
the Exchange will halt trading no later than the beginning of the next
trading day. In addition, proposed NYSE Rule 1100(f)(2) sets forth
trading halt procedures when the Exchange trades the ETF pursuant to
UTP. This proposed rule is substantially similar to that recently
adopted by another exchange, NYSEArca.\28\
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\28\ See Securities Exchange Act Release No. 54997 (December 21,
2006), 71 FR 78501 (December 29, 2006) (SR-NYSEArca-2006-77).
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In approving this proposal, the Commission relied on NYSE's
representation that its surveillance procedures are adequate to
properly monitor the trading of ICUs listed pursuant to the proposed
new listing standards or traded pursuant to unlisted trading
privileges. This approval is conditioned on the continuing accuracy of
that representation.
Acceleration
The Commission finds good cause for approving the proposed rule
change, as amended, prior to the 30th day after the date of publication
of the notice of filing thereof in the Federal Register. The Commission
notes that NYSE's proposal is substantially similar to an Amex proposal
that has been approved by the Commission.\29\ The Commission does not
believe that NYSE's proposal raises any novel regulatory issues and,
therefore, that good cause exists for approving the filing before the
conclusion of a notice-and-comment period. Accelerated approval of the
proposal will expedite the listing and trading of additional ETFs by
the Exchange, subject to consistent and reasonable standards.
Therefore, the Commission finds good cause, consistent with Section
19(b)(2) of the Exchange Act,\30\ to approve the proposed rule change,
as amended, on an accelerated basis.
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\29\ See supra note 23.
\30\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\31\ that the proposed rule change (SR-NYSE-2006-101), as
amended, be, and it hereby is, approved on an accelerated basis.
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\31\ Id.
\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\32\
Nancy M. Morris,
Secretary.
[FR Doc. E7-956 Filed 1-23-07; 8:45 am]
BILLING CODE 8011-01-P
