Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To List and Trade Shares of Eleven Funds of the ProShares Trust, 73404-73415 [E7-24997]

Download as PDF 73404 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices OCC.29 At any time within sixty days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–OCC–2007–15 and should be submitted on or before January 17, 2008. IV. Solicitation of Comments For the Commission by the Division of Trading and Markets, pursuant to delegated authority.30 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24984 Filed 12–26–07; 8:45 am] 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–OCC–2007–15 on the subject line. mstockstill on PROD1PC66 with NOTICES Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–OCC–2007–15. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC. All comments received will be posted 29 The Commission neither makes any findings nor expresses any opinion with respect to OCC’s representations and interpretations regarding the application of the Bankruptcy Code. VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56998; File No. SR–Amex– 2007–104] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To List and Trade Shares of Eleven Funds of the ProShares Trust December 19, 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 September 18, 2007, the American Stock Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. On December 18, 2007, Amex filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares (‘‘Shares’’) of 11 funds (‘‘Funds’’) of the ProShares Trust (‘‘Trust’’) based on a domestic stock index and several fixed income indexes. The text of the proposed rule change is available at https://www.amex.com, at 30 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 the Exchange 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, Amex 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. Amex 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 list under amended Rule 1000A–AEMI, shares of 10 new funds of the Trust that are designated as Short Funds or UltraShort Funds, and one new fund designated as an Ultra Fund. Amex Rules 1000A– AEMI and Rule 1001A through 1005A provide standards for the listing of Index Fund Shares, which are securities issued by an open-end management investment company for exchange trading. These securities are registered under the Investment Company Act of 1940 (‘‘1940 Act’’) as well as the Act. Index Fund Shares are defined in Rule 1000A–AEMI(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. Rule 1000A–AEMI(b)(2) permits the Exchange to list and trade Index Fund Shares that seek to provide investment results that exceed the performance of an underlying securities index by a specified multiple, or that seek to provide investment results that correspond to a specified multiple of the inverse or opposite of the index’s performance. The Commission has recently approved the listing and trading of certain Ultra Funds, Short Funds and UltraShort Funds based on a variety of underlying indexes.3 3 See Securities Exchange Act Release No. 52553 (October 3, 2005), 70 FR 59100 (October 11, 2005) (SR–Amex–2004–62)(’’Original Order’’); see also Securities Exchange Act Release Nos. 54040 (June 23, 2006), 71 FR 37669 (June 30, 2006) (SR–Amex 2006–41); 55117 (January 17, 2007), 72 FR 3442 (January 25, 2007) (SR–Amex–2006–101). E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices mstockstill on PROD1PC66 with NOTICES Each of the Funds will have a distinct investment objective.4 Each Fund will attempt, on a daily basis, to achieve its investment objective by corresponding to a specified multiple of the performance, the inverse performance, or an inverse multiple of the performance of a particular fixed income or equity securities index (individually referred to as the ‘‘Underlying Index’’ and collectively referred to as the ‘‘Underlying Indexes’’) as briefly described below. The Funds will be based on the following benchmark indexes: • Lehman Brothers 7–10 Year U.S. Treasury Index; • Lehman Brothers 20+ Year U.S. Treasury Index; • iBoxx $ Liquid Investment Grade Index; • iBoxx $ Liquid High Yield Index; and • Dow Jones U.S. Select Telecommunications Index (together, the ‘‘Underlying Indexes’’).5 Short Funds: The Exchange proposes to list and trade shares of the Funds that seek daily investment results, before fees and expenses, that correspond to the inverse or opposite of the daily performance (¥100%) of the Underlying Indexes (‘‘Short Funds’’). If each of these Funds is successful in meeting its objective, the net asset value (‘‘NAV’’) of shares of each Fund should increase approximately as much, on a percentage basis, as the respective Underlying Index loses when the prices of the securities in the Index decline on a given day, or should decrease approximately as much as the respective 4 The Funds are as follows: (1) Short Lehman Brothers 7–10 Year U.S. Treasury ProShares; (2) Short Lehman Brothers 20+ Year U.S. Treasury ProShares; (3) Short iBoxx $ Liquid Investment Grade ProShares; (4) Short iBoxx $ Liquid High Yield ProShares; (5) Short Dow Jones Select Telecommunications ProShares; (6) UltraShort Lehman Brothers 7–10 Year U.S. Treasury ProShares; (7) UltraShort Lehman Brothers 20+ Year U.S. Treasury ProShares; (8) UltraShort iBoxx $ Liquid Investment Grade ProShares; (9) UltraShort iBoxx $ Liquid High Yield ProShares; (10) UltraShort Dow Jones Select Telecommunications ProShares; and (11) Ultra Dow Jones Select Telecommunications ProShares. 5 The Statement of Additional Information (‘‘SAI’’) for the Funds discloses that each Fund reserves the right to substitute a different Index. Substitution could occur if the Index becomes unavailable, no longer serves the investment needs of shareholders, the Fund experiences difficulty in achieving investment results that correspond to the Index or for any other reason determined in good faith by the Board of Trustees of the Trust. In such instance, the substitute index would attempt to measure the same general market as the current index. Consistent with applicable law, shareholders will be notified (either directly or through their intermediary) in the event a Fund’s current index is replaced. VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 Index gains when the prices of the securities in the index rise on a given day, before fees and expenses. UltraShort Funds: The Exchange also proposes to list and trade shares of the Funds that seek daily investment results, before fees and expenses that correspond to twice the inverse (¥200%) of the daily performance of the Underlying Indexes (‘‘UltraShort Funds’’). If each of these Funds is successful in meeting its objective, the NAV of shares of each Fund should increase approximately twice as much, on a percentage basis, as the respective Underlying Index loses when the prices of the securities in the Index decline on a given day, or should decrease approximately twice as much as the respective Underlying Index gains when the prices of the securities in the index rise on a given day, before fees and expenses. 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.’’ Ultra Fund: Finally, the Exchange proposes to list and trade shares of one Fund 6 that seeks daily investment results, before fees and expenses, that corresponds to twice (200%) the daily performance of the Underlying Index (‘‘Ultra Fund’’ or ‘‘Bullish Fund’’). This Fund, if successful in meeting its investment objective, should gain, on a percentage basis, approximately twice as much as the Fund’s Underlying Index when the price of the securities in such Index increase on a given day, and should lose approximately twice as much when such prices decline on a given day. Underlying Indexes According to Rule 1000A–AEMI(b)(2), the Exchange may not list and trade Index Fund Shares under its generic listing standards adopted pursuant to Rule 19b–4(e) if the Index Fund Shares are leveraged, that is, they seek to provide investment results that either exceed or correspond to the inverse of the performance of a specified foreign or domestic stock index by a specified multiple.7 While the Exchange is proposing to list and trade the Funds pursuant to section 19(b)(1) of the Act, the Exchange represents that the indexes and their respective components (as described below) 6 The Ultra Fund will be based on the Dow Jones U.S. Select Telecommunications Index. 7 See Rule 1000A–AEMI(b)(2)(iii) and Commentary .02 thereto. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 73405 comply with the generic listing standards set forth in Commentary .02 and Commentary .03 to Amex Rule 1000A–AEMI.8 Lehman Brothers 7–10 Year U.S. Treasury Index The index is market capitalization weighted and includes all publicly issued U.S. Treasury Securities that have a remaining maturity of between 7 and 10 years and have more than $250 million par outstanding. The index value is calculated and published daily by 10:00 p.m. Eastern Time (‘‘ET’’). The Commission has previously approved the listing and trading on the Amex of an exchange-traded fund based on the iShares Lehman 7–10 Year Treasury Index.9 Lehman Brothers 20+ Year U.S. Treasury Index The index is market capitalization weighted and includes all publicly issued U.S. Treasury Securities that have a remaining maturity greater than 20 years and have more than $150 million par outstanding. The index value is calculated and published daily by 10:00 p.m. ET. The Commission has previously approved the listing and trading on the Amex of an exchangetraded fund based on the Lehman Brothers 20+ Year U.S. Treasury Index.10 iBoxx $ Liquid Investment Grade Index The index is a rules-based index consisting of up to 100 highly liquid, investment grade, U.S. dollardenominated corporate bonds with a minimum amount outstanding of $500 million that seeks to maximize liquidity while maintaining representation of the broader investment grade corporate bond market. The index consists of issuers domiciled in the U.S., Bermuda, Cayman Islands, Canada, Japan or Western Europe. The index is equally priced weighted and is re-balanced monthly. The index value is calculated and published daily by 4:30 p.m. ET. The Commission has previously approved the listing and trading on the Amex of an exchange-traded fund based 8 The Exchange represents that Shares based on the Underlying Indexes would meet the criteria set forth in Commentary .04 through .06, .08 and .09 to Amex Rule 1000A–AEMI. 9 See Securities Exchange Act Release No. 46252 (July 24, 2002), 67 FR 49715 (July 31, 2002) (SR– Amex–2001–35). The iShares Lehman Brothers 7– 10 Year Treasury Bond ETF (IEF) is listed and traded on the Exchange. 10 See id. The iShares Lehman Brothers 20+ Year Treasury Bond ETF (TLT) is listed and traded on the Exchange. E:\FR\FM\27DEN1.SGM 27DEN1 73406 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices on the iBoxx $ Liquid Investment Grade Index.11 iBoxx $ Liquid High Yield Index The index is a rules-based index consisting of up to 50 of the most liquid, high yield, U.S. dollar-denominated corporate bonds with a minimum amount outstanding of $200 million that seeks to maximize liquidity while maintaining representation of the broader high yield corporate bond market. The index consists of issuers domiciled in the U.S., Bermuda, Cayman Islands, Canada, Japan, or Western Europe. The index is equally priced weighted and is re-balanced monthly. The index value is calculated and published daily by 4:30 p.m. ET. An exchange-traded fund based on the iBoxx $ Liquid High Yield Index is listed and trade on the Exchange.12 Dow Jones U.S. Select Telecommunications Index The Dow Jones U.S. Select Telecommunications Index is a floatadjusted market capitalization weighted index designed to measure the performance of the telecommunications economic sector of the U.S. equity market. Component companies include fixed line and mobile telecommunications companies. Component weights are capped for diversification. The universe for the index includes all common stocks of companies in the Dow Jones U.S. Select Telecommunications Index that are categorized as belonging to the telecommunications sector, based on Industry Classification Benchmark (ICB) definitions. The company at the 90% cumulative market capitalization of the index must have a float adjusted market capitalization of at least $75 million. The Index value is calculated and disseminated every 15 seconds during Amex’s trading hours. The Exchange represents that the Dow Jones U.S. Select Telecommunications Index meets the Exchange’s generic listing standards for Index Fund Shares.13 mstockstill on PROD1PC66 with NOTICES The Funds ProShare Advisors LLC is the investment advisor (‘‘Advisor’’) to each Fund. The Advisor is registered under 11 See id. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) (formerly the GS $ InvesTop Index) is listed and traded on the Exchange. 12 The iBoxx High Yield Corporate Bond Fund (HYG) is listed and traded on the Exchange pursuant to the Exchange’s generic listing standards. See Commentary .03 to Rule 1000A– AEMI (setting forth standards for indexes based on fixed income securities). 13 See Commentary .02 to Rule 1000A–AEMI. VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 the Investment Advisers Act of 1940.14 While the Advisor will manage each Fund, the Trust’s Board of Trustees (‘‘Board’’) will have overall responsibility for the Funds’ operations. The composition of the Board is, and will be, in compliance with the requirements of section 10 of the 1940 Act. SEI Investments Distribution Company (‘‘Distributor’’), a brokerdealer registered under the Act, would act as the distributor and principal underwriter of the Shares. JPMorgan Chase Bank, N.A. would act as the index receipt agent (‘‘Index Receipt Agent’’) for the Bullish Fund for which it will receive fees. The Index Receipt Agent would be responsible for transmitting a list of names and the required number of shares of each deposit basket of equity securities (‘‘Deposit Securities’’) to be included in the Creation Deposit for the Bullish Fund (‘‘Deposit List’’) to the National Securities Clearing Corporation (‘‘NSCC’’) and for the processing, clearance and settlement of purchase and redemption orders through the facilities of the Depository Trust Company (‘‘DTC’’) and NSCC on behalf of the Trust. When applicable, the Index Receipt Agent will also be responsible for the coordination and transmission of files and purchase and redemption orders between the Distributor and the NSCC. Shares of the Funds issued by the Trust will be a class of exchange-traded securities that represent an interest in the portfolio of a particular Fund.15 Shares would be registered in bookentry form only and the Trust would not issue individual share certificates. The DTC or its nominee would be the record or registered owner of all outstanding Shares. Beneficial ownership of Shares would be shown on the records of DTC or DTC Participants. Investment Objective of the Funds The Bearish Funds would seek daily investment results, before fees and expenses, of the inverse or opposite (¥100%) of the Underlying Index while the UltraShort funds would seek daily investment results, before fees and expenses, of twice the inverse or opposite (¥200%) of the daily performance of the Underlying Index. The Bearish Funds would not invest 14 The Trust, Advisor and Distributor (‘‘Applicants’’) have filed with the Commission an Application to amend the Order under Sections 6(c) and 17(b) of the 1940 Act (the ‘‘Application’’) for the purpose of exempting the Funds of the Trust from various provisions of the 1940 Act. (File No. 812–13382). 15 The Trust is also registered as a business trust under the Delaware Corporate Code. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 directly in the component securities of the relevant Underlying Index, but instead, would create short exposure to such Index. Each Bearish Fund would rely on establishing positions in financial instruments (as defined below) that provide, on a daily basis, the inverse or opposite of, or twice the inverse or opposite of, the performance of the relevant Underlying Index. Normally 100% of the value of the portfolios of each Fund would be devoted to such financial instruments and money market instruments. The Bullish Fund would seek investment results that corresponds, before fees and expenses, to twice (200%) the daily performance of the Underlying Index and would invest its assets based upon the same strategies as conventional index funds. Rather than holding positions in equity securities and financial instruments intended to create exposure to 100% of the daily performance of an underlying index, the Bullish Fund would hold equity securities and financial instruments positions designed to create exposure equal to twice (200%), before fees and expenses, the daily performance of the Underlying Index. The Bullish Fund generally would hold 85% to 100% of its assets in the component equity securities of the Underlying Index. The remainder of assets would be devoted to Financial Instruments and Money Market Instruments (as defined below) that are intended to create the additional needed exposure to such Underlying Index necessary to pursue its investment objective. 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 (‘‘Financial Instruments’’). Money market instruments include U.S. government securities and repurchase agreements 16 (‘‘Money Market Instruments’’). While the Advisor would attempt to minimize any ‘‘tracking error’’ between the investment results of a particular Fund and the performance (and specified multiple thereof) or the inverse performance (and specified multiple thereof) of its Underlying Index, certain factors may tend to cause the investment results of a Fund to vary from such relevant Underlying Index or 16 Repurchase agreements held by the Funds will be consistent with Rule 2a–7 under the 1940 Act. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices specified multiple thereof.17 The Bullish Fund is expected to be highly correlated to the Underlying Index and investment objective (.95 or greater). The Bearish Funds are expected to be highly inversely correlated to each Underlying Index and investment objective (¥.95 or greater).18 In each case, the Funds are expected to have a daily tracking error of less than 5% (500 basis points) relative to the specified multiple, inverse, or inverse multiple of the performance of the relevant Underlying Index. mstockstill on PROD1PC66 with NOTICES The Portfolio Investment Methodology The Advisor would seek to establish an investment exposure in each portfolio corresponding to each Fund’s investment objective based upon its Portfolio Investment Methodology. The Portfolio Investment Methodology is a mathematical model based on wellestablished principles of finance that are widely used by investment practitioners, including conventional index fund managers. As set forth in the Application, the Portfolio Investment Methodology was designed to determine for each Fund the portfolio investments needed to achieve its stated investment objectives. The Portfolio Investment Methodology takes into account a variety of specified criteria and data (‘‘Inputs’’), 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 17 Several factors may cause a Fund to vary from the relevant Underlying Index and investment objective including: (1) A Fund’s expenses, including brokerage fees (which may be increased by high portfolio turnover) and the cost of the investment techniques employed by that Fund; (2) less than all of the securities in the benchmark index being held by a Fund and securities not included in the benchmark index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts, and the performance of the underlying securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) holding instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s share prices being rounded to the nearest cent; (7) changes to the benchmark index that are not disseminated in advance; (8) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; and (9) early and unanticipated closings of the markets on which the holdings of a Fund trade, resulting in the inability of the Fund to execute intended portfolio transactions. 18 Correlation is the strength of the relationship between (1) the change in a Fund’s NAV and (2) the change in the benchmark index (investment objective). The statistical measure of correlation is known as the ‘‘correlation coefficient.’’ A correlation coefficient of +1 indicates a perfect positive correlation while a value of ¥1 indicates a perfect negative (inverse) correlation. A value of zero would mean that there is no correlation between the two variables. VerDate Aug<31>2005 19:40 Dec 26, 2007 Jkt 214001 amount of required exposure to the Underlying Index, and (3) the positions in equity securities (if applicable), Financial Instruments and/or Money Market Instruments at the beginning of each trading day. The Advisor, pursuant to the methodology, would then mathematically determine the end-ofday positions to establish the required amount of exposure to the Underlying Index (‘‘Solution’’), which would consist of equity securities (if applicable), 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 (if applicable), Financial Instruments and/or Money Market Instruments that must be bought or sold for the day. The Solution represents the required exposure and, when necessary, is converted into an order or orders to be filled that same day. Generally, portfolio trades effected pursuant to the Solution are reflected in the NAV on the first business day (T+1) after the date the relevant trade is made. Therefore, the NAV calculated for a Fund on a given day should reflect the trades executed pursuant to the prior day’s Solution. For example, trades pursuant to the Solution calculated on a Monday afternoon are executed on behalf of the Fund in question on that day. For the Bearish Funds described herein, these trades would then be reflected in the NAV for that Fund that is generally calculated as of 3 p.m. ET on Tuesday (or earlier as necessary).19 The timeline for the Methodology is as follows: Authorized Participants (‘‘APs’’ or ‘‘Authorized Participant’’) have a 2 p.m. ET cut-off (or earlier as necessary) for orders submitted by telephone, facsimile and other electronic means of communication and a 4 p.m. ET cut-off for orders received via mail.20 AP orders by mail are exceedingly rare. Orders are received by the Distributor and relayed to the Advisor within 10 minutes. The Advisor would know by 2:10 p.m. ET the number of creation/redemption orders by APs for that day. Subsequently, the 19 The Bearish Funds are based on the following fixed income indexes: (1) The Lehman Brothers 7– 10 Year U.S. Treasury Index; (2) the Lehman Brothers 20+ Year U.S. Treasury Index; (3) the iBoxx $ Liquid Investment Grade Index; and (4) the iBoxx $ Liquid High Yield Index. 20 An Authorized Participant is either (1) A broker-dealer or other participant in the continuous net settlement system of the NSCC or (2) A DTC participant, and which has entered into a participant agreement with the Distributor. Orders for the ten Short Funds and UltraShort Funds described herein may not be placed on days where the equity markets are open, but the fixed income markets are closed. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 73407 Advisor generally puts orders into the market between 2:30 p.m. and 2:55 p.m. ET in order to obtain requisite portfolio exposure consistent with the Solution. At 3 p.m. ET, the Advisor would again look at the exposure to make sure that the orders placed are consistent with the Solution, and as described above, the Advisor would execute any other transactions in Financial Instruments to assure that the Fund’s exposure is consistent with the Solution. For the Bullish Fund,21 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 would then be reflected in the NAV for that Fund that is calculated as of 4 p.m. ET on Tuesday. The timeline for the Methodology is as follows: Authorized Participants have a 3 p.m. ET cut-off for orders submitted by telephone, facsimile and other electronic means of communication and a 4 p.m. ET cut-off for orders received via mail. AP orders by mail are exceedingly rare. Orders are received by the Distributor and relayed to the Advisor within 10 minutes. The Advisor would know by 3:10 p.m. ET the number of creation/redemption orders by APs for that day. Orders are then placed at approximately 3:40 p.m. ET as market-on-close (MOC) orders. At 4 p.m. ET, the Advisor would again look at the exposure to make sure that the orders placed are consistent with the Solution, and as described above, the Advisor would execute any other transactions in Financial Instruments to assure that the Fund’s exposure is consistent with the Solution. Description of Investment Techniques In attempting to achieve its individual investment objectives, a Fund may invest its assets in equity securities, Financial Instruments and Money Market Instruments (collectively, ‘‘Portfolio Investments’’). The Bullish Fund would hold between 85–100% of its total assets in the equity securities contained in the relevant Underlying Index. The remainder of assets, if any, would be devoted to Financial Instruments and Money Market Instruments that are intended to create additional needed exposure to such 21 This fund is based on the Dow Jones U.S. Select Telecommunications Index. E:\FR\FM\27DEN1.SGM 27DEN1 mstockstill on PROD1PC66 with NOTICES 73408 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices Underlying Index necessary to pursue the Bullish Fund’s investment objectives. The Bearish Funds generally would not invest in equity securities but rather would hold only Financial Instruments and Money Market Instruments. To the extent applicable, each Fund would comply with the requirements of the 1940 Act with respect to ‘‘cover’’ for Financial Instruments and thus may hold a significant portion of its assets in liquid instruments in segregated accounts. Each Fund may engage in transactions in futures contracts on designated contract markets where such contracts trade, and would only purchase and sell futures contracts traded on a U.S. futures exchange or board of trade. Each Fund would comply with the requirements of Rule 4.5 of the regulations promulgated by the Commodity Futures Trading Commission (‘‘CFTC’’).22 Each Fund may enter into swap agreements and/or forward contracts for the purposes of attempting to gain exposure to the equity securities of its Underlying Index without actually transacting such securities. The counterparties to the swap agreements and/or forward contracts would be major broker-dealers and banks. The creditworthiness of each potential counterparty is assessed by the Advisor’s credit committee pursuant to guidelines approved by the Board. Existing counterparties are reviewed periodically by the Board or its designee. Each Fund may also enter into repurchase and reverse repurchase agreements with terms of less than one year, and would only enter into such agreements with (i) members of the Federal Reserve System, (ii) primary dealers in U.S. government securities, or (iii) major broker-dealers. Each Fund may also invest in Money Market Instruments, in pursuit of its investment objectives, as ‘‘cover’’ for Financial Instruments, as described above, or to earn interest. The Trust would adopt certain fundamental policies consistent with the 1940 Act and each Fund would be classified as ‘‘non-diversified’’ under the 1940 Act. Each Fund, however, intends to maintain the required level of diversification and otherwise conduct its operations so as to qualify as a ‘‘regulated investment company’’ (‘‘RIC’’) for purposes of the Internal Revenue Code (‘‘Code’’), in order to relieve the Trust and the Funds of any 22 The CFTC Rule 4.5 provides an exclusion for investment companies registered under the 1940 Act from the definition of a ‘‘commodity pool operator’’ upon the filing of a notice of eligibility with the National Futures Association. VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 liability for Federal income tax to the extent that its earnings are distributed to shareholders.23 Availability of Information about the Shares and Underlying Indexes The Trust’s Web site, which is and would be publicly accessible at no charge, would 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/or Product Description; and (d) other quantitative information such as daily trading volume. The Prospectus and/or Product Description for each Fund would inform investors that the Trust’s Web site has information about the premiums and discounts at which the Fund’s Shares have traded.24 The Amex would disseminate for each Fund on a daily basis every 15 seconds by means of the Consolidated Tape Association (‘‘CTA’’) and CQ High Speed Lines information with respect to 23 In order for a fund to qualify for tax treatment as a RIC, it must meet several requirements under the Code. Among these is the requirement that, at the close of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s total assets must be represented by cash items, U.S. government securities, securities of other RICs, and other securities, with such other securities limited for purposes of this calculation in respect of any one issuer to an amount not greater than 5% of the value of the Fund’s assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets may be invested in the securities of any one issuer, or two or more issuers that are controlled by the Fund (within the meaning of Section 851(b)(4)(B) of the Internal Revenue Code and that are engaged in the same or similar trades or businesses or related trades or businesses other than U.S. government securities or the securities of other regulated investment companies. 24 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 .06 of Amex Rule 1000A–AEMI 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. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 an Intra-Day Indicative Value (‘‘IIV’’) (as defined and discussed below under ‘‘Dissemination of Intra-Day Indicative Value (IIV)’’), recent NAV, shares outstanding, estimated cash amount and total cash amount per Creation Unit.25 The Exchange would make available on its Web site daily trading volume, closing price, the NAV and final dividend amounts to be paid for each Fund. Each Fund’s total portfolio composition would be disclosed on the Web site of the Trust (https:// www.proshares.com) or another relevant Web site as determined by the Trust and/or the Exchange (https:// www.amex.com). Web site disclosure of portfolio holdings would be made by the Trust on a daily basis and would include, as applicable, the names and number of shares held of each equity security (if applicable), the specific types of Financial Instruments and characteristics of such instruments, cash equivalents and amount of cash held in the portfolio of each Fund. This public Web site disclosure of the portfolio composition of each Fund would coincide with the disclosure by the Advisor of the ‘‘IIV File’’ (described below) and the ‘‘PCF File,’’ when applicable (described below). Therefore, the same portfolio information (including accrued expenses and dividends) would be provided on the public Web site as well as in the IIV File and PCF File (when applicable) provided to ‘‘Authorized Participants’’ (defined below). The format of the public Web site disclosure and the IIV File and PCF File (when applicable) would differ because the public Web site would list all portfolio holdings while the IIV File and PCF File (when applicable) would similarly provide the portfolio holdings but in a format appropriate for Authorized Participants, i.e., the exact components of a Creation Unit.26 Accordingly, each investor would have access to the current portfolio composition of each Fund through the Trust’s Web site, at https:// www.proshares.com, and/or at the Exchange’s Web site at https:// www.amex.com. Beneficial owners of Shares (‘‘Beneficial Owners’’) would receive all of the statements, notices, and reports required under the 1940 Act and other applicable laws. They would receive, for example, annual and semi-annual fund reports, written statements 25 Quotations and last-sale information for the Funds’ Shares are disseminated over the Consolidated Tape. 26 The composition will be used to calculate the NAV later that day. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices mstockstill on PROD1PC66 with NOTICES accompanying dividend payments, proxy statements, annual notifications detailing the tax status of fund distributions, and Form 1099–DIVs. Some of these documents would be provided to Beneficial Owners by their brokers, while others would be provided by the Fund through the brokers. The daily closing index value and the percentage change in the daily closing index value for each Underlying Index would be publicly available on various websites by independent market data vendors, e.g., https:// www.bloomberg.com. Data regarding each Underlying Index is also available from the respective index provider to subscribers. With respect to the Lehman Brothers 7–10 Year U.S. Treasury Index, the Lehman Brothers 20+ Year U.S. Treasury Index, the iBoxx $ Liquid Investment Grade Index and the iBoxx $ Liquid High Yield Index, as noted above, the index value would be calculated once daily. With respect to the Dow Jones U.S. Select Telecommunications Index, the value would be updated intra-day on a real time basis as its individual component securities change in price. This intraday value of this index would be disseminated at least every 15 seconds throughout the trading day by the Amex or another organization authorized by the relevant Underlying Index provider. Creation and Redemption of Shares Each Fund would issue and redeem Shares only in initial aggregations of at least 75,000 (‘‘Creation Units’’). Purchasers of Creation Units would be able to separate the Units into individual Shares. Once the number of Shares in a Creation Unit is determined, it would not change thereafter (except in the event of a stock split or similar revaluation). The initial value of a Share for each Fund is expected to be in the range of $50–$250. At the end of each business day, the Trust would prepare the list of names and the required number of shares of each Deposit Security to be included in the next trading day’s Creation Unit for the Bullish Fund. The Trust would then add to the Deposit List, the cash information effective as of the close of business on that business day and create a portfolio composition file (‘‘PCF’’) for the Fund, which it would transmit to NSCC before the open of business the next business day. The information in the PCF would be available to all participants in the NSCC system. Because the NSCC’s system for the receipt and dissemination to its participants of the PCF is not currently capable of processing information with respect to Financial Instruments, the VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 Advisor has developed an ‘‘IIV File,’’ which it would use to disclose the Funds’ holdings of Financial Instruments.27 The IIV File would contain, for the Bullish Fund (to the extent that it holds Financial Instruments) and Bearish Funds, information sufficient by itself or in connection with the PCF File and other available information for market participants to calculate a Fund’s IIV and effectively arbitrage the Fund. For example, the following information would be provided in the IIV File for a Bullish Fund holding equity securities and a Bearish Fund holding swaps and futures contracts (and a Bullish Fund to the extent it holds such Financial Instruments): (A) The total value of the equity securities held by such Fund (Bullish Fund only), (B) the notional value of the swaps held by such Fund (together with an indication of the index on which such swap is based and whether the Fund’s position is long or short), (C) the most recent valuation of the swaps held by the Fund, (D) the notional value of any futures contracts (together with an indication of the index on which such contract is based, whether the Fund’s position is long or short and the contract’s expiration date), (E) the number of futures contracts held by the Fund (together with an indication of the index on which such contract is based, whether the Fund’s position is long or short and the contract’s expiration date), (F) the most recent valuation of the futures contracts held by the Fund, (G) the Fund’s total assets and total shares outstanding, and (H) a ‘‘net other assets’’ figure reflecting expenses and income of the Fund to be accrued during and through the following business day and accumulated gains or losses on the Fund’s Financial Instruments through the end of the business day immediately preceding the publication of the IIV File. To the extent that the Bullish or any Bearish Fund holds cash or cash equivalents about which information is not available in a PCF File, information regarding such Fund’s cash and cash equivalent positions would be disclosed in the IIV File for such Fund. The information in the IIV File would be sufficient for participants in the NSCC system to calculate the IIV for Bearish Funds and, together with the 27 The Trust or the Advisor will post the IIV File to a password-protected Web site before the opening of business on each business day, and all Authorized Participants and the Exchange will have access to a password and the Web site containing the IIV File. However, the Fund will disclose each business day to the public identical information, but in a format appropriate to public investors, at the same time the Fund discloses the IIV and PCF files, as applicable, to industry participants. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 73409 information on equity securities contained in the PCF, would be sufficient for calculation of IIV for the Bullish Fund, during the next business day. The IIV File, together with the applicable information in the PCF in the case of the Bullish Fund, would also be the basis for the next business day’s NAV calculation. Under normal circumstances, the Bullish Fund would be created and redeemed either entirely for cash and/or for Deposit Securities, plus a Balancing Amount, as described below. Under normal circumstances, the Bearish Funds would be created and redeemed entirely for cash. The IIV File published before the open of business on a business day would, however, permit NSCC participants to calculate (by means of calculating the IIV) the amount of cash required to create a Creation Unit, and the amount of cash that would be paid upon redemption of a Creation Unit, for each Bearish Fund for that business day. For the Bullish Fund, the PCF File would be prepared by the Trust after 4 p.m. ET and transmitted by the Index Receipt Agent to NSCC by 6:30 p.m. ET. All Authorized Participants who are NSCC participants, and the Exchange would have access to the Web site containing the IIV File. The IIV File would reflect the trades made on behalf of a Fund that business day and the creation/redemption orders for that business day. Accordingly, by 6:30 p.m. ET, Authorized Participants would know the composition of the Fund’s portfolio for the next trading day. The Balancing Amount would also be determined shortly after 4 p.m. ET each business day. Although the Balancing Amount for most exchange-traded funds is a small amount reflecting accrued dividends and other distributions, for the Bullish Fund it is expected to be larger due to changes in the value of the Financial Instruments, i.e., daily markto-market. For example, assuming a basket of deposit securities (‘‘Deposit Basket’’) of $5 million for a Bullish Fund, if the market increases 10%, the deposit basket would now be equal to $5.5 million at 4 p.m. ET. The Fund shares would increase in value by 20% or $1 million to equal $6 million total. With the Deposit Basket at $5.5 million, the Cash Balancing Amount would be $500,000. The next day’s Deposit Basket and cash balancing amount is announced generally by 6:30 p.m. ET each business day. E:\FR\FM\27DEN1.SGM 27DEN1 73410 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices Creation of the Bullish Fund 28 purchasing Typically, Creation Units from a Bullish Fund must make an in-kind deposit of a basket of securities (‘‘Deposit Securities’’) consisting of the securities selected by the Advisor from among those securities contained in the Fund’s portfolio, together with an amount of cash specified by the Advisor (‘‘Balancing Amount’’), plus the applicable transaction fee (‘‘Transaction Fee’’). The Deposit Securities and the Balancing Amount collectively are referred to as the ‘‘Creation Deposit.’’ The Balancing Amount is a cash payment designed to ensure that the value of a Creation Deposit is identical to the value of the Creation Unit it is used to purchase. The Balancing Amount is an amount equal to the difference between the NAV of a Creation Unit and the market value of the Deposit Securities.30 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-tomarket value of the Financial Instruments held by the Funds is included in the Balancing Amount. The Transaction Fee is a fee imposed by the Funds on investors purchasing (or redeeming) Creation Units. The Trust would make available through the DTC or the Distributor on each business day, prior to the opening of trading on the Exchange, a 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’’).31 The Trust also would make available on a daily basis information about the previous day’s Balancing Amount. The Bullish Fund reserves the right to permit or require an Authorized mstockstill on PROD1PC66 with NOTICES persons 29 28 This is the Bullish Fund based on the Dow Jones U.S. Telecommunications Index. 29 Authorized Participants are the only persons that may place orders to create and redeem Creation Units. Authorized Participants must be registered broker-dealers or other securities market participants (such as banks and other financial institutions that are exempt from registration as broker-dealers to engage in securities transactions) who are participants in DTC. 30 While not typical, if the market value of the Deposit Securities is greater than the NAV of a Creation Unit, then the Balancing Amount would be a negative number, in which case the Balancing Amount would be paid by the Bullish Fund to the purchaser, rather than vice-versa. 31 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. VerDate Aug<31>2005 18:32 Dec 26, 2007 Jkt 214001 Participant to substitute an amount of cash and/or a different security to replace any prescribed Deposit Security.32 Substitution might be permitted or required, for example, because one or more Deposit Securities may be unavailable, or may not be available in the quantity needed to make a Creation Deposit. Brokerage commissions incurred by a Fund to acquire any Deposit Security not part of a Creation Deposit are expected to be immaterial, and in any event the Adviser may adjust the relevant transaction fee to ensure that the Fund collects the extra expense from the purchaser. Orders to create or redeem Shares of the Bullish Fund must be placed through an Authorized Participant, which is either (1) A broker-dealer or other participant in the continuous net settlement system of the NSCC or (2) a DTC participant, and which has entered into a participant agreement with the Distributor. As noted below in ‘‘Dissemination of Intra-Day Indicative Value (IIV),’’ the Exchange would disseminate through the facilities of the CTA, at least in 15 second intervals during the Exchange’s regular trading hours, the IIV on a per Share basis. The Funds would not be involved in, or responsible for, the calculation or dissemination of any such amount and would make no warranty as to its accuracy. Redemption of the Bullish Fund Bullish Fund Shares in Creation Unit aggregations would be redeemable on any day on which the New York Stock Exchange (‘‘NYSE’’) is open in exchange for a basket of securities (‘‘Redemption Securities’’). As it does for Deposit Securities, the Trust would make available to Authorized Participants on each business day prior to the opening of trading a list of the names and number of shares of Redemption Securities for each Fund. The Redemption Securities given to redeeming investors in most cases would be the same as the Deposit Securities required of investors purchasing Creation Units on the same day.33 Depending on whether the NAV 32 In certain limited instances, a 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. 33 There may be circumstances, however, where the Deposit and Redemption Securities could differ. For example, if ABC stock were replacing XYZ stock in a Fund’s Underlying Index at the close of today’s trading session, today’s prescribed Deposit Securities might include ABC but not XYZ, while PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 of a Creation Unit is higher or lower than the market value of the Redemption Securities, the redeemer of a Creation Unit would either receive from or pay to the Fund a cash amount equal to the difference (‘‘Redemption Balancing Amount’’).34 The redeeming investor also must pay to the Fund a transaction fee to cover transaction costs.35 A Fund has the right to make redemption payments in cash, in kind, or a combination of each, provided that the value of its redemption payments equals the NAV of the Shares tendered at the time of tender, and the Redemption Balancing Amount. The Adviser currently contemplates that Creation Units of the Bullish Fund would be redeemed principally in kind with respect to the Redemption Securities and a Balancing Amount in cash largely resulting from the value of the Financial Instruments included in the Fund. In order to facilitate delivery of Redemption Securities, each redeeming Authorized Participant, acting on behalf of such Beneficial Owner or a DTC Participant, must have arrangements with a broker-dealer, bank, or other custody provider in each jurisdiction in which any of the Redemption Securities are customarily traded. If neither the redeeming Beneficial Owner nor the Authorized Participant has such arrangements, and it is not otherwise possible to make other arrangements, the Fund may in its discretion redeem the Shares for cash. Creation and Redemption of the Bearish Funds The Bearish Funds would be purchased and redeemed entirely for cash (‘‘All-Cash Payments’’). The use of an All-Cash Payment for the purchase and redemption of Creation Unit aggregations of the Bearish Funds is due to the limited transferability of Financial Instruments. The Exchange believes that Shares would not trade at a material discount or premium to the underlying securities held by a Fund based on potential arbitrage opportunities. The arbitrage process, which provides the opportunity to profit from differences in prices of the today’s prescribed Redemption Securities might include XYZ but not ABC. 34 In the typical situation where the Redemption Securities are the same as the Deposit Securities, this cash amount would be equal to the Balancing Amount described above in the creation process. 35 Redemptions in which cash is substituted for one or more Redemption Securities may be assessed a higher transaction fee to offset the transaction cost to the Fund of selling those particular Redemption Securities. This fee is expected to be between $100 and $1,000. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices same or similar securities, increases the efficiency of the markets and serves to prevent potentially manipulative efforts. If the price of a Share deviates enough from the Creation Unit, on a per share basis, to create a material discount or premium, an arbitrage opportunity is created allowing the arbitrageur to either buy Shares at a discount, immediately cancel them in exchange for the Creation Unit and sell the underlying securities in the cash market at a profit, or sell Shares short at a premium and buy the Creation Unit in exchange for the Shares to deliver against the short position. In both instances the arbitrageur locks in a profit and the markets move back into line.36 Creation Unit Aggregation Purchase and Redemption Orders mstockstill on PROD1PC66 with NOTICES Creation Unit aggregations of the Funds would be purchased at NAV plus a transaction fee. For the Bearish Funds, the purchaser would make a cash payment by 12 p.m. ET on the third business day following the date on which the request was made (T+3) or earlier. For the Bullish Fund, the purchaser would make an in-kind payment and/or all cash payment generally on the third business day following the date on which the request was made (T+3) or earlier. Purchasers of the Funds in Creation Unit aggregations must satisfy certain creditworthiness criteria established by the Advisor and approved by the Board, as provided in the Authorized Participant Agreement between the Trust and Authorized Participants. Creation Unit aggregations of the Bullish Fund would be redeemable either in-kind or all in cash equal to the NAV less the transaction fee. Creation Unit aggregations of the Bearish Funds would be redeemable for an All-Cash Payment equal to the NAV less the transaction fee. A Bullish Fund has the right to make redemption payments in cash, in kind, or a combination of each, provided that the value of its redemption payments equals the NAV 36 In their 1940 Act Application, the Applicants stated that they do not believe that All-Cash Payments will affect arbitrage efficiency. This is because Applicants believe it makes little difference to an arbitrageur whether Creation Unit aggregations are purchased in exchange for a basket of securities or cash. The important function of the arbitrageur is to bid the share price of any Fund up or down until it converges with the NAV. Applicants note that this can occur regardless of whether the arbitrageur is allowed to create in cash or with a Deposit Basket. In either case, the arbitrageur can effectively hedge a position in a Fund in a variety of ways, including the use of market-on-close contracts to buy or sell the Financial Instruments. VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 of the Shares tendered for redemption at the time of tender.37 Dividends Dividends, if any, from net investment income would be declared and paid at least annually by each Fund in the same manner as by other openend investment companies. Certain Funds may pay dividends on a semiannual or more frequent basis. Distributions of realized securities gains, if any, generally would be declared and paid at least once a year. Dividends and other distributions on the Shares of each Fund would be distributed, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments would be made through the Depository and the DTC Participants to Beneficial Owners then of record with proceeds received from each Fund. The Trust would not make the DTC book-entry Dividend Reinvestment Service (‘‘Dividend Reinvestment Service’’) available for use by Beneficial Owners for reinvestment of their cash proceeds but certain individual brokers may make a Dividend Reinvestment Service available to Beneficial Owners. The SAI would inform investors of this fact and direct interested investors to contact such investor’s broker to ascertain the availability and a description of such a service through such broker. The SAI would also caution interested Beneficial Owners that they should note that each broker may require investors to adhere to specific procedures and timetables in order to participate in the service and such investors should ascertain from their broker such necessary details. Shares acquired pursuant to such service would be held by the Beneficial Owners in the same manner, and subject to the same terms and conditions, as for original ownership of Shares. Brokerage commissions charges and other costs, if any, incurred in purchasing Shares in the secondary market with the cash from the distributions generally would be an expense borne by the individual beneficial owners participating in reinvestment through such service. 37 In the event an Authorized Participant has submitted a redemption request in good order and is unable to transfer all or part of a Creation Unit aggregation for redemption, a Fund may nonetheless accept the redemption request in reliance on the Authorized Participant’s undertaking to deliver the missing Fund Shares as soon as possible, which undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral. The Authorized Participant Agreement will permit the Fund to buy the missing Shares at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Fund of purchasing the Shares and the value of the collateral. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 73411 Dissemination of Intra-Day Indicative Value (IIV) In order to provide updated information relating to each Fund for use by investors, professionals, and persons wishing to create or redeem Shares, the Exchange would disseminate through the facilities of the CTA: (i) Continuously throughout the trading day, the market value of a Share, and (ii) at least every 15 seconds throughout the trading day, a calculation of the IIV 38 as calculated by the Exchange (‘‘IIV Calculator’’).39 Comparing these two figures helps an investor to determine whether, and to what extent, the Shares may be selling at a premium or a discount to NAV. The IIV Calculator would calculate an IIV for each Fund in the manner discussed below. The IIV is designed to provide investors with a reference value that can be used in connection with other related market information. The IIV does not necessarily reflect the precise composition of the current portfolio held by each Fund at a particular point in time. Therefore, the IIV on a per Share basis disseminated during Amex trading hours should not be viewed as a real time update of the NAV of a particular Fund, which is calculated only once a day. While the IIV that would be disseminated by the Amex is expected to be close to the most recently calculated Fund NAV on a per Share basis, it is possible that the value of the portfolio held by a Fund may diverge from the IIV during any trading day. In such case, the IIV would not precisely reflect the value of the Fund portfolio. Calculation of the IIV for the Bullish Fund The IIV Calculator would disseminate the IIV throughout the trading day for the Fund holding equity securities and Financial Instruments. The IIV Calculator would determine such IIV by: (i) Calculating the estimated current value of equity securities held by the Fund (if applicable) by (a) calculating the percentage change in the value of 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 38 The intra-day indicative value or IIV is referred to by other issuers for different exchange-traded funds as an ‘‘Estimated NAV,’’ ‘‘Underlying Trading Value,’’ ‘‘Indicative Optimized Portfolio Value (IOPV),’’ and ‘‘Intraday Value’’ in various places such as the prospectus and marketing materials. 39 The Exchange will calculate the IIV for each Fund. E:\FR\FM\27DEN1.SGM 27DEN1 73412 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices securities held by the Fund (as provided by the Trust); (ii) calculating the markto-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 the Fund (which previous day’s notional value would 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 would 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. mstockstill on PROD1PC66 with NOTICES Calculation of the IIV for the Bearish Funds The IIV Calculator would disseminate the IIV throughout the trading day for the Bearish Funds. The IIV Calculator would determine such IIV by: (i) Calculating the mark-to-market gains or losses from the Fund’s total return equity swap exposure based on the percentage change to the Underlying Index and the previous day’s notional values of the swap contracts, if any, held by such Fund (which previous day’s notional value would be provided by the Trust); (ii) calculating the markto-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 would include the swap costs), to arrive at a value; and (iv) dividing that value by the total shares outstanding (as provided by the Trust) to obtain current IIV. Criteria for Initial and Continued Listing The Shares are subject to the criteria for initial and continued listing of Index Fund Shares in Rule 1002A. A minimum of two Creation Units (at least 150,000 Shares) would be required to be outstanding at the start of trading. This minimum number of Shares required to be outstanding at the start of trading would be comparable to requirements that have been applied to previously listed series of Index Fund Shares. The Exchange believes that the proposed VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 minimum number of Shares outstanding at the start of trading is sufficient to provide market liquidity. The Exchange, pursuant to Rule 1002A(a)(ii), will obtain a representation from the Trust (for each Fund), prior to listing, that the NAV per share for each Fund would be calculated daily and made available to all market participants at the same time. The Exchange represents the Trust is required to comply with Rule 10A–3 under the Act 40 for the initial and continued listing of the Shares. The Amex original listing fee applicable to the listing of the Funds is $5,000 for each Fund. In addition, the annual listing fee applicable to the Funds under section 141 of the Amex Company Guide would be based upon the year-end aggregate number of outstanding Shares in all Funds of the Trust listed on the Exchange. Amex Trading Rules and Trading Halts 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. The Funds would trade on the Amex until 4:15 p.m. ET each business day. Shares would trade with a minimum price variation of $.01. In addition, Amex Rule 154–AEMI(c)(ii) 41 and Commentary .04 to Amex Rule 190 42 apply to Index Fund Shares listed on the Exchange, including the Shares. In addition to other factors that may be relevant, the Exchange may consider factors such as those set forth in Amex Rule 918C(b) in exercising its discretion to halt or suspend trading in Index Fund Shares. These factors would include, but are not limited to, (1) The extent to which trading is not occurring in securities comprising an Underlying Index and/or the Financial Instruments of a Fund; or (2) whether other unusual conditions or circumstances detrimental 40 17 CFR 240.10A–3 (setting forth listing standards relating to audit committees). 41 Amex Rule 154–AEMI(c)(ii) provides that stop and stop limit orders to buy or sell a security (other than an option, which is covered by Amex Rule 950(f) and Amex Rule 950–ANTE(f) and Commentary thereto), the price of which is derivatively priced based upon another security or index of securities, may be elected by a quotation. The Exchange has designated Index Fund Shares, including the Shares, as eligible for this treatment. 42 Commentary .04 states that nothing in Amex Rule 190(a) should be construed to restrict a specialist registered in a security issued by an investment company from purchasing and redeeming the listed security or securities that can be subdivided or converted into the listed security from the issuer as appropriate to facilitate the maintenance of a fair and orderly market. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 to the maintenance of a fair and orderly market are present. In the case of the Financial Instruments held by a Fund, the Exchange represents that a notification procedure would 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 would be made by phone, facsimile or e-mail. The Exchange would then determine on a case-by-case basis whether a default of a particular Financial Instrument justifies a trading halt of the Shares. Trading in shares of the Funds would also be halted if the circuit breaker parameters under Amex Rule 117 have been reached. Amex Rule 1002A(b)(ii) sets forth the trading halt parameters with respect to Index Fund Shares. If the IIV or the Underlying Index value applicable to that series of Index Fund Shares is not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the IIV or the Underlying Index value occurs. If the interruption to the dissemination of the IIV or the Underlying Index value persists past the trading day in which it occurred, the Exchange would halt trading no later than the beginning of the trading day following the interruption. Information Circular The Exchange, in an Information Circular to Exchange members and member organizations, prior to the commencement of trading, will inform members and member organizations, regarding the application of Commentary .06 to Amex Rule 1000A– AEMI to the Funds. The Information Circular will further inform members and member organizations of the prospectus and/or Product Description delivery requirements that apply to the Funds.43 The Information Circular will also provide guidance with regard to member firm compliance responsibilities 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 set forth the requirements relating to Commentary .05 to Amex Rule 411 (Duty to Know and Approve Customers). Specifically, the 43 The Exchange states that the product description used in reliance on Section 24(d) of the 1940 Act (15 U.S.C. 80a–24(d)) will comply with all representations and conditions set forth in the Application. See supra note 24. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices Information Circular will remind members of their obligations in recommending transactions in the Shares so that members have a reasonable basis to believe that (1) the recommendation is suitable for a customer given reasonable inquiry concerning the customer’s investment objectives, financial situation, needs, and any other information known by such member, and (2) that the customer can evaluate the special characteristics, and is able to bear the financial risks, of such investment. In connection with the suitability obligation, the Information Circular will also provide that members make reasonable efforts to obtain the following information: (a) The customer’s financial status; (b) the customer’s tax status; (c) the customer’s 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. In addition, the Information Circular will disclose that the procedures for purchases and redemptions of Shares in Creation Units are described in each Fund’s prospectus and SAI, and that Shares are not individually redeemable, but are redeemable only in Creation Unit aggregations or multiples thereof. Surveillance The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Shares. Specifically, Amex would rely on its existing surveillance procedures governing Index Fund Shares. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. 2. Statutory Basis The proposed rule change is consistent with section 6(b) of the Act,44 in general, and furthers the objectives of section 6(b)(5),45 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. mstockstill on PROD1PC66 with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange states 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. 44 15 45 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 73413 IV. Commission’s Findings and Order Granting Accelerated Approval of the Proposed Rule Change After careful consideration, the Commission finds that the proposed The Exchange states that no written comments were solicited or received by rule change is consistent with the requirements of the Act and the rules the Exchange on this proposal. and regulations thereunder applicable to III. Solicitation of Comments a national securities exchange.46 In particular, the Commission finds that Interested persons are invited to the proposed rule change is consistent submit written data, views, and with section 6(b)(5) of the Act,47 which arguments concerning the foregoing, requires that an exchange have rules including whether the proposed rule designed, among other things, to change is consistent with the Act. promote just and equitable principles of Comments may be submitted by any of trade, to remove impediments to and the following methods: perfect the mechanism of a free and Electronic Comments open market and a national market Use the Commission’s Internet system, and, in general, to protect comment form (https://www.sec.gov/ investors and the public interest. The Commission notes that it previously rules/sro.shtml); or send an e-mail to approved the original listing and trading rulecomments@sec.gov. Please include of certain inverse leveraged fund shares File Number SR–Amex–2007–104 on based on a variety of indexes.48 The the subject line. Commission also notes that it has Paper Comments previously approved the listing and • Send paper comments in triplicate trading of exchange-traded funds based to Nancy M. Morris, Secretary, on three of the Underlying Indexes.49 Securities and Exchange Commission, The Commission notes that the 100 F Street, NE., Washington, DC Exchange has represented that the two 20549–1090. remaining Underlying Indexes meet the Exchange’s criteria for indexes All submissions should refer to File underlying Index Fund Shares that may Number SR–Amex–2007–104. This file be approved for listing and trading number should be included on the subject line if e-mail is used. To help the under Amex’s generic listing standards adopted pursuant to Rule 19b–4(e) Commission process and review your under the Act.50 comments more efficiently, please use The Commission further believes that only one method. The Commission will the proposal is consistent with section post all comments on the Commission’s 11A(a)(1)(C)(iii) of the Act,51 which sets Internet Web site (https://www.sec.gov/ forth Congress’ finding that it is in the rules/sro.shtml). Copies of the public interest and appropriate for the submission, all subsequent protection of investors and the amendments, all written statements maintenance of fair and orderly markets with respect to the proposed rule to assure the availability to brokers, change that are filed with the dealers, and investors of information Commission, and all written with respect to quotations for and communications relating to the transactions in securities. The Exchange proposed rule change between the Commission and any person, other than has represented that quotations and lastsale information for the Shares will be those that may be withheld from the disseminated over the Consolidated public in accordance with the Tape. In addition, the Exchange will provisions of 5 U.S.C. 552, will be disseminate by means of the CTA and available for inspection and copying in CQ High Speed lines, the IIV at least the Commission’s Public Reference every 15 seconds on a daily basis Section, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will 46 In approving this proposed rule change, the be available for inspection and copying Commission notes that it has considered the at the principal office of the Amex. All proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). comments received will be posted 47 15 U.S.C. 78f(b)(5). without change; the Commission does 48 See Securities Exchange Act Release Nos. not edit personal identifying 56592 (October 1, 2007), 72 FR 57364 (October 9, information from submissions. You 2007) (SR–Amex–2007–60) (approving the listing and trading of eight funds of ProShares Trust based should submit only information that you wish to make available publicly. All on international equity indexes; see also supra note 3. submissions should refer to File 49 See supra notes 9 to 11. Number SR–Amex–2007–104 and 50 See supra notes 12 and 13 and accompanying should be submitted on or before text. 51 15 U.S.C. 78k–1(a)(1)(C)(iii). January 17, 2008. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 E:\FR\FM\27DEN1.SGM 27DEN1 mstockstill on PROD1PC66 with NOTICES 73414 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices throughout Amex’s trading day, the most recent NAV for each Fund, the number of Shares outstanding for each Fund, and the estimated cash amount and total cash amount per Creation Unit. The Exchange will also make available on its Web site daily trading volume, the closing prices, the NAV, and the final dividend amounts to be paid for each Fund. The daily closing index value and the percentage change in the daily closing index value for each Underlying Index would be publicly available on various websites by independent market data vendors. Data regarding each Underlying Index is also available from the respective index provider to subscribers. For the Funds based on indexes based on fixed income securities, the index value would be calculated once daily.52 With respect to the Dow Jones U.S. Select Telecommunications Index, the value would be updated intra-day on a real time basis as its individual component securities change in price and would be disseminated at least every 15 seconds throughout the trading day by the Amex or another organization authorized by the relevant Underlying Index provider. The Trust’s Web site will contain a variety of other quantitative information for the Shares of each Fund. Finally, each Fund’s total portfolio composition will be disclosed on the Web site of the Trust or another relevant Web site as determined by the Trust and/or the Exchange. Web site disclosure of portfolio holdings will be made by the Trust on a daily basis and will include, as applicable, the specific types of Financial Instruments and characteristics of such instruments, the cash equivalents and amount of cash held in the portfolio of each Fund. Furthermore, the Commission believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The Commission notes that the Exchange 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.53 In addition, the Exchange represents that the Web site disclosure of the portfolio composition of each Fund and the disclosure by the 52 The value for the Underlying Indexes consisting of Fixed Income Securities (i.e., the Bearish Funds) are calculated once daily. 53 See Amex Rule 1002A(a)(ii). VerDate Aug<31>2005 18:00 Dec 26, 2007 Jkt 214001 Advisor of the IIV File and the PCF will occur at the same time. Commentaries .02(b)(i) and .03(b)(i) to Amex Rule 1000A–AEMI provides for ‘‘fire wall’’ procedures with respect to personnel who have access to information concerning changes and adjustments to the Underlying Index, among other things. Commentary .09 to Amex Rule 1000A–AEMI restricts members or persons associated with members who have knowledge of all material terms and conditions of an order being facilitated or orders being crossed to enter, based on such knowledge, an order to buy or sell a Share that is the subject of the order, an order to buy or sell the overlying option class, or an order to buy or sell any related instrument 54 until all the terms of the order are disclosed to the trading crowd or the trade is no longer imminent in view of the passage of time since the order was received. The Commission also believes that the Exchange’s trading halt rules are reasonably designed to prevent trading in the Shares when transparency is impaired. Amex Rule 1002A(b)(ii) provides that the Exchange will halt trading in the Shares if the circuit breaker parameters of Amex Rule 117 have been reached. In exercising its discretion to halt or suspend trading in the Shares, the Exchange may consider factors such as those set forth in Amex Rule 918C(b) and other relevant factors. In addition, Amex Rule 1002A(b)(ii) provides that, 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. The Commission further believes that the trading rules and procedures to which the Shares will be subject pursuant to this proposal are consistent with the Act. The Exchange has represented that the Shares are equity securities subject to Amex’s rules governing the trading of equity securities. 54 For purposes of Commentary .09, an order to buy or sell a ‘‘related instrument’’ means an order to buy or sell securities comprising ten percent or more of the component securities in the Underlying Index or an order to buy or sell a futures contract on any economically equivalent index. See Commentary .09 to Amex Rule 1000A–AEMI. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 In support of this proposal, the Exchange has made the following representations: 1. The Exchange’s surveillance procedures are adequate to properly monitor the trading of the Shares. Specifically, Amex will rely on its existing surveillance procedures governing Index Fund Shares. 2. Prior to the commencement of trading, the Exchange will inform its members and member organizations in an Information Circular regarding the application of Commentary .06 to Amex Rule 1000A–AEMI to the Funds and the prospectus and/or product description delivery requirements that apply to the Funds. The Information Circular will also provide guidance with regard to member firm compliance responsibilities 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 addition, the Information Circular will disclose that the procedures for purchases and redemptions of Shares in Creation Units are described in each Fund’s prospectus, and that Shares are not individually redeemable, but are redeemable only in Creation Unit aggregations or multiples thereof. 3. The Exchange represents that the Trust is required to comply with Rule 10A–3 under the Act 55 for the initial and continued listing of the Shares. 4. This Order is conditioned on Amex’s adherence to the foregoing representations. The Commission finds good cause to approve the proposed rule change, prior to the thirtieth day after publication for comment in the Federal Register pursuant to section 19(b)(2) of the Act.56 The Commission does not believes that the proposed rule change, as modified by Amendment No. 1, raises any novel regulatory issues. Accelerating approval will allow the Shares to trade on the Exchange without undue delay and should generate additional competition in the market for such products. V. Conclusion IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act,57 that the proposed rule change (SR– Amex–2007–104), as modified by Amendment No. 1, be and it hereby is, approved on an accelerated basis. 55 17 CFR 240.10A–3. U.S.C. 78s(b)(2). 57 15 U.S.C. 78s(b)(2). 56 15 E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices 73415 For the Commission, by the Division of Trade and Markets, pursuant to delegated authority.58 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24997 Filed 12–26–07; 8:45 am] (Authority: 13 CFR 120.3) Charles W. Thomas, Acting Director, Office of Financial Assistance. [FR Doc. E7–25102 Filed 12–26–07; 8:45 am] Dated: December 18, 2007. C. Miller Crouch, Principal Deputy Assistant Secretary for Educational and Cultural Affairs, Department of State. [FR Doc. E7–25070 Filed 12–26–07; 8:45 am] BILLING CODE 8011–01–P BILLING CODE 8025–01–P BILLING CODE 4710–05–P SMALL BUSINESS ADMINISTRATION DEPARTMENT OF STATE DEPARTMENT OF STATE [Public Notice 6041] CommunityExpress Pilot Program [Public Notice 6040] U.S. Small Business Administration (SBA). ACTION: Notice of Pilot Program extension. mstockstill on PROD1PC66 with NOTICES AGENCY: SUMMARY: This notice announces SBA’s extension of the CommunityExpress Pilot Program until March 30, 2008. This extension will allow SBA to complete and implement a restructuring of the CommunityExpress program. DATES: The CommunityExpress Pilot Program is extended under this notice until March 30, 2008. FOR FURTHER INFORMATION CONTACT: Charles Thomas, Office of Financial Assistance, U.S. Small Business Administration, 409 Third Street, SW., Washington, DC 20416; Telephone (202) 205–6490; charles.thomas@sba.gov. SUPPLEMENTARY INFORMATION: The CommunityExpress Pilot Program was established in 1999 based on the Agency’s SBAExpress Program. Lenders approved for participation in CommunityExpress are authorized to use the expedited loan processing procedures in place for the SBAExpress Program, but the loans approved under this Program must be to distressed or underserved markets. To encourage lenders to make these loans, SBA provides its standard 75–85 percent guaranty, which contrasts with the 50 percent guaranty the Agency provides under SBAExpress. However, under CommunityExpress, participating lenders must arrange and, when necessary, pay for appropriate technical assistance for their borrowers under the program. Maximum loan amounts under this Program are limited to $250,000. SBA previously extended CommunityExpress until December 31, 2007 (72 FR 13341), to discuss and develop possible changes and enhancements to the Program. The further extension of this Program until March 30, 2008, will allow SBA to develop several new concepts designed to improve the potential effectiveness and efficiency of the program and enhance the prospects of success for the small business borrowers under it. 58 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 18:32 Dec 26, 2007 Jkt 214001 Culturally Significant Objects Imported for Exhibition Determinations: ‘‘Rhythms of Modern Life: British Prints 1914–1939’’ SUMMARY: Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681, et seq.; 22 U.S.C. 6501 note, et seq.), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority No. 236 of October 19, 1999, as amended, and Delegation of Authority No. 257 of April 15, 2003 [68 FR 19875], I hereby determine that the objects to be included in the exhibition ‘‘Rhythms of Modern Life: British Prints 1914— 1939,’’ imported from abroad for temporary exhibition within the United States, are of cultural significance. The objects are imported pursuant to loan agreements with the foreign owners or custodians. I also determine that the exhibition or display of the exhibit objects at the Museum of Fine Arts, Boston, Boston, Massachusetts, from on or about January 30, 2008, until on or about June 1, 2008, the Metropolitan Museum of Art, New York, New York, from on or about September 23, 2008, until on or about December 7, 2008, The Wolfsonian at Florida International University, Miami Beach, Florida, from on or about January 1, 2009, until on or about April 1, 2009, and at possible additional exhibitions or venues yet to be determined, is in the national interest. Public Notice of these Determinations is ordered to be published in the Federal Register. For further information, including a list of the exhibit objects, contact Paul W. Manning, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202/453–8052). The address is U.S. Department of State, SA– 44, 301 4th Street, SW., Room 700, Washington, DC 20547–0001. FOR FURTHER INFORMATION CONTACT: PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 Culturally Significant Objects Imported for Exhibition Determinations: ‘‘Wine, Worship and Sacrifice: The Golden Graves of Ancient Vani’’ Department of State. Notice, correction. AGENCY: ACTION: SUMMARY: On October 11, 2007, notice was published on page 57987 of the Federal Register (volume 72, number 196) of determinations made by the Department of State pertaining to the exhibition ‘‘Wine, Worship and Sacrifice: The Golden Graves of Ancient Vani.’’ The referenced notice is corrected as to two additional objects to be included in the exhibition. Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681, et seq.; 22 U.S.C. 6501 note, et seq.), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority No. 236 of October 19, 1999, as amended, and Delegation of Authority No. 257 of April 15, 2003 [68 FR 19875], I hereby determine that the additional objects to be included in the exhibition ‘‘Wine, Worship and Sacrifice: The Golden Graves of Ancient Vani’’, imported from abroad for temporary exhibition within the United States, are of cultural significance. The additional objects are imported pursuant to loan agreements with the foreign owners or custodians. I also determine that the exhibition or display of the additional exhibit objects at the Institute for the Study of the Ancient World, New York, New York, from on or about March 10, 2008 until on or about June 1, 2008, and at possible additional exhibitions or venues yet to be determined, is in the national interest. Public Notice of these Determinations is ordered to be published in the Federal Register. FOR FURTHER INFORMATION CONTACT: For further information, including a list of the exhibit objects, contact Wolodymyr Sulzynsky, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202/453–8050). The E:\FR\FM\27DEN1.SGM 27DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 247 (Thursday, December 27, 2007)]
[Notices]
[Pages 73404-73415]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24997]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56998; File No. SR-Amex-2007-104]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, To List and Trade 
Shares of Eleven Funds of the ProShares Trust

December 19, 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 September 18, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Exchange. On December 18, 2007, Amex filed Amendment No. 1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons and is approving the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares (``Shares'') of 11 
funds (``Funds'') of the ProShares Trust (``Trust'') based on a 
domestic stock index and several fixed income indexes.
    The text of the proposed rule change is available at https://
www.amex.com, at the Exchange 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, Amex 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. Amex 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 list under amended Rule 1000A-AEMI, shares 
of 10 new funds of the Trust that are designated as Short Funds or 
UltraShort Funds, and one new fund designated as an Ultra Fund. Amex 
Rules 1000A-AEMI and Rule 1001A through 1005A provide standards for the 
listing of Index Fund Shares, which are securities issued by an open-
end management investment company for exchange trading. These 
securities are registered under the Investment Company Act of 1940 
(``1940 Act'') as well as the Act. Index Fund Shares are defined in 
Rule 1000A-AEMI(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.
    Rule 1000A-AEMI(b)(2) permits the Exchange to list and trade Index 
Fund Shares that seek to provide investment results that exceed the 
performance of an underlying securities index by a specified multiple, 
or that seek to provide investment results that correspond to a 
specified multiple of the inverse or opposite of the index's 
performance. The Commission has recently approved the listing and 
trading of certain Ultra Funds, Short Funds and UltraShort Funds based 
on a variety of underlying indexes.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (SR-Amex-2004-62)(''Original 
Order''); see also Securities Exchange Act Release Nos. 54040 (June 
23, 2006), 71 FR 37669 (June 30, 2006) (SR-Amex 2006-41); 55117 
(January 17, 2007), 72 FR 3442 (January 25, 2007) (SR-Amex-2006-
101).

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

[[Page 73405]]

    Each of the Funds will have a distinct investment objective.\4\ 
Each Fund will attempt, on a daily basis, to achieve its investment 
objective by corresponding to a specified multiple of the performance, 
the inverse performance, or an inverse multiple of the performance of a 
particular fixed income or equity securities index (individually 
referred to as the ``Underlying Index'' and collectively referred to as 
the ``Underlying Indexes'') as briefly described below. The Funds will 
be based on the following benchmark indexes:
---------------------------------------------------------------------------

    \4\ The Funds are as follows: (1) Short Lehman Brothers 7-10 
Year U.S. Treasury ProShares; (2) Short Lehman Brothers 20+ Year 
U.S. Treasury ProShares; (3) Short iBoxx $ Liquid Investment Grade 
ProShares; (4) Short iBoxx $ Liquid High Yield ProShares; (5) Short 
Dow Jones Select Telecommunications ProShares; (6) UltraShort Lehman 
Brothers 7-10 Year U.S. Treasury ProShares; (7) UltraShort Lehman 
Brothers 20+ Year U.S. Treasury ProShares; (8) UltraShort iBoxx $ 
Liquid Investment Grade ProShares; (9) UltraShort iBoxx $ Liquid 
High Yield ProShares; (10) UltraShort Dow Jones Select 
Telecommunications ProShares; and (11) Ultra Dow Jones Select 
Telecommunications ProShares.
---------------------------------------------------------------------------

     Lehman Brothers 7-10 Year U.S. Treasury Index;
     Lehman Brothers 20+ Year U.S. Treasury Index;
     iBoxx $ Liquid Investment Grade Index;
     iBoxx $ Liquid High Yield Index; and
     Dow Jones U.S. Select Telecommunications Index (together, 
the ``Underlying Indexes'').\5\
---------------------------------------------------------------------------

    \5\ The Statement of Additional Information (``SAI'') for the 
Funds discloses that each Fund reserves the right to substitute a 
different Index. Substitution could occur if the Index becomes 
unavailable, no longer serves the investment needs of shareholders, 
the Fund experiences difficulty in achieving investment results that 
correspond to the Index or for any other reason determined in good 
faith by the Board of Trustees of the Trust. In such instance, the 
substitute index would attempt to measure the same general market as 
the current index. Consistent with applicable law, shareholders will 
be notified (either directly or through their intermediary) in the 
event a Fund's current index is replaced.
---------------------------------------------------------------------------

    Short Funds:
    The Exchange proposes to list and trade shares of the Funds that 
seek daily investment results, before fees and expenses, that 
correspond to the inverse or opposite of the daily performance (-100%) 
of the Underlying Indexes (``Short Funds''). If each of these Funds is 
successful in meeting its objective, the net asset value (``NAV'') of 
shares of each Fund should increase approximately as much, on a 
percentage basis, as the respective Underlying Index loses when the 
prices of the securities in the Index decline on a given day, or should 
decrease approximately as much as the respective Index gains when the 
prices of the securities in the index rise on a given day, before fees 
and expenses.
    UltraShort Funds:
    The Exchange also proposes to list and trade shares of the Funds 
that seek daily investment results, before fees and expenses that 
correspond to twice the inverse (-200%) of the daily performance of the 
Underlying Indexes (``UltraShort Funds''). If each of these Funds is 
successful in meeting its objective, the NAV of shares of each Fund 
should increase approximately twice as much, on a percentage basis, as 
the respective Underlying Index loses when the prices of the securities 
in the Index decline on a given day, or should decrease approximately 
twice as much as the respective Underlying Index gains when the prices 
of the securities in the index rise on a given day, before fees and 
expenses.
    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.''
    Ultra Fund:
    Finally, the Exchange proposes to list and trade shares of one Fund 
\6\ that seeks daily investment results, before fees and expenses, that 
corresponds to twice (200%) the daily performance of the Underlying 
Index (``Ultra Fund'' or ``Bullish Fund''). This Fund, if successful in 
meeting its investment objective, should gain, on a percentage basis, 
approximately twice as much as the Fund's Underlying Index when the 
price of the securities in such Index increase on a given day, and 
should lose approximately twice as much when such prices decline on a 
given day.
---------------------------------------------------------------------------

    \6\ The Ultra Fund will be based on the Dow Jones U.S. Select 
Telecommunications Index.
---------------------------------------------------------------------------

Underlying Indexes

    According to Rule 1000A-AEMI(b)(2), the Exchange may not list and 
trade Index Fund Shares under its generic listing standards adopted 
pursuant to Rule 19b-4(e) if the Index Fund Shares are leveraged, that 
is, they seek to provide investment results that either exceed or 
correspond to the inverse of the performance of a specified foreign or 
domestic stock index by a specified multiple.\7\ While the Exchange is 
proposing to list and trade the Funds pursuant to section 19(b)(1) of 
the Act, the Exchange represents that the indexes and their respective 
components (as described below) comply with the generic listing 
standards set forth in Commentary .02 and Commentary .03 to Amex Rule 
1000A-AEMI.\8\
---------------------------------------------------------------------------

    \7\ See Rule 1000A-AEMI(b)(2)(iii) and Commentary .02 thereto.
    \8\ The Exchange represents that Shares based on the Underlying 
Indexes would meet the criteria set forth in Commentary .04 through 
.06, .08 and .09 to Amex Rule 1000A-AEMI.
---------------------------------------------------------------------------

Lehman Brothers 7-10 Year U.S. Treasury Index
    The index is market capitalization weighted and includes all 
publicly issued U.S. Treasury Securities that have a remaining maturity 
of between 7 and 10 years and have more than $250 million par 
outstanding. The index value is calculated and published daily by 10:00 
p.m. Eastern Time (``ET''). The Commission has previously approved the 
listing and trading on the Amex of an exchange-traded fund based on the 
iShares Lehman 7-10 Year Treasury Index.\9\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 46252 (July 24, 
2002), 67 FR 49715 (July 31, 2002) (SR-Amex-2001-35). The iShares 
Lehman Brothers 7-10 Year Treasury Bond ETF (IEF) is listed and 
traded on the Exchange.
---------------------------------------------------------------------------

Lehman Brothers 20+ Year U.S. Treasury Index

    The index is market capitalization weighted and includes all 
publicly issued U.S. Treasury Securities that have a remaining maturity 
greater than 20 years and have more than $150 million par outstanding. 
The index value is calculated and published daily by 10:00 p.m. ET. The 
Commission has previously approved the listing and trading on the Amex 
of an exchange-traded fund based on the Lehman Brothers 20+ Year U.S. 
Treasury Index.\10\
---------------------------------------------------------------------------

    \10\ See id. The iShares Lehman Brothers 20+ Year Treasury Bond 
ETF (TLT) is listed and traded on the Exchange.
---------------------------------------------------------------------------

iBoxx $ Liquid Investment Grade Index

    The index is a rules-based index consisting of up to 100 highly 
liquid, investment grade, U.S. dollar-denominated corporate bonds with 
a minimum amount outstanding of $500 million that seeks to maximize 
liquidity while maintaining representation of the broader investment 
grade corporate bond market. The index consists of issuers domiciled in 
the U.S., Bermuda, Cayman Islands, Canada, Japan or Western Europe. The 
index is equally priced weighted and is re-balanced monthly. The index 
value is calculated and published daily by 4:30 p.m. ET. The Commission 
has previously approved the listing and trading on the Amex of an 
exchange-traded fund based

[[Page 73406]]

on the iBoxx $ Liquid Investment Grade Index.\11\
---------------------------------------------------------------------------

    \11\ See id. The iShares iBoxx $ Investment Grade Corporate Bond 
Fund (LQD) (formerly the GS $ InvesTop Index) is listed and traded 
on the Exchange.
---------------------------------------------------------------------------

iBoxx $ Liquid High Yield Index

    The index is a rules-based index consisting of up to 50 of the most 
liquid, high yield, U.S. dollar-denominated corporate bonds with a 
minimum amount outstanding of $200 million that seeks to maximize 
liquidity while maintaining representation of the broader high yield 
corporate bond market. The index consists of issuers domiciled in the 
U.S., Bermuda, Cayman Islands, Canada, Japan, or Western Europe. The 
index is equally priced weighted and is re-balanced monthly. The index 
value is calculated and published daily by 4:30 p.m. ET. An exchange-
traded fund based on the iBoxx $ Liquid High Yield Index is listed and 
trade on the Exchange.\12\
---------------------------------------------------------------------------

    \12\ The iBoxx High Yield Corporate Bond Fund (HYG) is listed 
and traded on the Exchange pursuant to the Exchange's generic 
listing standards. See Commentary .03 to Rule 1000A-AEMI (setting 
forth standards for indexes based on fixed income securities).
---------------------------------------------------------------------------

Dow Jones U.S. Select Telecommunications Index

    The Dow Jones U.S. Select Telecommunications Index is a float-
adjusted market capitalization weighted index designed to measure the 
performance of the telecommunications economic sector of the U.S. 
equity market. Component companies include fixed line and mobile 
telecommunications companies. Component weights are capped for 
diversification. The universe for the index includes all common stocks 
of companies in the Dow Jones U.S. Select Telecommunications Index that 
are categorized as belonging to the telecommunications sector, based on 
Industry Classification Benchmark (ICB) definitions. The company at the 
90% cumulative market capitalization of the index must have a float 
adjusted market capitalization of at least $75 million. The Index value 
is calculated and disseminated every 15 seconds during Amex's trading 
hours.
    The Exchange represents that the Dow Jones U.S. Select 
Telecommunications Index meets the Exchange's generic listing standards 
for Index Fund Shares.\13\
---------------------------------------------------------------------------

    \13\ See Commentary .02 to Rule 1000A-AEMI.
---------------------------------------------------------------------------

The Funds

    ProShare Advisors LLC is the investment advisor (``Advisor'') to 
each Fund. The Advisor is registered under the Investment Advisers Act 
of 1940.\14\ While the Advisor will manage each Fund, the Trust's Board 
of Trustees (``Board'') will have overall responsibility for the Funds' 
operations. The composition of the Board is, and will be, in compliance 
with the requirements of section 10 of the 1940 Act.
---------------------------------------------------------------------------

    \14\ The Trust, Advisor and Distributor (``Applicants'') have 
filed with the Commission an Application to amend the Order under 
Sections 6(c) and 17(b) of the 1940 Act (the ``Application'') for 
the purpose of exempting the Funds of the Trust from various 
provisions of the 1940 Act. (File No. 812-13382).
---------------------------------------------------------------------------

    SEI Investments Distribution Company (``Distributor''), a broker-
dealer registered under the Act, would act as the distributor and 
principal underwriter of the Shares. JPMorgan Chase Bank, N.A. would 
act as the index receipt agent (``Index Receipt Agent'') for the 
Bullish Fund for which it will receive fees. The Index Receipt Agent 
would be responsible for transmitting a list of names and the required 
number of shares of each deposit basket of equity securities (``Deposit 
Securities'') to be included in the Creation Deposit for the Bullish 
Fund (``Deposit List'') to the National Securities Clearing Corporation 
(``NSCC'') and for the processing, clearance and settlement of purchase 
and redemption orders through the facilities of the Depository Trust 
Company (``DTC'') and NSCC on behalf of the Trust. When applicable, the 
Index Receipt Agent will also be responsible for the coordination and 
transmission of files and purchase and redemption orders between the 
Distributor and the NSCC.
    Shares of the Funds issued by the Trust will be a class of 
exchange-traded securities that represent an interest in the portfolio 
of a particular Fund.\15\ Shares would be registered in book-entry form 
only and the Trust would not issue individual share certificates. The 
DTC or its nominee would be the record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares would be shown on 
the records of DTC or DTC Participants.
---------------------------------------------------------------------------

    \15\ The Trust is also registered as a business trust under the 
Delaware Corporate Code.
---------------------------------------------------------------------------

Investment Objective of the Funds

    The Bearish Funds would seek daily investment results, before fees 
and expenses, of the inverse or opposite (-100%) of the Underlying 
Index while the UltraShort funds would seek daily investment results, 
before fees and expenses, of twice the inverse or opposite (-200%) of 
the daily performance of the Underlying Index. The Bearish Funds would 
not invest directly in the component securities of the relevant 
Underlying Index, but instead, would create short exposure to such 
Index. Each Bearish Fund would rely on establishing positions in 
financial instruments (as defined below) that provide, on a daily 
basis, the inverse or opposite of, or twice the inverse or opposite of, 
the performance of the relevant Underlying Index. Normally 100% of the 
value of the portfolios of each Fund would be devoted to such financial 
instruments and money market instruments.
    The Bullish Fund would seek investment results that corresponds, 
before fees and expenses, to twice (200%) the daily performance of the 
Underlying Index and would invest its assets based upon the same 
strategies as conventional index funds. Rather than holding positions 
in equity securities and financial instruments intended to create 
exposure to 100% of the daily performance of an underlying index, the 
Bullish Fund would hold equity securities and financial instruments 
positions designed to create exposure equal to twice (200%), before 
fees and expenses, the daily performance of the Underlying Index. The 
Bullish Fund generally would hold 85% to 100% of its assets in the 
component equity securities of the Underlying Index. The remainder of 
assets would be devoted to Financial Instruments and Money Market 
Instruments (as defined below) that are intended to create the 
additional needed exposure to such Underlying Index necessary to pursue 
its investment objective.
    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 (``Financial Instruments''). Money market 
instruments include U.S. government securities and repurchase 
agreements \16\ (``Money Market Instruments'').
---------------------------------------------------------------------------

    \16\ Repurchase agreements held by the Funds will be consistent 
with Rule 2a-7 under the 1940 Act.
---------------------------------------------------------------------------

    While the Advisor would attempt to minimize any ``tracking error'' 
between the investment results of a particular Fund and the performance 
(and specified multiple thereof) or the inverse performance (and 
specified multiple thereof) of its Underlying Index, certain factors 
may tend to cause the investment results of a Fund to vary from such 
relevant Underlying Index or

[[Page 73407]]

specified multiple thereof.\17\ The Bullish Fund is expected to be 
highly correlated to the Underlying Index and investment objective (.95 
or greater). The Bearish Funds are expected to be highly inversely 
correlated to each Underlying Index and investment objective (-.95 or 
greater).\18\ In each case, the Funds are expected to have a daily 
tracking error of less than 5% (500 basis points) relative to the 
specified multiple, inverse, or inverse multiple of the performance of 
the relevant Underlying Index.
---------------------------------------------------------------------------

    \17\ Several factors may cause a Fund to vary from the relevant 
Underlying Index and investment objective including: (1) A Fund's 
expenses, including brokerage fees (which may be increased by high 
portfolio turnover) and the cost of the investment techniques 
employed by that Fund; (2) less than all of the securities in the 
benchmark index being held by a Fund and securities not included in 
the benchmark index being held by a Fund; (3) an imperfect 
correlation between the performance of instruments held by a Fund, 
such as futures contracts, and the performance of the underlying 
securities in the cash market; (4) bid-ask spreads (the effect of 
which may be increased by portfolio turnover); (5) holding 
instruments traded in a market that has become illiquid or 
disrupted; (6) a Fund's share prices being rounded to the nearest 
cent; (7) changes to the benchmark index that are not disseminated 
in advance; (8) the need to conform a Fund's portfolio holdings to 
comply with investment restrictions or policies or regulatory or tax 
law requirements; and (9) early and unanticipated closings of the 
markets on which the holdings of a Fund trade, resulting in the 
inability of the Fund to execute intended portfolio transactions.
    \18\ Correlation is the strength of the relationship between (1) 
the change in a Fund's NAV and (2) the change in the benchmark index 
(investment objective). The statistical measure of correlation is 
known as the ``correlation coefficient.'' A correlation coefficient 
of +1 indicates a perfect positive correlation while a value of -1 
indicates a perfect negative (inverse) correlation. A value of zero 
would mean that there is no correlation between the two variables.
---------------------------------------------------------------------------

The Portfolio Investment Methodology

    The Advisor would seek to establish an investment exposure in each 
portfolio corresponding to each Fund's investment objective based upon 
its Portfolio Investment Methodology. The Portfolio Investment 
Methodology is a mathematical model based on well-established 
principles of finance that are widely used by investment practitioners, 
including conventional index fund managers.
    As set forth in the Application, the Portfolio Investment 
Methodology was designed to determine for each Fund the portfolio 
investments needed to achieve its stated investment objectives. The 
Portfolio Investment Methodology takes into account a variety of 
specified criteria and data (``Inputs''), 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 (if applicable), Financial Instruments and/or Money 
Market Instruments at the beginning of each trading day. The Advisor, 
pursuant to the methodology, would then mathematically determine the 
end-of-day positions to establish the required amount of exposure to 
the Underlying Index (``Solution''), which would consist of equity 
securities (if applicable), 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 
(if applicable), Financial Instruments and/or Money Market Instruments 
that must be bought or sold for the day. The Solution represents the 
required exposure and, when necessary, is converted into an order or 
orders to be filled that same day.
    Generally, portfolio trades effected pursuant to the Solution are 
reflected in the NAV on the first business day (T+1) after the date the 
relevant trade is made. Therefore, the NAV calculated for a Fund on a 
given day should reflect the trades executed pursuant to the prior 
day's Solution. For example, trades pursuant to the Solution calculated 
on a Monday afternoon are executed on behalf of the Fund in question on 
that day. For the Bearish Funds described herein, these trades would 
then be reflected in the NAV for that Fund that is generally calculated 
as of 3 p.m. ET on Tuesday (or earlier as necessary).\19\
---------------------------------------------------------------------------

    \19\ The Bearish Funds are based on the following fixed income 
indexes: (1) The Lehman Brothers 7-10 Year U.S. Treasury Index; (2) 
the Lehman Brothers 20+ Year U.S. Treasury Index; (3) the iBoxx $ 
Liquid Investment Grade Index; and (4) the iBoxx $ Liquid High Yield 
Index.
---------------------------------------------------------------------------

    The timeline for the Methodology is as follows: Authorized 
Participants (``APs'' or ``Authorized Participant'') have a 2 p.m. ET 
cut-off (or earlier as necessary) for orders submitted by telephone, 
facsimile and other electronic means of communication and a 4 p.m. ET 
cut-off for orders received via mail.\20\ AP orders by mail are 
exceedingly rare. Orders are received by the Distributor and relayed to 
the Advisor within 10 minutes. The Advisor would know by 2:10 p.m. ET 
the number of creation/redemption orders by APs for that day. 
Subsequently, the Advisor generally puts orders into the market between 
2:30 p.m. and 2:55 p.m. ET in order to obtain requisite portfolio 
exposure consistent with the Solution. At 3 p.m. ET, the Advisor would 
again look at the exposure to make sure that the orders placed are 
consistent with the Solution, and as described above, the Advisor would 
execute any other transactions in Financial Instruments to assure that 
the Fund's exposure is consistent with the Solution.
---------------------------------------------------------------------------

    \20\ An Authorized Participant is either (1) A broker-dealer or 
other participant in the continuous net settlement system of the 
NSCC or (2) A DTC participant, and which has entered into a 
participant agreement with the Distributor. Orders for the ten Short 
Funds and UltraShort Funds described herein may not be placed on 
days where the equity markets are open, but the fixed income markets 
are closed.
---------------------------------------------------------------------------

    For the Bullish Fund,\21\ 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 would then be reflected in the NAV 
for that Fund that is calculated as of 4 p.m. ET on Tuesday.
---------------------------------------------------------------------------

    \21\ This fund is based on the Dow Jones U.S. Select 
Telecommunications Index.
---------------------------------------------------------------------------

    The timeline for the Methodology is as follows: Authorized 
Participants have a 3 p.m. ET cut-off for orders submitted by 
telephone, facsimile and other electronic means of communication and a 
4 p.m. ET cut-off for orders received via mail. AP orders by mail are 
exceedingly rare. Orders are received by the Distributor and relayed to 
the Advisor within 10 minutes. The Advisor would know by 3:10 p.m. ET 
the number of creation/redemption orders by APs for that day. Orders 
are then placed at approximately 3:40 p.m. ET as market-on-close (MOC) 
orders. At 4 p.m. ET, the Advisor would again look at the exposure to 
make sure that the orders placed are consistent with the Solution, and 
as described above, the Advisor would execute any other transactions in 
Financial Instruments to assure that the Fund's exposure is consistent 
with the Solution.

Description of Investment Techniques

    In attempting to achieve its individual investment objectives, a 
Fund may invest its assets in equity securities, Financial Instruments 
and Money Market Instruments (collectively, ``Portfolio Investments''). 
The Bullish Fund would hold between 85-100% of its total assets in the 
equity securities contained in the relevant Underlying Index. The 
remainder of assets, if any, would be devoted to Financial Instruments 
and Money Market Instruments that are intended to create additional 
needed exposure to such

[[Page 73408]]

Underlying Index necessary to pursue the Bullish Fund's investment 
objectives. The Bearish Funds generally would not invest in equity 
securities but rather would hold only Financial Instruments and Money 
Market Instruments. To the extent applicable, each Fund would comply 
with the requirements of the 1940 Act with respect to ``cover'' for 
Financial Instruments and thus may hold a significant portion of its 
assets in liquid instruments in segregated accounts.
    Each Fund may engage in transactions in futures contracts on 
designated contract markets where such contracts trade, and would only 
purchase and sell futures contracts traded on a U.S. futures exchange 
or board of trade. Each Fund would comply with the requirements of Rule 
4.5 of the regulations promulgated by the Commodity Futures Trading 
Commission (``CFTC'').\22\
---------------------------------------------------------------------------

    \22\ The CFTC Rule 4.5 provides an exclusion for investment 
companies registered under the 1940 Act from the definition of a 
``commodity pool operator'' upon the filing of a notice of 
eligibility with the National Futures Association.
---------------------------------------------------------------------------

    Each Fund may enter into swap agreements and/or forward contracts 
for the purposes of attempting to gain exposure to the equity 
securities of its Underlying Index without actually transacting such 
securities. The counterparties to the swap agreements and/or forward 
contracts would be major broker-dealers and banks. The creditworthiness 
of each potential counterparty is assessed by the Advisor's credit 
committee pursuant to guidelines approved by the Board. Existing 
counterparties are reviewed periodically by the Board or its designee. 
Each Fund may also enter into repurchase and reverse repurchase 
agreements with terms of less than one year, and would only enter into 
such agreements with (i) members of the Federal Reserve System, (ii) 
primary dealers in U.S. government securities, or (iii) major broker-
dealers. Each Fund may also invest in Money Market Instruments, in 
pursuit of its investment objectives, as ``cover'' for Financial 
Instruments, as described above, or to earn interest.
    The Trust would adopt certain fundamental policies consistent with 
the 1940 Act and each Fund would be classified as ``non-diversified'' 
under the 1940 Act. Each Fund, however, intends to maintain the 
required level of diversification and otherwise conduct its operations 
so as to qualify as a ``regulated investment company'' (``RIC'') for 
purposes of the Internal Revenue Code (``Code''), in order to relieve 
the Trust and the Funds of any liability for Federal income tax to the 
extent that its earnings are distributed to shareholders.\23\
---------------------------------------------------------------------------

    \23\ In order for a fund to qualify for tax treatment as a RIC, 
it must meet several requirements under the Code. Among these is the 
requirement that, at the close of each quarter of the Fund's taxable 
year, (i) at least 50% of the market value of the Fund's total 
assets must be represented by cash items, U.S. government 
securities, securities of other RICs, and other securities, with 
such other securities limited for purposes of this calculation in 
respect of any one issuer to an amount not greater than 5% of the 
value of the Fund's assets and not greater than 10% of the 
outstanding voting securities of such issuer, and (ii) not more than 
25% of the value of its total assets may be invested in the 
securities of any one issuer, or two or more issuers that are 
controlled by the Fund (within the meaning of Section 851(b)(4)(B) 
of the Internal Revenue Code and that are engaged in the same or 
similar trades or businesses or related trades or businesses other 
than U.S. government securities or the securities of other regulated 
investment companies.
---------------------------------------------------------------------------

Availability of Information about the Shares and Underlying Indexes

    The Trust's Web site, which is and would be publicly accessible at 
no charge, would 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/or Product Description; and (d) other quantitative information such 
as daily trading volume. The Prospectus and/or Product Description for 
each Fund would inform investors that the Trust's Web site has 
information about the premiums and discounts at which the Fund's Shares 
have traded.\24\
---------------------------------------------------------------------------

    \24\ 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 .06 of Amex Rule 1000A-AEMI 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.
---------------------------------------------------------------------------

    The Amex would disseminate for each Fund on a daily basis every 15 
seconds by means of the Consolidated Tape Association (``CTA'') and CQ 
High Speed Lines information with respect to an Intra-Day Indicative 
Value (``IIV'') (as defined and discussed below under ``Dissemination 
of Intra-Day Indicative Value (IIV)''), recent NAV, shares outstanding, 
estimated cash amount and total cash amount per Creation Unit.\25\ The 
Exchange would make available on its Web site daily trading volume, 
closing price, the NAV and final dividend amounts to be paid for each 
Fund.
---------------------------------------------------------------------------

    \25\ Quotations and last-sale information for the Funds' Shares 
are disseminated over the Consolidated Tape.
---------------------------------------------------------------------------

    Each Fund's total portfolio composition would be disclosed on the 
Web site of the Trust (https://www.proshares.com) or another relevant 
Web site as determined by the Trust and/or the Exchange (https://
www.amex.com). Web site disclosure of portfolio holdings would be made 
by the Trust on a daily basis and would include, as applicable, the 
names and number of shares held of each equity security (if 
applicable), the specific types of Financial Instruments and 
characteristics of such instruments, cash equivalents and amount of 
cash held in the portfolio of each Fund. This public Web site 
disclosure of the portfolio composition of each Fund would coincide 
with the disclosure by the Advisor of the ``IIV File'' (described 
below) and the ``PCF File,'' when applicable (described below). 
Therefore, the same portfolio information (including accrued expenses 
and dividends) would be provided on the public Web site as well as in 
the IIV File and PCF File (when applicable) provided to ``Authorized 
Participants'' (defined below). The format of the public Web site 
disclosure and the IIV File and PCF File (when applicable) would differ 
because the public Web site would list all portfolio holdings while the 
IIV File and PCF File (when applicable) would similarly provide the 
portfolio holdings but in a format appropriate for Authorized 
Participants, i.e., the exact components of a Creation Unit.\26\ 
Accordingly, each investor would have access to the current portfolio 
composition of each Fund through the Trust's Web site, at https://
www.proshares.com, and/or at the Exchange's Web site at https://
www.amex.com.
---------------------------------------------------------------------------

    \26\ The composition will be used to calculate the NAV later 
that day.
---------------------------------------------------------------------------

    Beneficial owners of Shares (``Beneficial Owners'') would receive 
all of the statements, notices, and reports required under the 1940 Act 
and other applicable laws. They would receive, for example, annual and 
semi-annual fund reports, written statements

[[Page 73409]]

accompanying dividend payments, proxy statements, annual notifications 
detailing the tax status of fund distributions, and Form 1099-DIVs. 
Some of these documents would be provided to Beneficial Owners by their 
brokers, while others would be provided by the Fund through the 
brokers.
    The daily closing index value and the percentage change in the 
daily closing index value for each Underlying Index would be publicly 
available on various websites by independent market data vendors, e.g., 
https://www.bloomberg.com. Data regarding each Underlying Index is also 
available from the respective index provider to subscribers. With 
respect to the Lehman Brothers 7-10 Year U.S. Treasury Index, the 
Lehman Brothers 20+ Year U.S. Treasury Index, the iBoxx $ Liquid 
Investment Grade Index and the iBoxx $ Liquid High Yield Index, as 
noted above, the index value would be calculated once daily. With 
respect to the Dow Jones U.S. Select Telecommunications Index, the 
value would be updated intra-day on a real time basis as its individual 
component securities change in price. This intra-day value of this 
index would be disseminated at least every 15 seconds throughout the 
trading day by the Amex or another organization authorized by the 
relevant Underlying Index provider.

Creation and Redemption of Shares

    Each Fund would issue and redeem Shares only in initial 
aggregations of at least 75,000 (``Creation Units''). Purchasers of 
Creation Units would be able to separate the Units into individual 
Shares. Once the number of Shares in a Creation Unit is determined, it 
would not change thereafter (except in the event of a stock split or 
similar revaluation). The initial value of a Share for each Fund is 
expected to be in the range of $50-$250.
    At the end of each business day, the Trust would prepare the list 
of names and the required number of shares of each Deposit Security to 
be included in the next trading day's Creation Unit for the Bullish 
Fund. The Trust would then add to the Deposit List, the cash 
information effective as of the close of business on that business day 
and create a portfolio composition file (``PCF'') for the Fund, which 
it would transmit to NSCC before the open of business the next business 
day. The information in the PCF would be available to all participants 
in the NSCC system.
    Because the NSCC's system for the receipt and dissemination to its 
participants of the PCF is not currently capable of processing 
information with respect to Financial Instruments, the Advisor has 
developed an ``IIV File,'' which it would use to disclose the Funds' 
holdings of Financial Instruments.\27\ The IIV File would contain, for 
the Bullish Fund (to the extent that it holds Financial Instruments) 
and Bearish Funds, information sufficient by itself or in connection 
with the PCF File and other available information for market 
participants to calculate a Fund's IIV and effectively arbitrage the 
Fund.
---------------------------------------------------------------------------

    \27\ The Trust or the Advisor will post the IIV File to a 
password-protected Web site before the opening of business on each 
business day, and all Authorized Participants and the Exchange will 
have access to a password and the Web site containing the IIV File. 
However, the Fund will disclose each business day to the public 
identical information, but in a format appropriate to public 
investors, at the same time the Fund discloses the IIV and PCF 
files, as applicable, to industry participants.
---------------------------------------------------------------------------

    For example, the following information would be provided in the IIV 
File for a Bullish Fund holding equity securities and a Bearish Fund 
holding swaps and futures contracts (and a Bullish Fund to the extent 
it holds such Financial Instruments): (A) The total value of the equity 
securities held by such Fund (Bullish Fund only), (B) the notional 
value of the swaps held by such Fund (together with an indication of 
the index on which such swap is based and whether the Fund's position 
is long or short), (C) the most recent valuation of the swaps held by 
the Fund, (D) the notional value of any futures contracts (together 
with an indication of the index on which such contract is based, 
whether the Fund's position is long or short and the contract's 
expiration date), (E) the number of futures contracts held by the Fund 
(together with an indication of the index on which such contract is 
based, whether the Fund's position is long or short and the contract's 
expiration date), (F) the most recent valuation of the futures 
contracts held by the Fund, (G) the Fund's total assets and total 
shares outstanding, and (H) a ``net other assets'' figure reflecting 
expenses and income of the Fund to be accrued during and through the 
following business day and accumulated gains or losses on the Fund's 
Financial Instruments through the end of the business day immediately 
preceding the publication of the IIV File. To the extent that the 
Bullish or any Bearish Fund holds cash or cash equivalents about which 
information is not available in a PCF File, information regarding such 
Fund's cash and cash equivalent positions would be disclosed in the IIV 
File for such Fund.
    The information in the IIV File would be sufficient for 
participants in the NSCC system to calculate the IIV for Bearish Funds 
and, together with the information on equity securities contained in 
the PCF, would be sufficient for calculation of IIV for the Bullish 
Fund, during the next business day. The IIV File, together with the 
applicable information in the PCF in the case of the Bullish Fund, 
would also be the basis for the next business day's NAV calculation.
    Under normal circumstances, the Bullish Fund would be created and 
redeemed either entirely for cash and/or for Deposit Securities, plus a 
Balancing Amount, as described below. Under normal circumstances, the 
Bearish Funds would be created and redeemed entirely for cash. The IIV 
File published before the open of business on a business day would, 
however, permit NSCC participants to calculate (by means of calculating 
the IIV) the amount of cash required to create a Creation Unit, and the 
amount of cash that would be paid upon redemption of a Creation Unit, 
for each Bearish Fund for that business day.
    For the Bullish Fund, the PCF File would be prepared by the Trust 
after 4 p.m. ET and transmitted by the Index Receipt Agent to NSCC by 
6:30 p.m. ET. All Authorized Participants who are NSCC participants, 
and the Exchange would have access to the Web site containing the IIV 
File. The IIV File would reflect the trades made on behalf of a Fund 
that business day and the creation/redemption orders for that business 
day. Accordingly, by 6:30 p.m. ET, Authorized Participants would know 
the composition of the Fund's portfolio for the next trading day.
    The Balancing Amount would also be determined shortly after 4 p.m. 
ET each business day. Although the Balancing Amount for most exchange-
traded funds is a small amount reflecting accrued dividends and other 
distributions, for the Bullish Fund it is expected to be larger due to 
changes in the value of the Financial Instruments, i.e., daily mark-to-
market. For example, assuming a basket of deposit securities (``Deposit 
Basket'') of $5 million for a Bullish Fund, if the market increases 
10%, the deposit basket would now be equal to $5.5 million at 4 p.m. 
ET. The Fund shares would increase in value by 20% or $1 million to 
equal $6 million total. With the Deposit Basket at $5.5 million, the 
Cash Balancing Amount would be $500,000. The next day's Deposit Basket 
and cash balancing amount is announced generally by 6:30 p.m. ET each 
business day.

[[Page 73410]]

Creation of the Bullish Fund \28\
---------------------------------------------------------------------------

    \28\ This is the Bullish Fund based on the Dow Jones U.S. 
Telecommunications Index.
---------------------------------------------------------------------------

    Typically, persons \29\ purchasing Creation Units from a Bullish 
Fund must make an in-kind deposit of a basket of securities (``Deposit 
Securities'') consisting of the securities selected by the Advisor from 
among those securities contained in the Fund's portfolio, together with 
an amount of cash specified by the Advisor (``Balancing Amount''), plus 
the applicable transaction fee (``Transaction Fee''). The Deposit 
Securities and the Balancing Amount collectively are referred to as the 
``Creation Deposit.'' The Balancing Amount is a cash payment designed 
to ensure that the value of a Creation Deposit is identical to the 
value of the Creation Unit it is used to purchase. The Balancing Amount 
is an amount equal to the difference between the NAV of a Creation Unit 
and the market value of the Deposit Securities.\30\ 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 Funds is included in the Balancing 
Amount. The Transaction Fee is a fee imposed by the Funds on investors 
purchasing (or redeeming) Creation Units.
---------------------------------------------------------------------------

    \29\ Authorized Participants are the only persons that may place 
orders to create and redeem Creation Units. Authorized Participants 
must be registered broker-dealers or other securities market 
participants (such as banks and other financial institutions that 
are exempt from registration as broker-dealers to engage in 
securities transactions) who are participants in DTC.
    \30\ While not typical, if the market value of the Deposit 
Securities is greater than the NAV of a Creation Unit, then the 
Balancing Amount would be a negative number, in which case the 
Balancing Amount would be paid by the Bullish Fund to the purchaser, 
rather than vice-versa.
---------------------------------------------------------------------------

    The Trust would make available through the DTC or the Distributor 
on each business day, prior to the opening of trading on the Exchange, 
a 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'').\31\ The Trust also would make available on a daily 
basis information about the previous day's Balancing Amount.
---------------------------------------------------------------------------

    \31\ In accordance with the Advisor's Code of Ethics, personnel 
of the Advisor with knowledge about the composition of a Creation 
Deposit will be prohibited from disclosing such information to any 
other person, except as authorized in the course of their 
employment, until such information is made public.
---------------------------------------------------------------------------

    The Bullish Fund reserves 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.\32\ 
Substitution might be permitted or required, for example, because one 
or more Deposit Securities may be unavailable, or may not be available 
in the quantity needed to make a Creation Deposit. Brokerage 
commissions incurred by a Fund to acquire any Deposit Security not part 
of a Creation Deposit are expected to be immaterial, and in any event 
the Adviser may adjust the relevant transaction fee to ensure that the 
Fund collects the extra expense from the purchaser.
---------------------------------------------------------------------------

    \32\ In certain limited instances, a 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.
---------------------------------------------------------------------------

    Orders to create or redeem Shares of the Bullish Fund must be 
placed through an Authorized Participant, which is either (1) A broker-
dealer or other participant in the continuous net settlement system of 
the NSCC or (2) a DTC participant, and which has entered into a 
participant agreement with the Distributor.
    As noted below in ``Dissemination of Intra-Day Indicative Value 
(IIV),'' the Exchange would disseminate through the facilities of the 
CTA, at least in 15 second intervals during the Exchange's regular 
trading hours, the IIV on a per Share basis. The Funds would not be 
involved in, or responsible for, the calculation or dissemination of 
any such amount and would make no warranty as to its accuracy.

Redemption of the Bullish Fund

    Bullish Fund Shares in Creation Unit aggregations would be 
redeemable on any day on which the New York Stock Exchange (``NYSE'') 
is open in exchange for a basket of securities (``Redemption 
Securities''). As it does for Deposit Securities, the Trust would make 
available to Authorized Participants on each business day prior to the 
opening of trading a list of the names and number of shares of 
Redemption Securities for each Fund. The Redemption Securities given to 
redeeming investors in most cases would be the same as the Deposit 
Securities required of investors purchasing Creation Units on the same 
day.\33\ Depending on whether the NAV of a Creation Unit is higher or 
lower than the market value of the Redemption Securities, the redeemer 
of a Creation Unit would either receive from or pay to the Fund a cash 
amount equal to the difference (``Redemption Balancing Amount'').\34\ 
The redeeming investor also must pay to the Fund a transaction fee to 
cover transaction costs.\35\
---------------------------------------------------------------------------

    \33\ There may be circumstances, however, where the Deposit and 
Redemption Securities could differ. For example, if ABC stock were 
replacing XYZ stock in a Fund's Underlying Index at the close of 
today's trading session, today's prescribed Deposit Securities might 
include ABC but not XYZ, while today's prescribed Redemption 
Securities might include XYZ but not ABC.
    \34\ In the typical situation where the Redemption Securities 
are the same as the Deposit Securities, this cash amount would be 
equal to the Balancing Amount described above in the creation 
process.
    \35\ Redemptions in which cash is substituted for one or more 
Redemption Securities may be assessed a higher transaction fee to 
offset the transaction cost to the Fund of selling those particular 
Redemption Securities. This fee is expected to be between $100 and 
$1,000.
---------------------------------------------------------------------------

    A Fund has the right to make redemption payments in cash, in kind, 
or a combination of each, provided that the value of its redemption 
payments equals the NAV of the Shares tendered at the time of tender, 
and the Redemption Balancing Amount. The Adviser currently contemplates 
that Creation Units of the Bullish Fund would be redeemed principally 
in kind with respect to the Redemption Securities and a Balancing 
Amount in cash largely resulting from the value of the Financial 
Instruments included in the Fund.
    In order to facilitate delivery of Redemption Securities, each 
redeeming Authorized Participant, acting on behalf of such Beneficial 
Owner or a DTC Participant, must have arrangements with a broker-
dealer, bank, or other custody provider in each jurisdiction in which 
any of the Redemption Securities are customarily traded. If neither the 
redeeming Beneficial Owner nor the Authorized Participant has such 
arrangements, and it is not otherwise possible to make other 
arrangements, the Fund may in its discretion redeem the Shares for 
cash.

Creation and Redemption of the Bearish Funds

    The Bearish Funds would be purchased and redeemed entirely for cash 
(``All-Cash Payments''). The use of an All-Cash Payment for the 
purchase and redemption of Creation Unit aggregations of the Bearish 
Funds is due to the limited transferability of Financial Instruments.
    The Exchange believes that Shares would not trade at a material 
discount or premium to the underlying securities held by a Fund based 
on potential arbitrage opportunities. The arbitrage process, which 
provides the opportunity to profit from differences in prices of the

[[Page 73411]]

same or similar securities, increases the efficiency of the markets and 
serves to prevent potentially manipulative efforts. If the price of a 
Share deviates enough from the Creation Unit, on a per share basis, to 
create a material discount or premium, an arbitrage opportunity is 
created allowing the arbitrageur to either buy Shares at a discount, 
immediately cancel them in exchange for the Creation Unit and sell the 
underlying securities in the cash market at a profit, or sell Shares 
short at a premium and buy the Creation Unit in exchange for the Shares 
to deliver against the short position. In both instances the 
arbitrageur locks in a profit and the markets move back into line.\36\
---------------------------------------------------------------------------

    \36\ In their 1940 Act Application, the Applicants stated that 
they do not believe that All-Cash Payments will affect arbitrage 
efficiency. This is because Applicants believe it makes little 
difference to an arbitrageur whether Creation Unit aggregations are 
purchased in exchange for a basket of securities or cash. The 
important function of the arbitrageur is to bid the share price of 
any Fund up or down until it converges with the NAV. Applicants note 
that this can occur regardless of whether the arbitrageur is allowed 
to create in cash or with a Deposit Basket. In either case, the 
arbitrageur can effectively hedge a position in a Fund in a variety 
of ways, including the use of market-on-close contracts to buy or 
sell the Financial Instruments.
---------------------------------------------------------------------------

Creation Unit Aggregation Purchase and Redemption Orders

    Creation Unit aggregations of the Funds would be purchased at NAV 
plus a transaction fee. For the Bearish Funds, the purchaser would make 
a cash payment by 12 p.m. ET on the third business day following the 
date on which the request was made (T+3) or earlier. For the Bullish 
Fund, the purchaser would make an in-kind payment and/or all cash 
payment generally on the third business day following the date on which 
the request was made (T+3) or earlier. Purchasers of the Funds in 
Creation Unit aggregations must satisfy certain creditworthiness 
criteria established by the Advisor and approved by the Board, as 
provided in the Authorized Participant Agreement between the Trust and 
Authorized Participants.
    Creation Unit aggregations of the Bullish Fund would be redeemable 
either in-kind or all in cash equal to the NAV less the transaction 
fee. Creation Unit aggregations of the Bearish Funds would be 
redeemable for an All-Cash Payment equal to the NAV less the 
transaction fee. A Bullish Fund has the right to make redemption 
payments in cash, in kind, or a combination of each, provided that the 
value of its redemption payments equals the NAV of the Shares tendered 
for redemption at the time of tender.\37\
---------------------------------------------------------------------------

    \37\ In the event an Authorized Participant has submitted a 
redemption request in good order and is unable to transfer all or 
part of a Creation Unit aggregation for redemption, a Fund may 
nonetheless accept the redemption request in reliance on the 
Authorized Participant's undertaking to deliver the missing Fund 
Shares as soon as possible, which undertaking shall be secured by 
the Authorized Participant's delivery and maintenance of collateral. 
The Authorized Participant Agreement will permit the Fund to buy the 
missing Shares at any time and will subject the Authorized 
Participant to liability for any shortfall between the cost to the 
Fund of purchasing the Shares and the value of the collateral.
---------------------------------------------------------------------------

Dividends

    Dividends, if any, from net investment income would be declared and 
paid at least annually by each Fund in the same manner as by other 
open-end investment companies. Certain Funds may pay dividends on a 
semi-annual or more frequent basis. Distributions of realized 
securities gains, if any, generally would be declared and paid at least 
once a year.
    Dividends and other distributions on the Shares of each Fund would 
be distributed, on a pro rata basis to Beneficial Owners of such 
Shares. Dividend payments would be made through the Depository and the 
DTC Participants to Beneficial Owners then of record with proceeds 
received from each Fund.
    The Trust would not make the DTC book-entry Dividend Reinvestment 
Service (``Dividend Reinvestment Service'') available for use by 
Beneficial Owners for reinvestment of their cash proceeds but certain 
individual brokers may make a Dividend Reinvestment Service available 
to Beneficial Owners. The SAI would inform investors of this fact and 
direct interested investors to contact such investor's broker to 
ascertain the availability and a description of such a service through 
such broker. The SAI would also caution interested Beneficial Owners 
that they should note that each broker may require investors to adhere 
to specific procedures and timetables in order to participate in the 
service and such investors should ascertain from their broker such 
necessary details. Shares acquired pursuant to such service would be 
held by the Beneficial Owners in the same manner, and subject to the 
same terms and conditions, as for original ownership of Shares. 
Brokerage commissions charges and other costs, if any, incurred in 
purchasing Shares in the secondary market with the cash from the 
distributions generally would be an expense borne by the individual 
beneficial owners participating in reinvestment through such service.

Dissemination of Intra-Day Indicative Value (IIV)

    In order to provide updated information relating to each Fund for 
use by investors, professionals, and persons wishing to create or 
redeem Shares, the Exchange would disseminate through the facilities of 
the CTA: (i) Continuously throughout the trading day, the market value 
of a Share, and (ii) at least every 15 seconds throughout the trading 
day, a calculation of the IIV \38\ as calculated by the Exchange (``IIV 
Calculator'').\39\ Comparing these two figures helps an investor to 
determine whether, and to what extent, the Shares may be selling at a 
premium or a discount to NAV.
    The IIV Calculator would calculate an IIV for each Fund in the 
manner discussed below. The IIV is designed to provide investors with a 
reference value that can be used in connection with other related 
market information. The IIV does not necessarily reflect the precise 
composition of the current portfolio held by each Fund at a particular 
point in time. Therefore, the IIV on a per Share basis disseminated 
during Amex trading hours should not be viewed as a real time update of 
the NAV of a particular Fund, which is calculated only once a day. 
While the IIV that would be disseminated by the Amex is expected to be 
close to the most recently calculated Fund NAV on a per Share basis, it 
is possible that the value of the portfolio held by a Fund may diverge 
from the IIV during any trading day. In such case, the IIV would not 
precisely reflect the value of the Fund portfolio.
---------------------------------------------------------------------------

    \38\ The intra-day indicative value or IIV is referred to by 
other issuers for different exchange-traded funds as an ``Estimated 
NAV,'' ``Underlying Trading Value,'' ``Indicative Optimized 
Portfolio Value (IOPV),'' and ``Intraday Value'' in various places 
such as the prospectus and marketing materials.
    \39\ The Exchange will calculate the IIV for each Fund.
---------------------------------------------------------------------------

Calculation of the IIV for the Bullish Fund

    The IIV Calculator would disseminate the IIV throughout the trading 
day for the Fund holding equity securities and Financial Instruments. 
The IIV Calculator would determine such IIV by: (i) Calculating the 
estimated current value of equity securities held by the Fund (if 
applicable) by (a) calculating the percentage change in the value of 
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

[[Page 73412]]

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 p

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.