Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Generic Listing Standards for Series of Investment Company Units Based on Fixed Income Indexes and Order Granting Accelerated Approval of Proposed Rule Change as Amended, 29022-29027 [E7-9874]

Download as PDF 29022 Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 J. Lynn Taylor, Assistant Secretary. [FR Doc. E7–9876 Filed 5–22–07; 8:45 am] and on the Exchange’s Web site at www.nyse.com. BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55780; File No. SR–NYSE– 2007–37] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Generic Listing Standards for Series of Investment Company Units Based on Fixed Income Indexes and Order Granting Accelerated Approval of Proposed Rule Change as Amended May 17, 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 March 29, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared substantially by the Exchange. On May 9, 2007, the Exchange filed Amendment No. 1.3 This order provides notice of the proposed rule change as modified by Amendment No. 1 and approves the proposed rule change as amended on an accelerated basis. pwalker on PROD1PC71 with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to revise Section 703.16 of the NYSE Listed Company Manual to include generic listing standards for series of Investment Company Units (‘‘ICUs’’) that are based on indexes or portfolios consisting of fixed income securities (‘‘Fixed Income Indexes’’) or on composite indexes consisting of equity and fixed income indexes or indexes or portfolios consisting of both equity and fixed income securities (collectively, ‘‘Combination Indexes’’). The text of the proposed rule change is available at the NYSE, at the Commission’s Public Reference Room, 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(l). 2 17 CFR 240.19b–4. 3 Amendment No. 1 replaced and superseded the original filing in its entirety. 1 15 VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NYSE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to revise Section 703.16 of the NYSE Listed Company Manual (‘‘Manual’’) to include generic listing standards for series of ICUs (also referred to herein as ‘‘exchange-traded funds’’ or ‘‘ETFs’’) that are based on Fixed Income Indexes or on Combination Indexes. This proposal will enable the Exchange to list and trade ETFs pursuant to Rule 19b– 4(e) under the Act 4 if each of the conditions set forth in Section 703.16 of the Manual is satisfied. Rule 19b–4(e) provides that the listing and trading of a new derivative securities product by a self-regulatory organization shall not be deemed a proposed rule change, pursuant to paragraph (c)(1) of Rule 19b–4,5 if the Commission has approved, pursuant to Section 19(b) of the Act,6 the self-regulatory organization’s trading rules, procedures, and listing standards for the product class that would include the new derivatives securities product, and the self-regulatory organization has a surveillance program for the product class.7 Exchange-Traded Funds NYSE Rule 1100 and Section 703.16 of the Manual provide standards for listing ICUs, which are securities issued by a unit investment trust, an open-end management investment company (open-end mutual fund), or similar entity based on a portfolio of stocks or 4 17 CFR 240.19b–4(e). CFR 240.19b–4(c)(1). 6 15 U.S.C. 78s(b). 7 When relying on Rule 19b–4(e), the SRO must submit Form 19b–4(e) to the Commission within five business days after the exchange begins trading the new derivative securities product. See 17 CFR 240.19b–4(e)(2)(ii). 5 17 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 fixed income securities that seeks to provide investment results that correspond generally to the price and yield performance of a specified foreign or domestic stock index or fixed income securities index. Pursuant to Section 703.16 of the Manual, ICUs must be issued in a specified aggregate number in return for a deposit of specified securities and/or a cash amount, with a value equal to the next determined net asset value (‘‘NAV’’). When aggregated in the same specified minimum number, ICUs must be redeemable by the issuer for the securities and/or cash, with a value equal to the next determined NAV. The NAV is calculated once a day after the close of the regular trading day. To meet the investment objective of providing investment returns that correspond to the price, dividend, and yield performance of the underlying index, an ETF may use a ‘‘replication’’ strategy or a ‘‘representative sampling’’ strategy with respect to the ETF portfolio. An ETF using a replication strategy will invest in each security found in the underlying index in about the same proportion as that security is represented in the index itself. An ETF using a representative sampling strategy will generally invest in a significant number, but perhaps not all, of the component securities of the underlying index, and will hold securities that, in the aggregate, are intended to approximate the full index in terms of certain key characteristics. In the context of a Fixed Income Index, such characteristics may include liquidity, duration, maturity, and yield. In addition, an ETF portfolio may be adjusted in accordance with changes in the composition of the underlying index or to maintain compliance with requirements applicable to a regulated investment company under the Internal Revenue Code (‘‘IRC’’).8 8 For an ETF to qualify for tax treatment as a regulated investment company, it must meet several requirements under the IRC. Among these is the requirement that, at the close of each quarter of the ETF’s taxable year, (i) at least 50% of the market value of the ETF’s total assets must be represented by cash items, U.S. government securities, securities of other regulated investment companies, and other securities, with such other securities limited for purposes of this calculation in respect of any one issuer to an amount not greater than 5% of the value if the ETF’s assets and not greater than 10% of the outstanding voting securities of such issuer; and (ii) not more than 25% of the value of its total assets may be invested in the securities of any one issuer, or two or more issuers that are controlled by the ETF (within the meaning of Section 851(b)(4)(B) of the IRC) and that are engaged in the same or similar trades or businesses or related trades or business (other than U.S. government securities or the securities of other regulated investment companies). E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices pwalker on PROD1PC71 with NOTICES Generic Listing Standards for ExchangeTraded Funds The Exchange notes that the Commission has previously approved generic listing standards for ETFs based on indexes that consist of stocks listed on U.S. exchanges as well as on indexes consisting of foreign stocks or both U.S. and foreign stocks.9 In addition, the Commission has previously approved the listing and trading of ETFs based on fixed income securities indexes.10 The Exchange notes that the Commission has also approved listing standards for other index-based derivatives that permit the listing— pursuant to Rule 19b–4(e)—of such securities where the Commission had previously approved the trading of specified index-based derivatives on the same index, on the condition that all of the standards set forth in the original order are satisfied by the exchange employing generic listing standards.11 The Exchange believes that adopting additional generic listing standards for ETFs based on Fixed Income Indexes and Combination Indexes and applying Rule 19b–4(e) should fulfill the intended objective of that rule by allowing those ETFs that satisfy the proposed generic listing standards to commence trading, without the need for individualized Commission approval. The proposed rules have the potential to reduce the time frame for bringing ETFs to market, thereby reducing the burdens on issuers and other market participants. The failure of a particular ETF to comply with the proposed generic listing standards would not, however, preclude the Exchange from 9 In 1996, the Commission approved Section 703.16 of the Listed Company Manual, which sets forth the rules related to the listing of ICUs. See Securities Exchange Act Release No. 36923 (March 5, 1996), 61 FR 10410 (March 13, 1996) (SR–NYSE– 95–23). In 2000, the Commission approved the Exchange’s generic listing standards for the listing and trading, or the trading pursuant to unlisted trading privileges (‘‘UTP’’), of ICUs based on U.S. stock indexes under Section 703.16 of the Manual and Exchange Rule 1100. See Securities Exchange Act Release No. 43679 (December 5, 2000); 65 FR 77949 (December 13, 2000) (SR–NYSE–00–46). In 2007, the Commission also approved the Exchange’s generic listing standards for the listing and trading, or the trading pursuant to UTP, of ICUs based on foreign or global stock indexes. See Securities Exchange Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 2007) (SR– NYSE–2006–101). 10 See Securities Exchange Act Release No. 46299 (August 1, 2002), 67 FR 51907 (August 9, 2002) (SR–NYSE–2002–26). 11 See, e.g., Section 703.22 of the Manual and Securities Exchange Act Release No. 55687 (May 1, 2007), 72 FR 25824 (May 7, 2007) (SR–NYSE–2007– 27); NYSE Arca Equities Rule 5.2(j)(6) and Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR 46559 (August 10, 2005) (SR–PCX– 2005–63) (approving generic listing standards for index-linked securities). VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 submitting a separate filing pursuant to Section 19(b)(2) requesting Commission approval to list and trade a particular ETF. Fixed Income and Combination Index ETFs Requirements for Listing and Trading Based on Fixed Income Indexes Exchange-traded funds listed pursuant to these generic standards would be traded in all other respects under the Exchange’s existing trading rules and procedures that apply to all Exchange-listed securities, including ETFs, and would be covered under the Exchange’s surveillance programs for equities.12 In order to list an ETF pursuant to the proposed generic listing standards for Fixed Income Indexes, the index underlying the ETF must satisfy all the conditions contained in proposed Section 703.16(D) of the Manual. As with existing generic listing standards for ETFs based on domestic and international or global indexes, the proposed generic listing standards are intended to ensure that fixed income securities with substantial market distribution and liquidity account for a substantial portion of the weight of an index or portfolio. While the standards in this proposal are loosely based on the standards contained in Commission and Commodity Futures Trading Commission (‘‘CFTC’’) rules regarding the application of the definition of narrow-based security index to debt security indexes 13 as well as existing fixed income ETFs, they have been adapted as appropriate to apply generally to Fixed Income Indexes for ETFs. Fixed Income Securities As proposed, Section 703.16(B)(3) defines the term ‘‘Fixed Income Securities’’ to include notes, bonds (including convertible bonds), debentures, or evidence of indebtedness that include, but are not limited to, U.S. Department of Treasury securities (‘‘Treasury Securities’’), governmentsponsored entity securities (‘‘GSE Securities’’), municipal securities, trustpreferred securities,14 supranational 12 See, e.g., NYSE Rule 1100. Securities Exchange Act Release No. 54106 (July 6, 2006), 71 FR 39534 (July 13, 2006) (File No. S7–07–06) (the ‘‘Joint Rules’’). 14 Trust-preferred securities are undated cumulative securities issued from a special purpose trust in which a bank or bank holding company owns all of the common securities. The trust’s sole asset is a subordinated note issued by the bank or bank holding company. Trust-preferred securities are treated as debt for tax purposes so that the distributions or dividends paid are a tax-deductible interest expense. 13 See PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 29023 debt,15 and debt of a foreign country or subdivision thereof. This new definition is designed to create a category of ETFs based on Fixed Income Indexes that may be listed and traded pursuant to Rule 19b–4(e) under the Act. For purposes of the proposed definition, a convertible bond is deemed to be a Fixed Income Security up until the time that it is converted into its underlying common or preferred stock.16 Once converted, the equity security may no longer continue as a component of a Fixed Income Index under the proposed rules, and accordingly, would be removed from such index. The Exchange proposes that, to list a series of ICUs based on a Fixed Income Index pursuant to the generic standards, the index must meet the following criteria: • The index or portfolio must consist of Fixed Income Securities; • Components that in aggregate account for at least 75% of the weight of the index or portfolio must have a minimum original principal amount outstanding of $100 million or more; • No component Fixed Income Security (excluding a Treasury Security or GSE Security) represents more than 30% of the weight of the index, and the five highest weighted component fixed income securities in the index do not in the aggregate account for more than 65% of the weight of the index; • An underlying index or portfolio (excluding one consisting entirely of exempted securities) must include a minimum of 13 non-affiliated issuers; and • Component securities that in aggregate account for at least 90% of the weight of the index or portfolio must be either: 15 Supranational debt represents the debt of international organizations such as the World Bank, the International Monetary Fund, regional multilateral development banks, and multilateral financial institutions. Examples of regional multilateral development banks include the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, and the Inter-American Development Bank. In addition, examples of multilateral financial institutions include the European Investment Bank and the International Fund for Agricultural Development. 16 The Exchange notes that, under the Section 3(a)(11) of the Act, 15 U.S.C. 78c(a)(11), a convertible security is defined as an equity security. However, for the purpose of the proposed generic listing criteria, NYSE believes that defining a convertible security (prior to its conversion) as a Fixed Income Security is consistent with the objectives and intention of the generic listing standards for fixed-income-based ETFs as well as the Act. E:\FR\FM\23MYN1.SGM 23MYN1 29024 Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices • From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; 17 • From issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; • From issuers that have outstanding securities that are notes, bonds, debentures, or evidences of indebtedness having a total remaining principal amount of at least $1 billion; • Exempted securities, as defined in Section 3(a)(12) of the Act; 18 or • From issuers that are governments of foreign countries or political subdivisions of foreign countries. The Exchange believes that these proposed component criteria standards are reasonable for Fixed Income Indexes, and, when applied in conjunction with the other listing requirements, would result in ETFs that are sufficiently broad-based in scope. The Exchange notes that the proposed standards are similar to the standards set forth by the Commission and the CFTC in the Joint Rules as well as existing fixed-income-based ETFs. First, in the proposed standards, component Fixed Income Securities that in the aggregate account for at least 75% of the weight of the index or portfolio would have to have a minimum original principal amount outstanding of at least $100 million. Second, the proposed standards provide that the most heavily weighted component security cannot exceed 30% of the weight of the index or portfolio, consistent with the standard for U.S. equity ETFs set forth in Section 703.16(C)(2)(a)(iii). In addition, this standard is identical to the standard set forth by the Commission and the CFTC in the Joint Rules.19 Third, in the proposed standards, the five most heavily weighted component securities could not exceed 65% of the weight of the index or portfolio, consistent with the standard for U.S. equity ETFs set forth in Section 703.16(C)(2)(a)(iii) of the Manual as well as the Joint Rules. Fourth, the minimum number of fixed income securities (except for portfolios consisting entirely of exempted securities, such as Treasury Securities or GSE Securities) from unaffiliated 20 17 15 U.S.C. 78m and 78o(d). U.S.C. 78c(a)(12). 19 See note 13 supra. 20 Rule 405 under the Securities Act of 1933, 17 CFR 230.405, defines an affiliate as a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such person. Control, for this purpose, is the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a pwalker on PROD1PC71 with NOTICES 18 15 VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 issuers in the proposed standards is 13, consistent with the standard for U.S. equity ETFs set forth in Section 703.16(C)(2)(a)(iv) of the Manual and the Joint Rules. This requirement together with the diversification standards set forth above would provide assurance that the fixed income securities comprising an index would not be overly dependent on the price behavior of a single component or small group of components. Finally, the proposed standards would require that at least 90% of the weight of the index or portfolio must be either (i) from issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; 21 (ii) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (iii) from issuers that have outstanding securities that are notes, bonds, debentures, or evidences of indebtedness having a total remaining principal amount of at least $1 billion; (iv) exempted securities, as defined in Section 3(a)(12) of the Act; 22 or (v) from issuers that are governments of foreign countries or political subdivisions of foreign countries. This proposed standard is consistent with a similar standard in the Joint Rules and is designed to ensure that the component fixed income securities have sufficient publicly available information. The proposed generic listing requirements for fixed income ETFs would not require that component securities in an underlying index have an investment-grade rating.23 In addition, the proposed requirements would not require a minimum trading volume, due to the lower trading volume that generally occurs in the fixed income markets as compared to the equity markets. The proposed standards would also provide that the Exchange could not approve a series of fixed income ETFs under the proposed generic listing requirements if such series seeks to provide investment results that either exceed the performance of a specified index by a specified multiple or that correspond to the inverse (opposite) of the performance of a specified index by a specified multiple. Requirements for Listing and Trading ETFs Based on Combination Indexes The Exchange also seeks to list and trade ETFs based on Combination person, whether through the ownership of voting securities, by contract, or otherwise. 21 15 U.S.C. 78m and 78o(d). 22 15 U.S.C. 78c(a)(12). 23 Cf. Joint Rules, 71 FR at 30538. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 Indexes. An ETF listed pursuant to the generic standards for Combination Indexes would be traded, in all other respects, under the Exchange’s existing trading rules and procedures that apply to all Exchange-listed securities, including ETFs, and would be covered under the Exchange’s surveillance program for equities. To list an ETF pursuant to the proposed generic listing standards for Combination Indexes, an index underlying an ICU must satisfy all the conditions contained in proposed Section 703.16(E). These generic listing standards are intended to ensure that securities with substantial market distribution and liquidity account for a substantial portion of the weight of both the equity and fixed income portions of an index or portfolio. Proposed Section 703.16(E) would provide that the Exchange may approve series of ICUs—based on a combination of indexes or a series of component securities representing the U.S. or domestic equity market, the international equity market, and the fixed income market—for listing and trading pursuant to Rule 19b–4(e) under the Act. The standards that an ETF would have to comply with are as follows: (i) Such portfolio or combination of indexes has been described in an exchange rule for the trading of options, ICUs, Index-Linked Exchangeable Notes, or Index-Linked Securities that has been approved by the Commission under Section 19(b)(2) of the Act, and all of the standards set forth in the original order are satisfied; or (ii) the equity portion and fixed income portion of the component securities separately meet the criteria set forth in Section 703.16(C) (equities) and proposed Section 703.16(D) (fixed income). The proposed standards would also provide that the Exchange could not approve a series of ETFs based on a Combination Index under the proposed generic listing requirements if such series seeks to provide investment results that either exceed the performance of a specified index by a specified multiple or that correspond to the inverse (opposite) of the performance of a specified index by a specified multiple. Index Methodology and Dissemination. The Exchange proposes to adopt Sections 703.16(D)(2) and (E)(1) to establish requirements for index methodology and dissemination in connection with Fixed Income and Combination Indexes. If a broker-dealer is responsible for maintaining (or has a role in maintaining) the underlying index, such E:\FR\FM\23MYN1.SGM 23MYN1 pwalker on PROD1PC71 with NOTICES Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices broker-dealer would be required to erect and maintain a ‘‘firewall,’’ in a form satisfactory to the Exchange, to prevent the flow of non-public information regarding the underlying index from the personnel involved in the development and maintenance of such index to others such as sales and trading personnel. With respect to index dissemination, the Exchange proposes to adopt Sections 703.16(D)(2)(b) and (E)(1)(b) of the Manual. Section 703.16(D)(2)(b) would require that the index value for an ETF listed pursuant to the proposed standards for fixed income ETFs be widely disseminated by one or more major market data vendors at least once a day. If the index value does not change during some or all of the period when trading is occurring on the Exchange, the last official calculated index value must remain available throughout Exchange trading hours. This reflects the nature of the fixed income markets as well as the frequency of intra-day trading information with respect to Fixed Income Indexes. If an ETF is based on a Combination Index, pursuant to proposed Section 703.16(E)(1)(b), the index would have to be widely disseminated by one or more major market data vendors at least every 15 seconds during the time when the ETF shares trade on the Exchange to reflect updates for the prices of the equity securities included in the Combination Index. The fixed income portion of the Combination Index would have to be updated at least daily. Application of General Rules. Section 703(16)(F) would be added to identify those requirements for ETFs that would apply to all such series of ICUs based on Fixed Income or Combination Indexes. This would include the dissemination of the Intraday Indicative Value, an estimate of the value of a share of each ETF, updated at least every 15 seconds. In addition, Section 703.16(F)(2) would provide that paragraph (C)(5) of Section 703.16, which requires the Exchange to implement written surveillance procedures applicable to a series of ICUs, would apply to series of ICUs based on Fixed Income or Combination Indexes. The Exchange states that the Commission has approved generic standards providing for the listing pursuant to Rule 19b–4(e) of other derivative products based on indexes described in rule changes previously approved by the Commission under Section 19(b)(2) of the Act. The Exchange proposes to include in the generic standards for the listing of ICUs based on Fixed Income and Combination Indexes, in Section 703.16(E), indexes described in VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 exchange rules approved by the Commission in connection with the listing of options, Investment Company Units, Index-Linked Exchangeable Notes, or Index-Linked Securities. The Exchange believes that the application of that standard to ETFs is appropriate because the underlying index would have been subject to Commission review in the context of the approval of listing of other derivatives.24 The Exchange notes that current Section 703.16(E), which includes continued listing criteria applicable to ICUs, would be re-designated as Section 703.16(H), and this provision would apply to a series of ICUs based on Fixed Income or Combination Indexes. The Exchange further notes that current Section 703.16(A)(6) of the Manual provides that, in connection with approving an ETF issuer for listing on the Exchange, the Exchange will obtain a representation from the ETF issuer that the NAV per share will be calculated each business day and made available to all market participants at the same time. The trading halt or suspension requirements for existing ETFs contained in current Rule 1100(f) will similarly apply to fixed income and combination index ETFs. The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of ICUs listed pursuant to the proposed new listing standards or traded pursuant to unlisted trading privileges. In addition, the Exchange has a general policy prohibiting the dissemination of material, non-public information by its employees. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 25 in general, and furthers the objectives of Section 6(b)(5) of the Act 26 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, 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. 24 See supra notes 10 and 11. U.S.C. 78f(b). 26 15 U.S.C. 78f(b)(5). 25 15 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 29025 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes that the proposed rule change would impose no burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received comments on this proposal. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (www.sec.gov/rules/ sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2007–37 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSE–2007–37. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (www.sec.gov/rules/ sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of NYSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You E:\FR\FM\23MYN1.SGM 23MYN1 29026 Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2007–37 and should be submitted on or before June 7, 2007. pwalker on PROD1PC71 with NOTICES IV. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.27 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act 28 in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Currently, the Exchange would have to file a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Act 29 and Rule 19b–4 thereunder 30 to list or trade any ETF based on a Fixed Income Index or on a Combination Index. The Exchange also would have to file a proposed rule change to list or trade an ETF based on a Fixed Income or Combination Index described in an exchange rule previously approved by the Commission as an underlying benchmark for a derivative security. Rule 19b–4(e), however, provides that the listing and trading of a new derivative securities product by an SRO will not be deemed a proposed rule change pursuant to Rule 19b–4(c)(1) if the Commission has approved, pursuant to Section 19(b) of the Act, the SRO’s trading rules, procedures, and listing standards for the product class that would include the new derivative securities product, and the SRO has a surveillance program for the product class. The Exchange’s proposed rules for the listing and trading of ETFs pursuant to Rule 19b– 4(e) based on (1) certain indexes with components that include Fixed Income Securities or (2) indexes or portfolios described in exchange rules previously approved by the Commission as underlying benchmarks for derivative securities fulfill these requirements. Use 27 In approving this rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 28 15 U.S.C. 78f(b)(5). 29 15 U.S.C. 78s(b)(1). 30 17 CFR 240.19b–4. VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 of Rule 19b–4(e) by NYSE to list and trade such ETFs should promote competition, reduce burdens on issuers and other market participants, and make such ETFs available to investors more quickly.31 The Commission previously has approved generic listing standards for another exchange, Amex, that are substantially similar to those proposed here by NYSE.32 This proposal does not appear to raise any novel regulatory issues. Therefore, the Commission finds that NYSE’s proposal is consistent with the Act on the same basis that it approved Amex’s generic listing standards for ETFs based on Fixed Income or Combination Indexes or on indexes or portfolios described in exchange rules that have previously been approved by the Commission and underlie derivative securities. Proposed Sections 703.16(D) and 703.16(E) of the Manual establish the standards for the composition of a Fixed Income Index or Combination Index underlying an ETF. The Commission believes that these standards are reasonably designed to ensure that a substantial portion of any underlying index or portfolio consists of securities about which information is publicly available, and that when applied in conjunction with the other applicable listing requirements, will permit the listing and trading only of ETFs that are sufficiently broad-based in scope to minimize potential manipulation. The Commission further believes that the proposed listing standards are reasonably designed to preclude NYSE from listing and trading ETFs that might be used as a surrogate for trading in unregistered securities. The proposed generic listing standards also will permit NYSE to list and trade an ETF if the Commission previously has approved an exchange rule that contemplates listing and trading a derivative security based on the same underlying index. NYSE would be able to rely on that earlier approval order, provided that NYSE complies with the commitments undertaken by the other SRO set forth in the prior order, including any surveillance-sharing arrangements. The Commission believes that NYSE’s proposal is consistent with Section 31 The Commission notes that failure of a particular ETF to satisfy the Exchange’s generic listing standards does not preclude the Exchange from submitting a separate proposal under Rule 19b–4 to list and trade such ETF. 32 See Securities Exchange Act Release No. 55434 (March 9, 2007), 72 FR 12233 (March 15, 2006) (SR– Amex–2006–118) (approving generic listing standards for series of ETFs based on Fixed Income and Combination Indexes). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 11A(a)(1)(C)(iii) of the Act,33 which sets forth Congress’ finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities. The value of a Fixed Income Index underlying underlying an ETF listed pursuant to this proposal is required to be widely disseminated by one or more major market data vendors at least once a day. Likewise, the value of an underlying Combination Index is required to be widely disseminated by one or more major market data vendors at least once every 15 seconds during the time when the corresponding ETF trades on the Exchange, provided that, with respect to the fixed income components of the Combination Index, the impact on the index is required to be updated only once each day. Furthermore, the Commission believes that the proposed rules are reasonably designed to promote fair disclosure of information that may be necessary to price an ETF appropriately. If a broker-dealer is responsible for maintaining (or has a role in maintaining) the underlying index, such broker-dealer would be required to erect and maintain a ‘‘firewall,’’ in a form satisfactory to the Exchange, to prevent the flow of non-public information regarding the underlying index from the personnel involved in the development and maintenance of such index to others such as sales and trading personnel. The Commission also notes that current Section 703.16(A)(6) of the Manual provides that, in connection with approving an ETF issuer for listing on the Exchange, the Exchange will obtain a representation from the ETF issuer that the NAV per share will be calculated each business day and made available to all market participants at the same time. The Commission also believes that the Exchange’s trading halt rules are reasonably designed to prevent trading in an ETF when transparency is impaired. NYSE Rule 1100(f)(1) provides that, when the Exchange is the listing market, if the IIV or index value applicable to an ETF is not disseminated as required, the Exchange may halt trading during the day in which the interruption occurs. If the interruption continues, then the Exchange will halt trading no later than the beginning of the next trading day. Also, the Exchange may commence delisting proceedings in the event that 33 15 E:\FR\FM\23MYN1.SGM U.S.C. 78k–1(a)(1)(C)(iii). 23MYN1 Federal Register / Vol. 72, No. 99 / Wednesday, May 23, 2007 / Notices the value of the underlying index is no longer calculated or available. The Exchange will implement written surveillance procedures for ETFs based on Fixed Income Indexes or Combination Indexes.34 In approving this proposal, the Commission relied on NYSE’s representation that its surveillance procedures are adequate to properly monitor the trading of ICUs listed pursuant to this proposal. This approval is conditioned on the continuing accuracy of that representation. Acceleration The Commission finds good cause for approving the proposed rule change, as amended, prior to the 30th day after the date of publication of the notice of filing thereof in the Federal Register. The Commission notes that NYSE’s proposal is substantially similar to an Amex proposal that has been approved by the Commission.35 The Commission does not believe that NYSE’s proposal raises any novel regulatory issues and, therefore, believes that good cause exists for approving the filing before the conclusion of a notice-and-comment period. Accelerated approval of the proposal will expedite the listing and trading of additional ETFs by the Exchange, subject to consistent and reasonable standards. Therefore, the Commission finds good cause, consistent with Section 19(b)(2) of the Exchange Act,36 to approve the proposed rule change, as amended, on an accelerated basis. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,37 that the proposed rule change (SR– NYSE–2007–37), as amended, be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.38 J. Lynn Taylor, Assistant Secretary. [FR Doc. E7–9874 Filed 5–22–07; 8:45 am] pwalker on PROD1PC71 with NOTICES BILLING CODE 8010–01–P 34 See proposed Section 703.16(F)(2). supra note 32. 36 15 U.S.C. 78s(b)(2). 37 Id. 38 17 CFR 200.30–3(a)(12). 35 See VerDate Aug<31>2005 18:32 May 22, 2007 Jkt 211001 29027 SECURITIES AND EXCHANGE COMMISSION the most significant aspects of such statements. [Release No. 34–55775; File No. SR– NYSEArca–2007–40] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Closing Auctions for Securities Similar to Exchange-Traded Funds May 16, 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 May 11, 2007, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’), through its wholly owned subsidiary NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange filed the proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange, through NYSE Arca Equities, proposes to amend NYSE Arca Equities Rule 7.35(e)(3)(E) relating to closing auctions for exchange-traded funds (‘‘ETFs’’). The text of the proposed rule change is available on the Exchange’s Web site (https:// www.nysearca.com), 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 III below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 2 17 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 1. Purpose The Exchange proposes to amend NYSE Arca Equities Rule 7.35(e)(3)(E) relating to closing auctions for ETFs. Currently, NYSE Arca Equities Rule 7.35(e)(3)(E) provides special closing auction rules for certain listed ETFs as defined in NYSE Arca Equities Rules 5.1(b)(13) (Unit Investment Trusts), 5.2(j)(3) (Investment Company Units), and 8.100 (Portfolio Depositary Receipts).5 Since receiving Commission approval to include ETFs in its closing auction process in 2004, the Exchange has obtained approval from the Commission to list and trade the securities of additional derivative securities products that operate in a manner similar to ETFs. These derivative securities products are not currently included in NYSE Arca Equities Rule 7.35(e)(3)(E). The Exchange proposes to amend NYSE Arca Equities Rule 7.35(e)(3)(E) to include references to the rules governing these additional derivative securities products, rendering these types of products subject to the same closing auction rules as ETFs. Specifically, the Exchange proposes to amend NYSE Arca Equities Rule 7.35(e)(3)(E) to include references to NYSE Arca Equities Rules 5.2(j)(5) (Equity Gold Shares),6 8.200 (Trust Issued Receipts),7 8.201 (Commodity Based Trust Shares),8 8.202 (Currency 5 See Securities Exchange Act Release No. 50643 (November 5, 2004), 69 FR 65668 (November 15, 2004) (SR–PCX–2004–98) (approving amendments to NYSE Arca Equities Rule 7.35 to include certain ETFs in the closing auction process). NYSE Arca Equities Rule 7.35(e)(3)(E) applies only to securities that are listed on the Exchange and not to securities that are traded pursuant to unlisted trading privileges (‘‘UTP’’). 6 See Securities Exchange Act Release No. 51245 (February 23, 2005), 70 FR 10731 (March 4, 2005) (SR–PCX–2004–117) (approving generic listing standards for Equity Gold Shares and trading, on a UTP basis, of the streetTRACKS Gold Shares pursuant to NYSE Arca Equities Rule 5.2(j)(5)). 7 See Securities Exchange Act Release No. 44182 (April 16, 2001), 66 FR 21798 (May 1, 2001) (SR– PCX–2001–01) (approving generic listing standards for Trust Issued Receipts pursuant to NYSE Arca Equities Rule 8.200). 8 See Securities Exchange Act Release No. 51067 (January 21, 2005), 70 FR 3952 (January 27, 2005) (SR–PCX–2004–132) (approving generic listing standards for Commodity-Based Trust Shares and trading, on a UTP basis, of the iShares COMEX Gold Trust pursuant to NYSE Arca Equities Rule 8.201). E:\FR\FM\23MYN1.SGM 23MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 99 (Wednesday, May 23, 2007)]
[Notices]
[Pages 29022-29027]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-9874]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55780; File No. SR-NYSE-2007-37]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Generic Listing Standards for Series of Investment Company 
Units Based on Fixed Income Indexes and Order Granting Accelerated 
Approval of Proposed Rule Change as Amended

May 17, 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 March 29, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared substantially by the Exchange. 
On May 9, 2007, the Exchange filed Amendment No. 1.\3\ This order 
provides notice of the proposed rule change as modified by Amendment 
No. 1 and approves the proposed rule change as amended on an 
accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to revise Section 703.16 of the NYSE Listed 
Company Manual to include generic listing standards for series of 
Investment Company Units (``ICUs'') that are based on indexes or 
portfolios consisting of fixed income securities (``Fixed Income 
Indexes'') or on composite indexes consisting of equity and fixed 
income indexes or indexes or portfolios consisting of both equity and 
fixed income securities (collectively, ``Combination Indexes'').
    The text of the proposed rule change is available at the NYSE, at 
the Commission's Public Reference Room, and on the Exchange's Web site 
at www.nyse.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to revise Section 703.16 of the NYSE Listed 
Company Manual (``Manual'') to include generic listing standards for 
series of ICUs (also referred to herein as ``exchange-traded funds'' or 
``ETFs'') that are based on Fixed Income Indexes or on Combination 
Indexes. This proposal will enable the Exchange to list and trade ETFs 
pursuant to Rule 19b-4(e) under the Act \4\ if each of the conditions 
set forth in Section 703.16 of the Manual is satisfied. Rule 19b-4(e) 
provides that the listing and trading of a new derivative securities 
product by a self-regulatory organization shall not be deemed a 
proposed rule change, pursuant to paragraph (c)(1) of Rule 19b-4,\5\ if 
the Commission has approved, pursuant to Section 19(b) of the Act,\6\ 
the self-regulatory organization's trading rules, procedures, and 
listing standards for the product class that would include the new 
derivatives securities product, and the self-regulatory organization 
has a surveillance program for the product class.\7\
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange 
begins trading the new derivative securities product. See 17 CFR 
240.19b-4(e)(2)(ii).
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Exchange-Traded Funds

    NYSE Rule 1100 and Section 703.16 of the Manual provide standards 
for listing ICUs, which are securities issued by a unit investment 
trust, an open-end management investment company (open-end mutual 
fund), or similar entity based on a portfolio of stocks or fixed income 
securities that seeks to provide investment results that correspond 
generally to the price and yield performance of a specified foreign or 
domestic stock index or fixed income securities index. Pursuant to 
Section 703.16 of the Manual, ICUs must be issued in a specified 
aggregate number in return for a deposit of specified securities and/or 
a cash amount, with a value equal to the next determined net asset 
value (``NAV''). When aggregated in the same specified minimum number, 
ICUs must be redeemable by the issuer for the securities and/or cash, 
with a value equal to the next determined NAV. The NAV is calculated 
once a day after the close of the regular trading day.
    To meet the investment objective of providing investment returns 
that correspond to the price, dividend, and yield performance of the 
underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF portfolio. 
An ETF using a replication strategy will invest in each security found 
in the underlying index in about the same proportion as that security 
is represented in the index itself. An ETF using a representative 
sampling strategy will generally invest in a significant number, but 
perhaps not all, of the component securities of the underlying index, 
and will hold securities that, in the aggregate, are intended to 
approximate the full index in terms of certain key characteristics. In 
the context of a Fixed Income Index, such characteristics may include 
liquidity, duration, maturity, and yield.
    In addition, an ETF portfolio may be adjusted in accordance with 
changes in the composition of the underlying index or to maintain 
compliance with requirements applicable to a regulated investment 
company under the Internal Revenue Code (``IRC'').\8\
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    \8\ For an ETF to qualify for tax treatment as a regulated 
investment company, it must meet several requirements under the IRC. 
Among these is the requirement that, at the close of each quarter of 
the ETF's taxable year, (i) at least 50% of the market value of the 
ETF's total assets must be represented by cash items, U.S. 
government securities, securities of other regulated investment 
companies, and other securities, with such other securities limited 
for purposes of this calculation in respect of any one issuer to an 
amount not greater than 5% of the value if the ETF's assets and not 
greater than 10% of the outstanding voting securities of such 
issuer; and (ii) not more than 25% of the value of its total assets 
may be invested in the securities of any one issuer, or two or more 
issuers that are controlled by the ETF (within the meaning of 
Section 851(b)(4)(B) of the IRC) and that are engaged in the same or 
similar trades or businesses or related trades or business (other 
than U.S. government securities or the securities of other regulated 
investment companies).

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[[Page 29023]]

Generic Listing Standards for Exchange-Traded Funds

    The Exchange notes that the Commission has previously approved 
generic listing standards for ETFs based on indexes that consist of 
stocks listed on U.S. exchanges as well as on indexes consisting of 
foreign stocks or both U.S. and foreign stocks.\9\ In addition, the 
Commission has previously approved the listing and trading of ETFs 
based on fixed income securities indexes.\10\
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    \9\ In 1996, the Commission approved Section 703.16 of the 
Listed Company Manual, which sets forth the rules related to the 
listing of ICUs. See Securities Exchange Act Release No. 36923 
(March 5, 1996), 61 FR 10410 (March 13, 1996) (SR-NYSE-95-23). In 
2000, the Commission approved the Exchange's generic listing 
standards for the listing and trading, or the trading pursuant to 
unlisted trading privileges (``UTP''), of ICUs based on U.S. stock 
indexes under Section 703.16 of the Manual and Exchange Rule 1100. 
See Securities Exchange Act Release No. 43679 (December 5, 2000); 65 
FR 77949 (December 13, 2000) (SR-NYSE-00-46). In 2007, the 
Commission also approved the Exchange's generic listing standards 
for the listing and trading, or the trading pursuant to UTP, of ICUs 
based on foreign or global stock indexes. See Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 
2007) (SR-NYSE-2006-101).
    \10\ See Securities Exchange Act Release No. 46299 (August 1, 
2002), 67 FR 51907 (August 9, 2002) (SR-NYSE-2002-26).
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    The Exchange notes that the Commission has also approved listing 
standards for other index-based derivatives that permit the listing--
pursuant to Rule 19b-4(e)--of such securities where the Commission had 
previously approved the trading of specified index-based derivatives on 
the same index, on the condition that all of the standards set forth in 
the original order are satisfied by the exchange employing generic 
listing standards.\11\
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    \11\ See, e.g., Section 703.22 of the Manual and Securities 
Exchange Act Release No. 55687 (May 1, 2007), 72 FR 25824 (May 7, 
2007) (SR-NYSE-2007-27); NYSE Arca Equities Rule 5.2(j)(6) and 
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR 
46559 (August 10, 2005) (SR-PCX-2005-63) (approving generic listing 
standards for index-linked securities).
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    The Exchange believes that adopting additional generic listing 
standards for ETFs based on Fixed Income Indexes and Combination 
Indexes and applying Rule 19b-4(e) should fulfill the intended 
objective of that rule by allowing those ETFs that satisfy the proposed 
generic listing standards to commence trading, without the need for 
individualized Commission approval. The proposed rules have the 
potential to reduce the time frame for bringing ETFs to market, thereby 
reducing the burdens on issuers and other market participants. The 
failure of a particular ETF to comply with the proposed generic listing 
standards would not, however, preclude the Exchange from submitting a 
separate filing pursuant to Section 19(b)(2) requesting Commission 
approval to list and trade a particular ETF.

Fixed Income and Combination Index ETFs

Requirements for Listing and Trading Based on Fixed Income Indexes
    Exchange-traded funds listed pursuant to these generic standards 
would be traded in all other respects under the Exchange's existing 
trading rules and procedures that apply to all Exchange-listed 
securities, including ETFs, and would be covered under the Exchange's 
surveillance programs for equities.\12\
---------------------------------------------------------------------------

    \12\ See, e.g., NYSE Rule 1100.
---------------------------------------------------------------------------

    In order to list an ETF pursuant to the proposed generic listing 
standards for Fixed Income Indexes, the index underlying the ETF must 
satisfy all the conditions contained in proposed Section 703.16(D) of 
the Manual. As with existing generic listing standards for ETFs based 
on domestic and international or global indexes, the proposed generic 
listing standards are intended to ensure that fixed income securities 
with substantial market distribution and liquidity account for a 
substantial portion of the weight of an index or portfolio. While the 
standards in this proposal are loosely based on the standards contained 
in Commission and Commodity Futures Trading Commission (``CFTC'') rules 
regarding the application of the definition of narrow-based security 
index to debt security indexes \13\ as well as existing fixed income 
ETFs, they have been adapted as appropriate to apply generally to Fixed 
Income Indexes for ETFs.
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    \13\ See Securities Exchange Act Release No. 54106 (July 6, 
2006), 71 FR 39534 (July 13, 2006) (File No. S7-07-06) (the ``Joint 
Rules'').
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Fixed Income Securities

    As proposed, Section 703.16(B)(3) defines the term ``Fixed Income 
Securities'' to include notes, bonds (including convertible bonds), 
debentures, or evidence of indebtedness that include, but are not 
limited to, U.S. Department of Treasury securities (``Treasury 
Securities''), government-sponsored entity securities (``GSE 
Securities''), municipal securities, trust-preferred securities,\14\ 
supranational debt,\15\ and debt of a foreign country or subdivision 
thereof. This new definition is designed to create a category of ETFs 
based on Fixed Income Indexes that may be listed and traded pursuant to 
Rule 19b-4(e) under the Act.
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    \14\ Trust-preferred securities are undated cumulative 
securities issued from a special purpose trust in which a bank or 
bank holding company owns all of the common securities. The trust's 
sole asset is a subordinated note issued by the bank or bank holding 
company. Trust-preferred securities are treated as debt for tax 
purposes so that the distributions or dividends paid are a tax-
deductible interest expense.
    \15\ Supranational debt represents the debt of international 
organizations such as the World Bank, the International Monetary 
Fund, regional multilateral development banks, and multilateral 
financial institutions. Examples of regional multilateral 
development banks include the African Development Bank, Asian 
Development Bank, European Bank for Reconstruction and Development, 
and the Inter-American Development Bank. In addition, examples of 
multilateral financial institutions include the European Investment 
Bank and the International Fund for Agricultural Development.
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    For purposes of the proposed definition, a convertible bond is 
deemed to be a Fixed Income Security up until the time that it is 
converted into its underlying common or preferred stock.\16\ Once 
converted, the equity security may no longer continue as a component of 
a Fixed Income Index under the proposed rules, and accordingly, would 
be removed from such index.
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    \16\ The Exchange notes that, under the Section 3(a)(11) of the 
Act, 15 U.S.C. 78c(a)(11), a convertible security is defined as an 
equity security. However, for the purpose of the proposed generic 
listing criteria, NYSE believes that defining a convertible security 
(prior to its conversion) as a Fixed Income Security is consistent 
with the objectives and intention of the generic listing standards 
for fixed-income-based ETFs as well as the Act.
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    The Exchange proposes that, to list a series of ICUs based on a 
Fixed Income Index pursuant to the generic standards, the index must 
meet the following criteria:
     The index or portfolio must consist of Fixed Income 
Securities;
     Components that in aggregate account for at least 75% of 
the weight of the index or portfolio must have a minimum original 
principal amount outstanding of $100 million or more;
     No component Fixed Income Security (excluding a Treasury 
Security or GSE Security) represents more than 30% of the weight of the 
index, and the five highest weighted component fixed income securities 
in the index do not in the aggregate account for more than 65% of the 
weight of the index;
     An underlying index or portfolio (excluding one consisting 
entirely of exempted securities) must include a minimum of 13 non-
affiliated issuers; and
     Component securities that in aggregate account for at 
least 90% of the weight of the index or portfolio must be either:

[[Page 29024]]

     From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; \17\
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    \17\ 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------

     From issuers that have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
     From issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion;
     Exempted securities, as defined in Section 3(a)(12) of the 
Act; \18\ or
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    \18\ 15 U.S.C. 78c(a)(12).
---------------------------------------------------------------------------

     From issuers that are governments of foreign countries or 
political subdivisions of foreign countries.
    The Exchange believes that these proposed component criteria 
standards are reasonable for Fixed Income Indexes, and, when applied in 
conjunction with the other listing requirements, would result in ETFs 
that are sufficiently broad-based in scope.
    The Exchange notes that the proposed standards are similar to the 
standards set forth by the Commission and the CFTC in the Joint Rules 
as well as existing fixed-income-based ETFs. First, in the proposed 
standards, component Fixed Income Securities that in the aggregate 
account for at least 75% of the weight of the index or portfolio would 
have to have a minimum original principal amount outstanding of at 
least $100 million. Second, the proposed standards provide that the 
most heavily weighted component security cannot exceed 30% of the 
weight of the index or portfolio, consistent with the standard for U.S. 
equity ETFs set forth in Section 703.16(C)(2)(a)(iii). In addition, 
this standard is identical to the standard set forth by the Commission 
and the CFTC in the Joint Rules.\19\ Third, in the proposed standards, 
the five most heavily weighted component securities could not exceed 
65% of the weight of the index or portfolio, consistent with the 
standard for U.S. equity ETFs set forth in Section 703.16(C)(2)(a)(iii) 
of the Manual as well as the Joint Rules. Fourth, the minimum number of 
fixed income securities (except for portfolios consisting entirely of 
exempted securities, such as Treasury Securities or GSE Securities) 
from unaffiliated \20\ issuers in the proposed standards is 13, 
consistent with the standard for U.S. equity ETFs set forth in Section 
703.16(C)(2)(a)(iv) of the Manual and the Joint Rules. This requirement 
together with the diversification standards set forth above would 
provide assurance that the fixed income securities comprising an index 
would not be overly dependent on the price behavior of a single 
component or small group of components.
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    \19\ See note 13 supra.
    \20\ Rule 405 under the Securities Act of 1933, 17 CFR 230.405, 
defines an affiliate as a person that directly, or indirectly 
through one or more intermediaries, controls or is controlled by, or 
is under common control with, such person. Control, for this 
purpose, is the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
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    Finally, the proposed standards would require that at least 90% of 
the weight of the index or portfolio must be either (i) from issuers 
that are required to file reports pursuant to Sections 13 and 15(d) of 
the Act; \21\ (ii) from issuers that have a worldwide market value of 
its outstanding common equity held by non-affiliates of $700 million or 
more; (iii) from issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion; (iv) exempted 
securities, as defined in Section 3(a)(12) of the Act; \22\ or (v) from 
issuers that are governments of foreign countries or political 
subdivisions of foreign countries. This proposed standard is consistent 
with a similar standard in the Joint Rules and is designed to ensure 
that the component fixed income securities have sufficient publicly 
available information.
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    \21\ 15 U.S.C. 78m and 78o(d).
    \22\ 15 U.S.C. 78c(a)(12).
---------------------------------------------------------------------------

    The proposed generic listing requirements for fixed income ETFs 
would not require that component securities in an underlying index have 
an investment-grade rating.\23\ In addition, the proposed requirements 
would not require a minimum trading volume, due to the lower trading 
volume that generally occurs in the fixed income markets as compared to 
the equity markets.
---------------------------------------------------------------------------

    \23\ Cf. Joint Rules, 71 FR at 30538.
---------------------------------------------------------------------------

    The proposed standards would also provide that the Exchange could 
not approve a series of fixed income ETFs under the proposed generic 
listing requirements if such series seeks to provide investment results 
that either exceed the performance of a specified index by a specified 
multiple or that correspond to the inverse (opposite) of the 
performance of a specified index by a specified multiple.

Requirements for Listing and Trading ETFs Based on Combination Indexes

    The Exchange also seeks to list and trade ETFs based on Combination 
Indexes. An ETF listed pursuant to the generic standards for 
Combination Indexes would be traded, in all other respects, under the 
Exchange's existing trading rules and procedures that apply to all 
Exchange-listed securities, including ETFs, and would be covered under 
the Exchange's surveillance program for equities.
    To list an ETF pursuant to the proposed generic listing standards 
for Combination Indexes, an index underlying an ICU must satisfy all 
the conditions contained in proposed Section 703.16(E). These generic 
listing standards are intended to ensure that securities with 
substantial market distribution and liquidity account for a substantial 
portion of the weight of both the equity and fixed income portions of 
an index or portfolio.
    Proposed Section 703.16(E) would provide that the Exchange may 
approve series of ICUs--based on a combination of indexes or a series 
of component securities representing the U.S. or domestic equity 
market, the international equity market, and the fixed income market--
for listing and trading pursuant to Rule 19b-4(e) under the Act. The 
standards that an ETF would have to comply with are as follows: (i) 
Such portfolio or combination of indexes has been described in an 
exchange rule for the trading of options, ICUs, Index-Linked 
Exchangeable Notes, or Index-Linked Securities that has been approved 
by the Commission under Section 19(b)(2) of the Act, and all of the 
standards set forth in the original order are satisfied; or (ii) the 
equity portion and fixed income portion of the component securities 
separately meet the criteria set forth in Section 703.16(C) (equities) 
and proposed Section 703.16(D) (fixed income).
    The proposed standards would also provide that the Exchange could 
not approve a series of ETFs based on a Combination Index under the 
proposed generic listing requirements if such series seeks to provide 
investment results that either exceed the performance of a specified 
index by a specified multiple or that correspond to the inverse 
(opposite) of the performance of a specified index by a specified 
multiple.
    Index Methodology and Dissemination. The Exchange proposes to adopt 
Sections 703.16(D)(2) and (E)(1) to establish requirements for index 
methodology and dissemination in connection with Fixed Income and 
Combination Indexes.
    If a broker-dealer is responsible for maintaining (or has a role in 
maintaining) the underlying index, such

[[Page 29025]]

broker-dealer would be required to erect and maintain a ``firewall,'' 
in a form satisfactory to the Exchange, to prevent the flow of non-
public information regarding the underlying index from the personnel 
involved in the development and maintenance of such index to others 
such as sales and trading personnel.
    With respect to index dissemination, the Exchange proposes to adopt 
Sections 703.16(D)(2)(b) and (E)(1)(b) of the Manual. Section 
703.16(D)(2)(b) would require that the index value for an ETF listed 
pursuant to the proposed standards for fixed income ETFs be widely 
disseminated by one or more major market data vendors at least once a 
day. If the index value does not change during some or all of the 
period when trading is occurring on the Exchange, the last official 
calculated index value must remain available throughout Exchange 
trading hours. This reflects the nature of the fixed income markets as 
well as the frequency of intra-day trading information with respect to 
Fixed Income Indexes. If an ETF is based on a Combination Index, 
pursuant to proposed Section 703.16(E)(1)(b), the index would have to 
be widely disseminated by one or more major market data vendors at 
least every 15 seconds during the time when the ETF shares trade on the 
Exchange to reflect updates for the prices of the equity securities 
included in the Combination Index. The fixed income portion of the 
Combination Index would have to be updated at least daily.
    Application of General Rules. Section 703(16)(F) would be added to 
identify those requirements for ETFs that would apply to all such 
series of ICUs based on Fixed Income or Combination Indexes. This would 
include the dissemination of the Intraday Indicative Value, an estimate 
of the value of a share of each ETF, updated at least every 15 seconds. 
In addition, Section 703.16(F)(2) would provide that paragraph (C)(5) 
of Section 703.16, which requires the Exchange to implement written 
surveillance procedures applicable to a series of ICUs, would apply to 
series of ICUs based on Fixed Income or Combination Indexes.
    The Exchange states that the Commission has approved generic 
standards providing for the listing pursuant to Rule 19b-4(e) of other 
derivative products based on indexes described in rule changes 
previously approved by the Commission under Section 19(b)(2) of the 
Act. The Exchange proposes to include in the generic standards for the 
listing of ICUs based on Fixed Income and Combination Indexes, in 
Section 703.16(E), indexes described in exchange rules approved by the 
Commission in connection with the listing of options, Investment 
Company Units, Index-Linked Exchangeable Notes, or Index-Linked 
Securities. The Exchange believes that the application of that standard 
to ETFs is appropriate because the underlying index would have been 
subject to Commission review in the context of the approval of listing 
of other derivatives.\24\
---------------------------------------------------------------------------

    \24\ See supra notes 10 and 11.
---------------------------------------------------------------------------

    The Exchange notes that current Section 703.16(E), which includes 
continued listing criteria applicable to ICUs, would be re-designated 
as Section 703.16(H), and this provision would apply to a series of 
ICUs based on Fixed Income or Combination Indexes.
    The Exchange further notes that current Section 703.16(A)(6) of the 
Manual provides that, in connection with approving an ETF issuer for 
listing on the Exchange, the Exchange will obtain a representation from 
the ETF issuer that the NAV per share will be calculated each business 
day and made available to all market participants at the same time.
    The trading halt or suspension requirements for existing ETFs 
contained in current Rule 1100(f) will similarly apply to fixed income 
and combination index ETFs.
    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of ICUs listed pursuant to the 
proposed new listing standards or traded pursuant to unlisted trading 
privileges. In addition, the Exchange has a general policy prohibiting 
the dissemination of material, non-public information by its employees.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \25\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \26\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, 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.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change would impose no 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on this 
proposal.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (www.sec.gov/
rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2007-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-37. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NYSE. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You

[[Page 29026]]

should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSE-2007-37 
and should be submitted on or before June 7, 2007.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\27\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \28\ in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \27\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Currently, the Exchange would have to file a proposed rule change 
with the Commission pursuant to Section 19(b)(1) of the Act \29\ and 
Rule 19b-4 thereunder \30\ to list or trade any ETF based on a Fixed 
Income Index or on a Combination Index. The Exchange also would have to 
file a proposed rule change to list or trade an ETF based on a Fixed 
Income or Combination Index described in an exchange rule previously 
approved by the Commission as an underlying benchmark for a derivative 
security. Rule 19b-4(e), however, provides that the listing and trading 
of a new derivative securities product by an SRO will not be deemed a 
proposed rule change pursuant to Rule 19b-4(c)(1) if the Commission has 
approved, pursuant to Section 19(b) of the Act, the SRO's trading 
rules, procedures, and listing standards for the product class that 
would include the new derivative securities product, and the SRO has a 
surveillance program for the product class. The Exchange's proposed 
rules for the listing and trading of ETFs pursuant to Rule 19b-4(e) 
based on (1) certain indexes with components that include Fixed Income 
Securities or (2) indexes or portfolios described in exchange rules 
previously approved by the Commission as underlying benchmarks for 
derivative securities fulfill these requirements. Use of Rule 19b-4(e) 
by NYSE to list and trade such ETFs should promote competition, reduce 
burdens on issuers and other market participants, and make such ETFs 
available to investors more quickly.\31\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(1).
    \30\ 17 CFR 240.19b-4.
    \31\ The Commission notes that failure of a particular ETF to 
satisfy the Exchange's generic listing standards does not preclude 
the Exchange from submitting a separate proposal under Rule 19b-4 to 
list and trade such ETF.
---------------------------------------------------------------------------

    The Commission previously has approved generic listing standards 
for another exchange, Amex, that are substantially similar to those 
proposed here by NYSE.\32\ This proposal does not appear to raise any 
novel regulatory issues. Therefore, the Commission finds that NYSE's 
proposal is consistent with the Act on the same basis that it approved 
Amex's generic listing standards for ETFs based on Fixed Income or 
Combination Indexes or on indexes or portfolios described in exchange 
rules that have previously been approved by the Commission and underlie 
derivative securities.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release No. 55434 (March 9, 
2007), 72 FR 12233 (March 15, 2006) (SR-Amex-2006-118) (approving 
generic listing standards for series of ETFs based on Fixed Income 
and Combination Indexes).
---------------------------------------------------------------------------

    Proposed Sections 703.16(D) and 703.16(E) of the Manual establish 
the standards for the composition of a Fixed Income Index or 
Combination Index underlying an ETF. The Commission believes that these 
standards are reasonably designed to ensure that a substantial portion 
of any underlying index or portfolio consists of securities about which 
information is publicly available, and that when applied in conjunction 
with the other applicable listing requirements, will permit the listing 
and trading only of ETFs that are sufficiently broad-based in scope to 
minimize potential manipulation. The Commission further believes that 
the proposed listing standards are reasonably designed to preclude NYSE 
from listing and trading ETFs that might be used as a surrogate for 
trading in unregistered securities.
    The proposed generic listing standards also will permit NYSE to 
list and trade an ETF if the Commission previously has approved an 
exchange rule that contemplates listing and trading a derivative 
security based on the same underlying index. NYSE would be able to rely 
on that earlier approval order, provided that NYSE complies with the 
commitments undertaken by the other SRO set forth in the prior order, 
including any surveillance-sharing arrangements.
    The Commission believes that NYSE's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\33\ which sets forth Congress' 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for and transactions in 
securities. The value of a Fixed Income Index underlying underlying an 
ETF listed pursuant to this proposal is required to be widely 
disseminated by one or more major market data vendors at least once a 
day. Likewise, the value of an underlying Combination Index is required 
to be widely disseminated by one or more major market data vendors at 
least once every 15 seconds during the time when the corresponding ETF 
trades on the Exchange, provided that, with respect to the fixed income 
components of the Combination Index, the impact on the index is 
required to be updated only once each day.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    Furthermore, the Commission believes that the proposed rules are 
reasonably designed to promote fair disclosure of information that may 
be necessary to price an ETF appropriately. If a broker-dealer is 
responsible for maintaining (or has a role in maintaining) the 
underlying index, such broker-dealer would be required to erect and 
maintain a ``firewall,'' in a form satisfactory to the Exchange, to 
prevent the flow of non-public information regarding the underlying 
index from the personnel involved in the development and maintenance of 
such index to others such as sales and trading personnel. The 
Commission also notes that current Section 703.16(A)(6) of the Manual 
provides that, in connection with approving an ETF issuer for listing 
on the Exchange, the Exchange will obtain a representation from the ETF 
issuer that the NAV per share will be calculated each business day and 
made available to all market participants at the same time.
    The Commission also believes that the Exchange's trading halt rules 
are reasonably designed to prevent trading in an ETF when transparency 
is impaired. NYSE Rule 1100(f)(1) provides that, when the Exchange is 
the listing market, if the IIV or index value applicable to an ETF is 
not disseminated as required, the Exchange may halt trading during the 
day in which the interruption occurs. If the interruption continues, 
then the Exchange will halt trading no later than the beginning of the 
next trading day. Also, the Exchange may commence delisting proceedings 
in the event that

[[Page 29027]]

the value of the underlying index is no longer calculated or available.
    The Exchange will implement written surveillance procedures for 
ETFs based on Fixed Income Indexes or Combination Indexes.\34\ In 
approving this proposal, the Commission relied on NYSE's representation 
that its surveillance procedures are adequate to properly monitor the 
trading of ICUs listed pursuant to this proposal. This approval is 
conditioned on the continuing accuracy of that representation.
---------------------------------------------------------------------------

    \34\ See proposed Section 703.16(F)(2).
---------------------------------------------------------------------------

Acceleration

    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing thereof in the Federal Register. The Commission 
notes that NYSE's proposal is substantially similar to an Amex proposal 
that has been approved by the Commission.\35\ The Commission does not 
believe that NYSE's proposal raises any novel regulatory issues and, 
therefore, believes that good cause exists for approving the filing 
before the conclusion of a notice-and-comment period. Accelerated 
approval of the proposal will expedite the listing and trading of 
additional ETFs by the Exchange, subject to consistent and reasonable 
standards. Therefore, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Exchange Act,\36\ to approve the proposed rule 
change, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \35\ See supra note 32.
    \36\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\37\ that the proposed rule change (SR-NYSE-2007-37), as 
amended, be, and it hereby is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \37\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E7-9874 Filed 5-22-07; 8:45 am]
BILLING CODE 8010-01-P

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