Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Accelerated Approval to a Proposed Rule Change as Modified by Amendments No. 1 and 2 Thereto Relating to the Listing and Trading of Shares of Funds of the ProShares Trust, 3442-3447 [E7-1057]
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Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices
Eligible Directors to remain on the
Board and to devote their best efforts to
the success of HTGC’s business and the
enhancement of stockholder value.
Applicant states that the options granted
under the Plan will provide a means for
the Eligible Directors to increase their
ownership interests in HTGC, thereby
ensuring close identification of their
interests with those of HTGC and its
stockholders. Applicant asserts that by
providing incentives in the form of
options under the Plan, HTGC would be
better able to retain and attract qualified
persons to serve as Eligible Directors.
4. Applicant submits that the terms of
the Plan are fair and reasonable and do
not involve overreaching of applicant or
its shareholders. Applicant asserts that
the exercise of the options pursuant to
the Plan will not have a substantial
dilutive effect on the net asset value of
applicant’s Common Stock.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–1061 Filed 1–24–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55117; File No. SR–Amex–
2006–101]
Self-Regulatory Organizations;
American Stock Exchange LLC; Order
Granting Accelerated Approval to a
Proposed Rule Change as Modified by
Amendments No. 1 and 2 Thereto
Relating to the Listing and Trading of
Shares of Funds of the ProShares
Trust
January 17, 2007.
I. Introduction
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On October 24, 2006, the American
Stock Exchange LLC (‘‘Amex’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
On November 22, 2006, Amex filed
Amendment No. 1 to the proposed rule
change.3 On December 8, 2006, Amex
filed Amendment No. 2 to the proposed
rule change.4 The proposed rule change,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 supersedes and replaces the
original filing in its entirety.
4 Amendment No. 2 supersedes and replaces
Amendment No. 1 in its entirety.
2 17
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as amended, was published for
comment in the Federal Register on
December 27, 2006 for a 15-day
comment period.5 The Commission
received no comments on the proposal.
This order approves the proposed rule
change, as modified by Amendments
No. 1 and 2, on an accelerated basis.
II. Description of the Proposal
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.6 Index
Fund Shares are registered under the
Investment Company Act of 1940
(‘‘1940 Act’’), as well as under the Act.
Under Amex Rule 1000A(b)(2), the
Exchange proposes 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.
Pursuant to these rules, the Exchange
proposes to list the shares (the
‘‘Shares’’) of eighty-one (81) new funds
(the ‘‘Funds’’) of the ProShares Trust
(the ‘‘Trust’’). In its proposal, the
Exchange provided detailed
descriptions regarding the Underlying
Indexes,7 as well as the structure and
operation of the Funds and the listing
and trading of the Shares. Key features
of the proposal are noted below.
Product Description
The Funds are based on the following
equity securities indexes: (1) S&P Small
Cap 600 Index; (2) S&P 500/Citigroup
Value Index; (3) S&P 500/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)
5 See Securities Exchange Act Release No. 54961
(December 18, 2006), 71 FR 77823 (‘‘Notice’’).
6 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.
7 See Notice, supra note 5, 71 FR at 77825–77827
(describing the general design and composition of
each Underlying Index).
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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’’).
Each of the Funds is designated as an
Ultra Fund, Short Fund, or UltraShort
Fund, based on its investment objective.
Each Ultra Fund or ‘‘Bullish Fund’’
seeks a daily investment result, before
fees and expenses, which corresponds
to twice (200%) the daily performance
of its Underlying Index. Accordingly,
the NAV of the Shares of each Ultra
Fund, if successful in meeting its
objective, should increase, on a
percentage basis, approximately twice
as much as the corresponding
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. The 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 8 and money market
instruments 9 that are intended to create
the additional needed exposure to such
Underlying Index necessary to pursue
its investment objective.
Each Short Fund seeks a daily
investment result, before fees and
expenses, that corresponds to the
inverse or opposite of the daily
performance (¥100%) of its Underlying
Index. Accordingly, the NAV of the
Shares of each Short Fund should
increase approximately as much, on a
percentage basis, as the corresponding
8 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’’).
9 Money market instruments include U.S.
government securities and repurchase agreements
(the ‘‘Money Market Instruments’’). Repurchase
agreements held by the Funds will be consistent
with Rule 2a-7 of the 1940 Act, i.e., remaining
maturities of 397 days or less and rated investmentgrade.
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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 that
Underlying Index gains when the prices
of the securities in the Underlying Index
rise on a given day.
Finally, each UltraShort Fund seeks a
daily investment result, before fees and
expenses, that corresponds to twice the
inverse (¥200%) of the daily
performance of its Underlying Indexes.
Accordingly, the NAV of the Shares of
each UltraShort Fund should increase
approximately twice as much, on a
percentage basis, as the corresponding
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 that 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.’’ 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.10
As advisor to the Funds, ProShare
Advisors LLC (the ‘‘Advisor’’) will
implement a mathematical investment
strategy known or ‘‘Portfolio Investment
Methodology,’’ to establish an
investment exposure in each portfolio
corresponding to each Fund’s
investment objective. 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
10 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.
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each trading day. Each day, the
methodology will determine for each
Fund, 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.11
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.
Creation and Redemption of Shares
Fund Shares will be issued and
redeemed on a continuous basis at a
price equal to the NAV per Share next
determined after an order is received in
proper form. Only certain qualified
entities (‘‘Authorized Participants’’) may
create or redeem Shares, and each Fund
will issue and redeem Shares only in
aggregations of at least 50,000
(‘‘Creation Units’’). Additional
information about the creation and
redemption process is included in
Amex’s proposal.12
In summary, to create Bullish Fund
Shares, an Authorized Participant must
properly place a creation order and
typically make an in-kind deposit of a
basket of equity securities (‘‘Deposit
Securities’’) consisting of the securities
selected by the Advisor from among
those securities contained in the Fund’s
portfolio,13 together with an amount of
11 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.
12 See Notice, supra note 5, 71 FR at 77829–
77831.
13 The Trust will make available through the
Depository Trust Company or SEI Investments
Distribution Company (the ‘‘Distributor’’) on each
business day, prior to the opening of trading on the
Exchange, the list of names and the required
number of shares of each Deposit Security to be
included in the Creation Deposit for each Bullish
Fund (‘‘Deposit List’’). In accordance with the
Advisor’s Code of Ethics, personnel of the Advisor
with knowledge about the composition of a
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cash specified by the Advisor (the
‘‘Balancing Amount’’), plus the
applicable transaction fee (together, the
‘‘Creation Deposit’’).
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.
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 inkind stocks so that it has liquid
resources on hand to make the
necessary purchases.
Similarly, Bullish Fund Shares in
Creation Unit-size aggregations will be
redeemable on any day on which the
New York Stock Exchange is open in
exchange for a basket of securities
(‘‘Redemption Securities’’), a list of
which will be available to Authorized
Participants on each business day prior
to the opening of trading. To redeem
Shares in a Bullish Fund, an Authorized
Participant must properly place a
redemption order and deliver the
Redemption Securities, any required
Balancing Amount, and applicable
transaction fee.14
Notably, 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 Bearish Funds will be purchased
and redeemed entirely for cash (‘‘AllCash Payments’’). The use of an AllCash Payment for the purchase and
redemption of Creation Unit
aggregations of the Bearish Fund Shares
is due to the limited transferability of
Financial Instruments.
Dividends and Distributions
As described more fully in the Notice,
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. Distributions of
realized securities gains, if any,
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.
14 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.
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generally will be declared and paid once
a year.
Arbitrage
In its proposal, the Exchange stated
that it did not expect the Shares to trade
at a material discount or premium to the
underlying securities held by a Fund
based on potential arbitrage
opportunities. As is the case for other
exchange traded derivative products,
the arbitrage process should provide
market participants the opportunity to
profit from differences in the price of
Shares and their underlying value,
mitigating the occurrence of material
discounts or premiums.
Dissemination of Underlying Index
Information
The daily closing index value and the
percentage change in the daily closing
index value for each Underlying Index
will be publicly available on various
Internet Web sites, such as at https://
www.bloomberg.com. Data regarding
each Underlying Index is also available
from the respective Underlying Index
provider to subscribers. Several
independent data vendors also package
and disseminate Underlying Index data
in various value-added formats
(including vendors displaying both
securities and index levels and vendors
displaying index levels only).
The value of each Underlying Index
will be updated intra-day on a real time
basis as its individual component
securities change in price. These intraday 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.
Availability of Information Regarding
the Shares
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1. Indicative Intra-Day Fund Values
During the Exchange’s regular trading
hours, Amex will calculate and
disseminate at least every 15 seconds
through the facilities of the
Consolidated Tape Association
(‘‘CTA’’), an Indicative Intra-Day Value
(‘‘IIV’’) for each of the Funds on a per
Share basis, representing an estimate of
the NAV per Share for each Fund. The
Exchange will also make the IIV
available on its Web site at https://
www.amex.com.
For each Bullish Fund, the designated
IIV Calculator (Amex) will determine
the IIV by: (i) Calculating the estimated
current value of equity securities held
by such Fund by (a) calculating the
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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.
For each Bearish Fund, the Exchange
will determine the 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
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.
2. Other Information
Amex will disseminate for each Fund
on a daily basis through the facilities of
the CTA and CQ High Speed Lines and
on its Web site at https://www.amex.com
the following information:
• Daily trading volume;
• the closing prices of each Fund’s
Shares and corresponding NAV; and
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• the final dividend amounts to be
paid for each Fund.
The Exchange will also make
available information with respect to
recent NAV, Shares outstanding, and
the estimated cash amount and total
cash amount per Creation Unit.
Additionally, the Trust’s Internet Web
site (https://www.proshares.com), which
is and will be publicly accessible at no
charge, will contain the following
information for each Fund’s Shares: (a)
The prior business day’s closing NAV,
the reported closing price, and a
calculation 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 Web site for the Trust and/or the
Exchange will also disclose each Fund’s
total portfolio composition on a daily
basis, including, 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. Importantly, 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’’ and the
portfolio composition file (‘‘PCF’’) to
Authorized Participants. Therefore, the
same portfolio information (including
accrued expenses and dividends) will
be provided to all market participants at
the same time.
Also, as explained in Amex’s
proposal, beneficial owners of Shares
(‘‘Beneficial Owners’’) will receive all of
the statements, notices, and reports
required under the 1940 Act and other
applicable laws.15
15 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
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Criteria for Initial and Continued Listing
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The Shares are subject to the criteria
for initial and continued listing of Index
Fund Shares under Amex Rule 1002A.
Pursuant to Amex Rule 1002A(a)(ii), the
Exchange has stated that it 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; 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
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.16
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
sales material will reference the availability of such
circular and the prospectus.
16 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.
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14:58 Jan 24, 2007
Jkt 211001
occurred, the Exchange will halt trading
no later than the beginning of the
trading day following the interruption.
For each Fund, a minimum of two
Creation Units (at least 100,000 Shares)
will be required to be outstanding at the
commencement of trading on the
Exchange. The initial value of a Share
for each of the Funds is expected to be
in the range of $50–$250.
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 represents that the
Trust is required to comply with Section
803 of the Amex Company Guide and
Rule 10A–3 under the Act for the initial
and continued listing of the Shares.17
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). The Shares of the Funds will
trade on the Exchange until 4:15 p.m.
ET each business day and will trade
with a minimum price variation of $.01.
Trading Halts
Trading in Shares of the Funds will be
halted if the circuit breaker parameters
under Amex Rule 117 have been
reached. The Exchange may also halt
trading in consideration of other factors,
such as those set forth in Amex Rule
918C(b). 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; 18
or (2) whether other unusual conditions
or circumstances detrimental to the
17 Telephone conversation between Nyieri
Nazarian, Assistant General Counsel, Amex, and
Edward Cho, Special Counsel, Division of Market
Regulation (‘‘Division’’), Commission, on January 9,
2007 (clarifying that the Trust is required to comply
with Rule 803 of the Amex Company Guide).
18 In the case of the Financial Instruments held
by a Fund, the Exchange represents that a
notification procedure will be 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.
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3445
maintenance of a fair and orderly
market are present.
Amex Rule 1002A(b)(ii) sets forth the
trading halt parameters with respect to
Index Fund Shares. Importantly, 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. In particular, the
Information Circular will inform Amex
members and member organizations that
the procedures for purchases and
redemptions of Shares, and that Shares
are not individually redeemable, but are
redeemable only in Creation Unit
aggregations or multiples thereof. In
addition, prior to the commencement of
trading, the Exchange will inform
members and member organizations in
such Information Circular 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.
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
E:\FR\FM\25JAN1.SGM
25JAN1
3446
Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices
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
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.
Surveillance
The Exchange represents that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares and to deter and detect
violations of applicable rules.19
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.
III. Discussion and Commission’s
Findings
After careful consideration, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.20 In
particular, the Commission finds that
the proposed rule change, as amended,
is consistent with the requirements of
Section 6(b)(5) of the Act,21 which
requires, among other things, that the
Exchange’s rules be designed to promote
just and equitable principles of trade, 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.
ycherry on PROD1PC64 with NOTICES
A. Surveillance
The Commission notes that the
Exchange has represented that its
surveillance procedures are adequate to
monitor the trading of the Shares. The
shares based on the Underlying Indexes
are almost all currently listed and/or
traded on the Exchange. Amex stated
that it would rely on its existing
surveillance procedures governing
Index Fund Shares. The Commission
19 Telephone conversation between Nyieri
Nazarian, Assistant General Counsel, Amex, and
Edward Cho, Special Counsel, Division,
Commission, on January 9, 2007 (confirming that
the Exchange’s surveillance procedures are capable
of detecting and deterring violations of applicable
rules).
20 In approving this proposed 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).
21 15 U.S.C. 78f(b)(5).
VerDate Aug<31>2005
14:58 Jan 24, 2007
Jkt 211001
believes that these procedures provide a
framework for Amex to monitor
fraudulent and manipulative practices
in the trading of the Shares.
In addition, the Exchange represents
that, if a Fund uses a successor or
substitute index, or an Underlying Index
provider substantially changes either
the Underlying Index component
selection methodology or the weighting
methodology, Amex will file with the
Commission a proposed rule change,
which addresses, among other things,
applicable surveillance procedures.
Unless approved by the Commission,
the Exchange will commence delisting
of the Shares.
B. Dissemination of Information
The Commission believes that
sufficient venues exist for obtaining
reliable information so that investors in
the Shares can monitor the values of the
Underlying Indexes relative to the IIV of
their Shares.
The Exchange has represented that it
will calculate and publish the value of
the Underlying Indexes at least every 15
seconds during Amex trading hours
through the facilities of the CTA in
accordance with Commentary .02(c) to
Amex Rule 1000A. The Commission
notes that the daily closing index value
and the percentage change in the daily
closing index value for each Underlying
Index will be publicly available on
various Internet Web sites, such as at
https://www.bloomberg.com, from the
respective Underlying Index provider to
subscribers, and from various
independent data vendors that package
and disseminate Underlying Index data
in various value-added formats.
Likewise, the Exchange has
represented that it will calculate and
publish the IIV for each Fund on a perShare basis at least every 15 seconds
during Amex trading hours through the
facilities of the CTA and on its Web site
at https://www.amex.com. The
Commission believes that dissemination
of the IIV provides additional
information that is not otherwise
available to the public and is useful to
professionals and investors in
connection with the Shares trading on
the Exchange, and the creation and
redemption of the Shares. The
Commission believes that publication of
such information should promote
transparency with regard to the Shares.
The Exchange will make additional
information available on its Internet
Web site at https://www.amex.com,
including daily trading volume, the
closing price, the NAV, and the final
dividend amounts to be paid for each
Fund. The Trust’s Web site (https://
www.proshares.com), which is and will
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
be publicly accessible at no charge, will
also contain trading and other
information pertaining to the Shares of
each Fund. Notably, each Fund’s total
portfolio composition will be disclosed
on the Trust’s Web site (or another
relevant Internet Web site as determined
by the Trust) and/or Amex’s Web site
(https://www.amex.com).
In sum, the Commission believes that
the availability of information about the
Underlying Indexes, the composition
and valuation of each Fund, and the
Shares should facilitate transparency
with respect to the proposed Shares to
allow for the maintenance of fair and
orderly markets.
C. Listing and Trading
The Commission finds that the
Exchange’s proposed rules and
procedures for the listing and trading of
the Shares are consistent with the Act.
The Shares will trade as equity
securities subject to Amex rules
including, among others, rules
governing priority, parity and
precedence of orders, specialist
responsibilities, account opening, and
customer suitability requirements.
The Commission believes that the
listing and delisting criteria for the
Shares should help to maintain a
minimum level of liquidity and
therefore minimize the potential for
manipulation of the Shares.
Additionally, the Commission finds that
Amex Rule 1000A and Commentary
thereto are reasonably designed to
govern trading in the Shares. Finally,
the Commission notes that the
Information Circular distributed by the
Exchange will inform members and
member organizations about the terms,
characteristics, and risks in trading the
Shares, including their prospectus
delivery obligations.
D. Accelerated Approval
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendments No. 1 and 2
thereto, prior to the thirtieth day after
publication for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.22 Accelerating approval of this
proposed rule change should benefit
investors who desire to participate,
through the Shares of the ProShares
Trust Funds, in an investment based on
specified investment objectives which
correspond to a multiple of the
performance, or the inverse
performance, of a particular equity
securities benchmark index.
22 15
E:\FR\FM\25JAN1.SGM
U.S.C. 78s(b)(2).
25JAN1
Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–Amex–2006–
101), as modified by Amendments No.
1 and 2, be, and it hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.23
Nancy M. Morris,
Secretary.
[FR Doc. E7–1057 Filed 1–24–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55122; File No. SR–Amex–
2006–116]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change and
Amendment No. 1 Thereto Amending
Associate Member Fees
January 18, 2007.
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 December
19, 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. Amex has designated this
proposal as one establishing or changing
a due, fee, or other charge imposed by
a self-regulatory organization pursuant
to Section 19(b)(3)(A)(ii) of the Act 3 and
Rule 19b–4(f)(2) thereunder,4 which
renders the proposal effective upon
filing with the Commission. On January
16, 2007, the Exchange submitted
Amendment No. 1 to the proposed rule
change.5 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 amend
Amex’s Member Fees to eliminate the
ycherry on PROD1PC64 with NOTICES
23 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
5 In Amendment No. 1, the Exchange made cleanup changes to its proposed rule text and added text
to its discussion section.
VerDate Aug<31>2005
14:58 Jan 24, 2007
Jkt 211001
Associate Members’ Initiation Fee and
the Financial Regulation Fee, to reduce
the Electronic Access Fee paid by
Associate Members, and to increase the
Associate Member Nominee initiation
fee of $1,500 currently charged to
$2,000 and re-designate such fee as an
application fee (in order to conform this
fee to the application fee charged to all
members).
The text of the proposed rule change
is available on the Exchange’s Web site
(https://www.amex.com/atamex/
ruleFilings/2006/
SR_Amex_2006_116_initial.pdf), at the
Exchange’s principal 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. 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 currently charges a one-time
initiation fee (the ‘‘Initiation Fee’’) to
Associate Members that is equivalent to
5% of the price of the last completed
regular membership sold. The Exchange
proposes to eliminate this Initiation Fee,
which has become disproportionate to
the cost of other types of seat-based,
Regular, Option Principal, and Limited
Trading Permit Memberships. The
Exchange believes that the Initiation Fee
may act as a deterrent for firms seeking
to apply for membership.
Associate Members are also currently
required to pay a financial regulation fee
(‘‘Financial Regulation Fee’’) which is
imposed in instances where the
Exchange is the Designated Examining
Authority ( ‘‘DEA’’). This fee may be
waived by demonstrating to the
Exchange’s Financial Regulatory
Services Department that 10% of the
firm’s volume is transacted on the floor
of the Exchange. The Financial
Regulation Fee is $4,000 a month for
associate member firms and $3,000
annually for individual Associate
Members. The Exchange submits that
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
3447
this fee does not generate significant
income, and further acts as an
impediment to expanding Associate
Memberships. Associate Members,
however, will continue to be subject to
Regulatory Fees that are applicable to all
members, as set forth in the Exchange’s
Examination Fees section of the Member
Fees.
The Exchange is also proposing to
reduce the current Electronic Access
Fee from $30,000 to $15,000, to reflect
the current prices of seats and the prices
to lease a seat.
The Exchange notes that Associate
Member firms will continue to be
subject to Annual Membership dues of
$1,500. In addition, the Exchange
proposes to amend the Amex
Constitution to charge Nominees of
Associate Firms a $2,000 Application
Processing fee to replace the Initiation
Fee of $1,500. A $2,000 Application
Processing fee is currently charged to all
Members.
The Exchange believes that
elimination of the Initiation Fee and the
Financial Regulation Fee and the
reduction of the Electronic Access Fee
will help to adjust an imbalance in
membership costs, and encourage firms
to utilize this type of Membership. The
Exchange represents that the foregoing
fee adjustments will accordingly place
the Associate Member status on a
comparable level with the cost of floor
memberships.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the 1934
Act,6 in general, and furthers the
objectives of Section 6(b)(4),7 in
particular, in that it is designed to
provide for the equitable allocation of
reasonable dues, fees, and other charges
among its members and issuers and
other persons using facilities. The
Exchange asserts that the proposal is
equitable as required by Section 6(b)(4)
of the Act in that it places Associate
Member Fees on the same level as
Regular, Option Principal, and Limited
Trading Permit Memberships.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
6 15
7 15
E:\FR\FM\25JAN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
25JAN1
]]>Agencies
[Federal Register Volume 72, Number 16 (Thursday, January 25, 2007)]
[Notices]
[Pages 3442-3447]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-1057]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55117; File No. SR-Amex-2006-101]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Accelerated Approval to a Proposed Rule Change as Modified by
Amendments No. 1 and 2 Thereto Relating to the Listing and Trading of
Shares of Funds of the ProShares Trust
January 17, 2007.
I. Introduction
On October 24, 2006, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ On November 22, 2006, Amex filed Amendment No. 1 to the
proposed rule change.\3\ On December 8, 2006, Amex filed Amendment No.
2 to the proposed rule change.\4\ The proposed rule change, as amended,
was published for comment in the Federal Register on December 27, 2006
for a 15-day comment period.\5\ The Commission received no comments on
the proposal. This order approves the proposed rule change, as modified
by Amendments No. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 supersedes and replaces the original filing
in its entirety.
\4\ Amendment No. 2 supersedes and replaces Amendment No. 1 in
its entirety.
\5\ See Securities Exchange Act Release No. 54961 (December 18,
2006), 71 FR 77823 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
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.\6\ Index Fund Shares are
registered under the Investment Company Act of 1940 (``1940 Act''), as
well as under the Act. Under Amex Rule 1000A(b)(2), the Exchange
proposes 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.
---------------------------------------------------------------------------
\6\ 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.
---------------------------------------------------------------------------
Pursuant to these rules, the Exchange proposes to list the shares
(the ``Shares'') of eighty-one (81) new funds (the ``Funds'') of the
ProShares Trust (the ``Trust''). In its proposal, the Exchange provided
detailed descriptions regarding the Underlying Indexes,\7\ as well as
the structure and operation of the Funds and the listing and trading of
the Shares. Key features of the proposal are noted below.
---------------------------------------------------------------------------
\7\ See Notice, supra note 5, 71 FR at 77825-77827 (describing
the general design and composition of each Underlying Index).
---------------------------------------------------------------------------
Product Description
The Funds are based on the following equity securities indexes: (1)
S&P Small Cap 600 Index; (2) S&P 500/Citigroup Value Index; (3) S&P
500/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'').
Each of the Funds is designated as an Ultra Fund, Short Fund, or
UltraShort Fund, based on its investment objective. Each Ultra Fund or
``Bullish Fund'' seeks a daily investment result, before fees and
expenses, which corresponds to twice (200%) the daily performance of
its Underlying Index. Accordingly, the NAV of the Shares of each Ultra
Fund, if successful in meeting its objective, should increase, on a
percentage basis, approximately twice as much as the corresponding
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. The 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 \8\ and money market
instruments \9\ that are intended to create the additional needed
exposure to such Underlying Index necessary to pursue its investment
objective.
---------------------------------------------------------------------------
\8\ 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'').
\9\ 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.
---------------------------------------------------------------------------
Each Short Fund seeks a daily investment result, before fees and
expenses, that corresponds to the inverse or opposite of the daily
performance (-100%) of its Underlying Index. Accordingly, the NAV of
the Shares of each Short Fund should increase approximately as much, on
a percentage basis, as the corresponding
[[Page 3443]]
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 that Underlying Index gains when the prices of
the securities in the Underlying Index rise on a given day.
Finally, each UltraShort Fund seeks a daily investment result,
before fees and expenses, that corresponds to twice the inverse (-200%)
of the daily performance of its Underlying Indexes. Accordingly, the
NAV of the Shares of each UltraShort Fund should increase approximately
twice as much, on a percentage basis, as the corresponding 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 that 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.'' 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.\10\
---------------------------------------------------------------------------
\10\ 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.
---------------------------------------------------------------------------
As advisor to the Funds, ProShare Advisors LLC (the ``Advisor'')
will implement a mathematical investment strategy known or ``Portfolio
Investment Methodology,'' to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective. 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. Each day, the methodology will
determine for each Fund, 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.\11\
---------------------------------------------------------------------------
\11\ 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 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.
Creation and Redemption of Shares
Fund Shares will be issued and redeemed on a continuous basis at a
price equal to the NAV per Share next determined after an order is
received in proper form. Only certain qualified entities (``Authorized
Participants'') may create or redeem Shares, and each Fund will issue
and redeem Shares only in aggregations of at least 50,000 (``Creation
Units''). Additional information about the creation and redemption
process is included in Amex's proposal.\12\
---------------------------------------------------------------------------
\12\ See Notice, supra note 5, 71 FR at 77829-77831.
---------------------------------------------------------------------------
In summary, to create Bullish Fund Shares, an Authorized
Participant must properly place a creation order and typically make an
in-kind deposit of a basket of equity securities (``Deposit
Securities'') consisting of the securities selected by the Advisor from
among those securities contained in the Fund's portfolio,\13\ together
with an amount of cash specified by the Advisor (the ``Balancing
Amount''), plus the applicable transaction fee (together, the
``Creation Deposit'').
---------------------------------------------------------------------------
\13\ The Trust will make available through the Depository Trust
Company or SEI Investments Distribution Company (the
``Distributor'') on each business day, prior to the opening of
trading on the Exchange, the list of names and the required number
of shares of each Deposit Security to be included in the Creation
Deposit for each Bullish Fund (``Deposit List''). 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.
---------------------------------------------------------------------------
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. 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.
Similarly, Bullish Fund Shares in Creation Unit-size aggregations
will be redeemable on any day on which the New York Stock Exchange is
open in exchange for a basket of securities (``Redemption
Securities''), a list of which will be available to Authorized
Participants on each business day prior to the opening of trading. To
redeem Shares in a Bullish Fund, an Authorized Participant must
properly place a redemption order and deliver the Redemption
Securities, any required Balancing Amount, and applicable transaction
fee.\14\
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
Notably, 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 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
Fund Shares is due to the limited transferability of Financial
Instruments.
Dividends and Distributions
As described more fully in the Notice, 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.
Distributions of realized securities gains, if any,
[[Page 3444]]
generally will be declared and paid once a year.
Arbitrage
In its proposal, the Exchange stated that it did not expect the
Shares to trade at a material discount or premium to the underlying
securities held by a Fund based on potential arbitrage opportunities.
As is the case for other exchange traded derivative products, the
arbitrage process should provide market participants the opportunity to
profit from differences in the price of Shares and their underlying
value, mitigating the occurrence of material discounts or premiums.
Dissemination of Underlying Index Information
The daily closing index value and the percentage change in the
daily closing index value for each Underlying Index will be publicly
available on various Internet Web sites, such as at https://
www.bloomberg.com. Data regarding each Underlying Index is also
available from the respective Underlying Index provider to subscribers.
Several independent data vendors also package and disseminate
Underlying Index data in various value-added formats (including vendors
displaying both securities and index levels and vendors displaying
index levels only).
The value of each Underlying Index will be updated intra-day on a
real time basis as its individual component securities change in price.
These intra-day values of each Underlying Index will be disseminated at
least every 15 seconds throughout the trading day by Amex or another
organization authorized by the relevant Underlying Index provider in
accordance with Commentary .02(c) to Amex Rule 1000A.
Availability of Information Regarding the Shares
1. Indicative Intra-Day Fund Values
During the Exchange's regular trading hours, Amex will calculate
and disseminate at least every 15 seconds through the facilities of the
Consolidated Tape Association (``CTA''), an Indicative Intra-Day Value
(``IIV'') for each of the Funds on a per Share basis, representing an
estimate of the NAV per Share for each Fund. The Exchange will also
make the IIV available on its Web site at https://www.amex.com.
For each Bullish Fund, the designated IIV Calculator (Amex) will
determine the 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-to-market 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.
For each Bearish Fund, the Exchange will determine the 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 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.
2. Other Information
Amex will disseminate for each Fund on a daily basis through the
facilities of the CTA and CQ High Speed Lines and on its Web site at
https://www.amex.com the following information:
Daily trading volume;
the closing prices of each Fund's Shares and corresponding
NAV; and
the final dividend amounts to be paid for each Fund.
The Exchange will also make available information with respect to
recent NAV, Shares outstanding, and the estimated cash amount and total
cash amount per Creation Unit.
Additionally, the Trust's Internet Web site (https://
www.proshares.com), which is and will be publicly accessible at no
charge, will contain the following information for each Fund's Shares:
(a) The prior business day's closing NAV, the reported closing price,
and a calculation 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 Web site for the Trust and/or the Exchange will also disclose
each Fund's total portfolio composition on a daily basis, including, 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. Importantly,
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'' and the portfolio composition file (``PCF'') to Authorized
Participants. Therefore, the same portfolio information (including
accrued expenses and dividends) will be provided to all market
participants at the same time.
Also, as explained in Amex's proposal, beneficial owners of Shares
(``Beneficial Owners'') will receive all of the statements, notices,
and reports required under the 1940 Act and other applicable laws.\15\
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\15\ 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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[[Page 3445]]
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. Pursuant to Amex
Rule 1002A(a)(ii), the Exchange has stated that it 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 twelve-month 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; 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 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.\16\
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\16\ 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.
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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.
For each Fund, a minimum of two Creation Units (at least 100,000
Shares) will be required to be outstanding at the commencement of
trading on the Exchange. The initial value of a Share for each of the
Funds is expected to be in the range of $50-$250.
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 represents that the Trust is required to comply with
Section 803 of the Amex Company Guide and Rule 10A-3 under the Act for
the initial and continued listing of the Shares.\17\
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\17\ Telephone conversation between Nyieri Nazarian, Assistant
General Counsel, Amex, and Edward Cho, Special Counsel, Division of
Market Regulation (``Division''), Commission, on January 9, 2007
(clarifying that the Trust is required to comply with Rule 803 of
the Amex Company Guide).
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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). The Shares of the Funds will trade on the Exchange until
4:15 p.m. ET each business day and will trade with a minimum price
variation of $.01.
Trading Halts
Trading in Shares of the Funds will be halted if the circuit
breaker parameters under Amex Rule 117 have been reached. The Exchange
may also halt trading in consideration of other factors, such as those
set forth in Amex Rule 918C(b). 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; \18\ or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.
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\18\ In the case of the Financial Instruments held by a Fund,
the Exchange represents that a notification procedure will be
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.
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Amex Rule 1002A(b)(ii) sets forth the trading halt parameters with
respect to Index Fund Shares. Importantly, 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. In particular,
the Information Circular will inform Amex members and member
organizations that the procedures for purchases and redemptions of
Shares, and that Shares are not individually redeemable, but are
redeemable only in Creation Unit aggregations or multiples thereof. In
addition, prior to the commencement of trading, the Exchange will
inform members and member organizations in such Information Circular 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.
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
[[Page 3446]]
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 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.
Surveillance
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares and to deter and
detect violations of applicable rules.\19\ 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.
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\19\ Telephone conversation between Nyieri Nazarian, Assistant
General Counsel, Amex, and Edward Cho, Special Counsel, Division,
Commission, on January 9, 2007 (confirming that the Exchange's
surveillance procedures are capable of detecting and deterring
violations of applicable rules).
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III. Discussion and Commission's Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\20\ In particular, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of Section
6(b)(5) of the Act,\21\ which requires, among other things, that the
Exchange's rules be designed to promote just and equitable principles
of trade, 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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\20\ In approving this proposed 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).
\21\ 15 U.S.C. 78f(b)(5).
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A. Surveillance
The Commission notes that the Exchange has represented that its
surveillance procedures are adequate to monitor the trading of the
Shares. The shares based on the Underlying Indexes are almost all
currently listed and/or traded on the Exchange. Amex stated that it
would rely on its existing surveillance procedures governing Index Fund
Shares. The Commission believes that these procedures provide a
framework for Amex to monitor fraudulent and manipulative practices in
the trading of the Shares.
In addition, the Exchange represents that, if a Fund uses a
successor or substitute index, or an Underlying Index provider
substantially changes either the Underlying Index component selection
methodology or the weighting methodology, Amex will file with the
Commission a proposed rule change, which addresses, among other things,
applicable surveillance procedures. Unless approved by the Commission,
the Exchange will commence delisting of the Shares.
B. Dissemination of Information
The Commission believes that sufficient venues exist for obtaining
reliable information so that investors in the Shares can monitor the
values of the Underlying Indexes relative to the IIV of their Shares.
The Exchange has represented that it will calculate and publish the
value of the Underlying Indexes at least every 15 seconds during Amex
trading hours through the facilities of the CTA in accordance with
Commentary .02(c) to Amex Rule 1000A. The Commission notes that the
daily closing index value and the percentage change in the daily
closing index value for each Underlying Index will be publicly
available on various Internet Web sites, such as at https://
www.bloomberg.com, from the respective Underlying Index provider to
subscribers, and from various independent data vendors that package and
disseminate Underlying Index data in various value-added formats.
Likewise, the Exchange has represented that it will calculate and
publish the IIV for each Fund on a per-Share basis at least every 15
seconds during Amex trading hours through the facilities of the CTA and
on its Web site at https://www.amex.com. The Commission believes that
dissemination of the IIV provides additional information that is not
otherwise available to the public and is useful to professionals and
investors in connection with the Shares trading on the Exchange, and
the creation and redemption of the Shares. The Commission believes that
publication of such information should promote transparency with regard
to the Shares.
The Exchange will make additional information available on its
Internet Web site at https://www.amex.com, including daily trading
volume, the closing price, the NAV, and the final dividend amounts to
be paid for each Fund. The Trust's Web site (https://www.proshares.com),
which is and will be publicly accessible at no charge, will also
contain trading and other information pertaining to the Shares of each
Fund. Notably, each Fund's total portfolio composition will be
disclosed on the Trust's Web site (or another relevant Internet Web
site as determined by the Trust) and/or Amex's Web site (https://
www.amex.com).
In sum, the Commission believes that the availability of
information about the Underlying Indexes, the composition and valuation
of each Fund, and the Shares should facilitate transparency with
respect to the proposed Shares to allow for the maintenance of fair and
orderly markets.
C. Listing and Trading
The Commission finds that the Exchange's proposed rules and
procedures for the listing and trading of the Shares are consistent
with the Act. The Shares will trade as equity securities subject to
Amex rules including, among others, rules governing priority, parity
and precedence of orders, specialist responsibilities, account opening,
and customer suitability requirements.
The Commission believes that the listing and delisting criteria for
the Shares should help to maintain a minimum level of liquidity and
therefore minimize the potential for manipulation of the Shares.
Additionally, the Commission finds that Amex Rule 1000A and Commentary
thereto are reasonably designed to govern trading in the Shares.
Finally, the Commission notes that the Information Circular distributed
by the Exchange will inform members and member organizations about the
terms, characteristics, and risks in trading the Shares, including
their prospectus delivery obligations.
D. Accelerated Approval
The Commission finds good cause to approve the proposed rule
change, as modified by Amendments No. 1 and 2 thereto, prior to the
thirtieth day after publication for comment in the Federal Register
pursuant to Section 19(b)(2) of the Act.\22\ Accelerating approval of
this proposed rule change should benefit investors who desire to
participate, through the Shares of the ProShares Trust Funds, in an
investment based on specified investment objectives which correspond to
a multiple of the performance, or the inverse performance, of a
particular equity securities benchmark index.
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\22\ 15 U.S.C. 78s(b)(2).
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[[Page 3447]]
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-Amex-2006-101), as modified by
Amendments No. 1 and 2, be, and it hereby is, approved on an
accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-1057 Filed 1-24-07; 8:45 am]
BILLING CODE 8011-01-P
