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]

Download as PDF 3442 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 ycherry on PROD1PC64 with NOTICES 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 VerDate Aug<31>2005 14:58 Jan 24, 2007 Jkt 211001 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). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 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. E:\FR\FM\25JAN1.SGM 25JAN1 ycherry on PROD1PC64 with NOTICES Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices 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. VerDate Aug<31>2005 14:58 Jan 24, 2007 Jkt 211001 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 PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 3443 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. E:\FR\FM\25JAN1.SGM 25JAN1 3444 Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices 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 http:// www.bloomberg.com. Data regarding each Underlying Index is also available from the respective Underlying Index provider to subscribers. Several independent data vendors also package and disseminate Underlying Index data in various value-added formats (including vendors displaying both securities and index levels and vendors displaying index levels only). The value of each Underlying Index will be updated intra-day on a real time basis as its individual component securities change in price. These 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 ycherry on PROD1PC64 with NOTICES 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 http:// 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 VerDate Aug<31>2005 14:58 Jan 24, 2007 Jkt 211001 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 http://www.amex.com the following information: • Daily trading volume; • the closing prices of each Fund’s Shares and corresponding NAV; and PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 • 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 (http://www.proshares.com), which is and will be publicly accessible at no charge, will contain the following information for each Fund’s Shares: (a) The prior business day’s closing NAV, the reported closing price, and a calculation 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 E:\FR\FM\25JAN1.SGM 25JAN1 Federal Register / Vol. 72, No. 16 / Thursday, January 25, 2007 / Notices Criteria for Initial and Continued Listing ycherry on PROD1PC64 with NOTICES 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. VerDate Aug<31>2005 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. PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 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 http://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 http://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 http://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 (http:// 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 (http://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 (http://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]


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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.
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    \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'').
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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.
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    \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.
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    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.
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    \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.
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    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\
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    \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\
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    \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.
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    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'').
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    \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.
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    The Bullish Funds reserve the right to permit or require an 
Authorized Participant to substitute an amount of cash and/or a 
different security to replace any prescribed Deposit Security. 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\
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    \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 http://
www.bloomberg.com. Data regarding each Underlying Index is also 
available from the respective Underlying Index provider to subscribers. 
Several independent data vendors also package and disseminate 
Underlying Index data in various value-added formats (including vendors 
displaying both securities and index levels and vendors displaying 
index levels only).
    The value of each Underlying Index will be updated intra-day on a 
real time basis as its individual component securities change in price. 
These intra-day values of each Underlying Index will be disseminated at 
least every 15 seconds throughout the trading day by Amex or another 
organization authorized by the relevant Underlying Index provider in 
accordance with Commentary .02(c) to Amex Rule 1000A.

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 http://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 
http://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 (http://
www.proshares.com), which is and will be publicly accessible at no 
charge, will contain the following information for each Fund's Shares: 
(a) The prior business day's closing NAV, the reported closing price, 
and a calculation 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 http://
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 http://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 http://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 (http://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 (http://
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