[Federal Register: January 25, 2007 (Volume 72, Number 16)]
[Notices]
[Page 3442-3447]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja07-82]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55117; File No. SR-Amex-2006-101]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Accelerated Approval to a Proposed Rule Change as Modified by
Amendments No. 1 and 2 Thereto Relating to the Listing and Trading of
Shares of Funds of the ProShares Trust
January 17, 2007.
I. Introduction
On October 24, 2006, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ On November 22, 2006, Amex filed Amendment No. 1 to the
proposed rule change.\3\ On December 8, 2006, Amex filed Amendment No.
2 to the proposed rule change.\4\ The proposed rule change, as amended,
was published for comment in the Federal Register on December 27, 2006
for a 15-day comment period.\5\ The Commission received no comments on
the proposal. This order approves the proposed rule change, as modified
by Amendments No. 1 and 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 supersedes and replaces the original filing
in its entirety.
\4\ Amendment No. 2 supersedes and replaces Amendment No. 1 in
its entirety.
\5\ See Securities Exchange Act Release No. 54961 (December 18,
2006), 71 FR 77823 (``Notice'').
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II. Description of the Proposal
Amex Rules 1000A et seq. provide standards for the listing of Index
Fund Shares, which are securities issued by an open-end management
investment company for exchange trading.\6\ Index Fund Shares are
registered under the Investment Company Act of 1940 (``1940 Act''), as
well as under the Act. Under Amex Rule 1000A(b)(2), the Exchange
proposes to list and trade Index Fund Shares that seek to provide
investment results that exceed the performance of an underlying
securities index by a specified multiple or that seek to provide
investment results that correspond to a specified multiple of the
inverse or opposite of the index's performance.
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\6\ Index Fund Shares are defined in Amex Rule 1000A(b)(1) as
securities based on a portfolio of stocks or fixed income securities
that seek to provide investment results that correspond generally to
the price and yield of a specified foreign or domestic stock index
or fixed income securities index.
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Pursuant to these rules, the Exchange proposes to list the shares
(the ``Shares'') of eighty-one (81) new funds (the ``Funds'') of the
ProShares Trust (the ``Trust''). In its proposal, the Exchange provided
detailed descriptions regarding the Underlying Indexes,\7\ as well as
the structure and operation of the Funds and the listing and trading of
the Shares. Key features of the proposal are noted below.
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\7\ See Notice, supra note 5, 71 FR at 77825-77827 (describing
the general design and composition of each Underlying Index).
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Product Description
The Funds are based on the following equity securities indexes: (1)
S&P Small Cap 600 Index; (2) S&P 500/Citigroup Value Index; (3) S&P
500/Citigroup Growth Index; (4) S&P MidCap 400/Citigroup Value Index;
(5) S&P MidCap 400/Citigroup Growth Index; (6) S&P SmallCap 600/
Citigroup Value Index; (7) S&P SmallCap 600/Citigroup Growth Index; (8)
Dow Jones U.S. Basic Materials Index; (9) Dow Jones U.S. Consumer
Services Index; (10) Dow Jones U.S. Consumer Goods Index; (11) Dow
Jones U.S. Oil and Gas Index; (12) Dow Jones U.S. Financials Index;
(13) Dow Jones U.S. Health Care Index; (14) Dow Jones U.S. Industrials
Index; (15) Dow Jones U.S. Real Estate Index; (16) Dow Jones U.S.
Semiconductor Index; (17) Dow Jones U.S. Technology Index; (18) Dow
Jones U.S. Utilities Index; (19) Russell 2000[supreg] Index; (20)
Russell Midcap[supreg] Index; (21) Russell Midcap[supreg] Growth Index;
(22) Russell Midcap[supreg] Value Index; (23) Russell 1000[supreg]
Index; (24) Russell 1000[supreg] Growth Index; (25) Russell
1000[supreg] Value Index; (26) Russell 2000[supreg] Growth Index; and
(27) Russell 2000[supreg] Value Index (each index individually referred
to as the ``Underlying Index,'' and all Underlying Indexes collectively
referred to as the ``Underlying Indexes'').
Each of the Funds is designated as an Ultra Fund, Short Fund, or
UltraShort Fund, based on its investment objective. Each Ultra Fund or
``Bullish Fund'' seeks a daily investment result, before fees and
expenses, which corresponds to twice (200%) the daily performance of
its Underlying Index. Accordingly, the NAV of the Shares of each Ultra
Fund, if successful in meeting its objective, should increase, on a
percentage basis, approximately twice as much as the corresponding
Underlying Index gains when the prices of the securities in such
Underlying Index increase on a given day, and should decrease
approximately twice as much as the respective Underlying Index loses
when such prices decline on a given day. The Bullish Funds generally
will hold at least 85% of their assets in the component equity
securities of the relevant Underlying Index. The remainder of assets
will be devoted to certain financial instruments \8\ and money market
instruments \9\ that are intended to create the additional needed
exposure to such Underlying Index necessary to pursue its investment
objective.
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\8\ The financial instruments to be held by any of the Funds may
include stock index futures contracts, options on futures contracts,
options on securities and indices, equity caps, collars and floors,
as well as swap agreements, forward contracts, repurchase
agreements, and reverse repurchase agreements (the ``Financial
Instruments'').
\9\ Money market instruments include U.S. government securities
and repurchase agreements (the ``Money Market Instruments'').
Repurchase agreements held by the Funds will be consistent with Rule
2a-7 of the 1940 Act, i.e., remaining maturities of 397 days or less
and rated investment-grade.
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Each Short Fund seeks a daily investment result, before fees and
expenses, that corresponds to the inverse or opposite of the daily
performance (-100%) of its Underlying Index. Accordingly, the NAV of
the Shares of each Short Fund should increase approximately as much, on
a percentage basis, as the corresponding
[[Page 3443]]
Underlying Index loses when the prices of the securities in the
Underlying Index decline on a given day, or should decrease
approximately as much as that Underlying Index gains when the prices of
the securities in the Underlying Index rise on a given day.
Finally, each UltraShort Fund seeks a daily investment result,
before fees and expenses, that corresponds to twice the inverse (-200%)
of the daily performance of its Underlying Indexes. Accordingly, the
NAV of the Shares of each UltraShort Fund should increase approximately
twice as much, on a percentage basis, as the corresponding Underlying
Index loses when the prices of the securities in the Underlying Index
decline on a given day, or should decrease approximately twice as much
as that Underlying Index gains when the prices of the securities in the
Underlying Index rise on a given day.
The Short Funds and UltraShort Funds each have investment
objectives that seek investment results corresponding to an inverse
performance of the Underlying Indexes and are collectively referred to
as the ``Bearish Funds.'' Each of these Bearish Funds will not invest
directly in the component securities of the relevant Underlying Index,
but instead, will create short exposure to such Underlying Index. Each
Bearish Fund will rely on establishing positions in Financial
Instruments that provide, on a daily basis, the inverse or opposite of,
or twice the inverse or opposite of, as the case may be, the
performance of the relevant Underlying Index. Normally, 100% of the
value of the portfolios of each Bearish Fund will be devoted to
Financial Instruments and Money Market Instruments.\10\
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\10\ To the extent, applicable, each Fund will comply with the
requirements of the 1940 Act with respect to ``cover'' for Financial
Instruments and thus may hold a significant portion of its assets in
liquid instruments in segregated accounts.
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As advisor to the Funds, ProShare Advisors LLC (the ``Advisor'')
will implement a mathematical investment strategy known or ``Portfolio
Investment Methodology,'' to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective. The
Portfolio Investment Methodology takes into account a variety of
specified criteria and data, the most important of which are: (1) Net
assets (taking into account creations and redemptions) in each Fund's
portfolio at the end of each trading day; (2) the amount of required
exposure to the Underlying Index; and (3) the positions in equity
securities, Financial Instruments, and/or Money Market Instruments at
the beginning of each trading day. Each day, the methodology will
determine for each Fund, the end-of-day positions to establish the
required amount of exposure to the Underlying Index (the ``Solution''),
which will consist of equity securities, Financial Instruments, and/or
Money Market Instruments. The difference between the start-of-day
positions and the required end-of-day positions is the actual amount of
equity securities, Financial Instruments, and/or Money Market
Instruments that must be bought or sold for the day. The Solution
represents the required exposure and, when necessary, is converted into
an order or orders to be filled that same day.\11\
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\11\ Generally, portfolio trades effected pursuant to the
Solution are reflected in the NAV on the first business day (T+1)
after the date the relevant trade is made. Therefore, the NAV
calculated for a Fund on a given day should reflect the trades
executed pursuant to the prior day's Solution. For example, trades
pursuant to the Solution calculated on a Monday afternoon are
executed on behalf of the Fund in question on that day. These trades
will then be reflected in the NAV for that Fund that is calculated
as of 4 p.m. Eastern Time (``ET'') on Tuesday.
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The Funds are expected to have a daily tracking error of less than
5% (500 basis points) relative to the specified multiple or inverse
multiple of the performance of the relevant Underlying Index.
Creation and Redemption of Shares
Fund Shares will be issued and redeemed on a continuous basis at a
price equal to the NAV per Share next determined after an order is
received in proper form. Only certain qualified entities (``Authorized
Participants'') may create or redeem Shares, and each Fund will issue
and redeem Shares only in aggregations of at least 50,000 (``Creation
Units''). Additional information about the creation and redemption
process is included in Amex's proposal.\12\
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\12\ See Notice, supra note 5, 71 FR at 77829-77831.
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In summary, to create Bullish Fund Shares, an Authorized
Participant must properly place a creation order and typically make an
in-kind deposit of a basket of equity securities (``Deposit
Securities'') consisting of the securities selected by the Advisor from
among those securities contained in the Fund's portfolio,\13\ together
with an amount of cash specified by the Advisor (the ``Balancing
Amount''), plus the applicable transaction fee (together, the
``Creation Deposit'').
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\13\ The Trust will make available through the Depository Trust
Company or SEI Investments Distribution Company (the
``Distributor'') on each business day, prior to the opening of
trading on the Exchange, the list of names and the required number
of shares of each Deposit Security to be included in the Creation
Deposit for each Bullish Fund (``Deposit List''). In accordance with
the Advisor's Code of Ethics, personnel of the Advisor with
knowledge about the composition of a Creation Deposit will be
prohibited from disclosing such information to any other person,
except as authorized in the course of their employment, until such
information is made public.
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The Bullish Funds reserve the right to permit or require an
Authorized Participant to substitute an amount of cash and/or a
different security to replace any prescribed Deposit Security. In
certain limited instances, a Bullish Fund may require a purchasing
investor to purchase a Creation Unit entirely for cash. For example, on
days when a substantial rebalancing of a Fund's portfolio is required,
the Advisor might prefer to receive cash rather than in-kind stocks so
that it has liquid resources on hand to make the necessary purchases.
Similarly, Bullish Fund Shares in Creation Unit-size aggregations
will be redeemable on any day on which the New York Stock Exchange is
open in exchange for a basket of securities (``Redemption
Securities''), a list of which will be available to Authorized
Participants on each business day prior to the opening of trading. To
redeem Shares in a Bullish Fund, an Authorized Participant must
properly place a redemption order and deliver the Redemption
Securities, any required Balancing Amount, and applicable transaction
fee.\14\
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\14\ A Bullish Fund has the right to make redemption payments in
cash, in kind, or a combination of each, provided that the value of
its redemption payments equals the NAV of the Shares tendered at the
time of tender.
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Notably, the Balancing Amount may, at times, represent a
significant portion of the aggregate purchase price or, in the case of
redemptions, the redemption proceeds. This may occur because the mark-
to-market value of the Financial Instruments held by the Bullish Funds,
if any, is included in the Balancing Amount.
The Bearish Funds will be purchased and redeemed entirely for cash
(``All-Cash Payments''). The use of an All-Cash Payment for the
purchase and redemption of Creation Unit aggregations of the Bearish
Fund Shares is due to the limited transferability of Financial
Instruments.
Dividends and Distributions
As described more fully in the Notice, dividends, if any, from net
investment income will be declared and paid at least annually by each
Fund in the same manner as by other open-end investment companies.
Distributions of realized securities gains, if any,
[[Page 3444]]
generally will be declared and paid once a year.
Arbitrage
In its proposal, the Exchange stated that it did not expect the
Shares to trade at a material discount or premium to the underlying
securities held by a Fund based on potential arbitrage opportunities.
As is the case for other exchange traded derivative products, the
arbitrage process should provide market participants the opportunity to
profit from differences in the price of Shares and their underlying
value, mitigating the occurrence of material discounts or premiums.
Dissemination of Underlying Index Information
The daily closing index value and the percentage change in the
daily closing index value for each Underlying Index will be publicly
available on various Internet Web sites, such as at http://www.bloomberg.com.
Data regarding each Underlying Index is also
available from the respective Underlying Index provider to subscribers.
Several independent data vendors also package and disseminate
Underlying Index data in various value-added formats (including vendors
displaying both securities and index levels and vendors displaying
index levels only).
The value of each Underlying Index will be updated intra-day on a
real time basis as its individual component securities change in price.
These intra-day values of each Underlying Index will be disseminated at
least every 15 seconds throughout the trading day by Amex or another
organization authorized by the relevant Underlying Index provider in
accordance with Commentary .02(c) to Amex Rule 1000A.
Availability of Information Regarding the Shares
1. Indicative Intra-Day Fund Values
During the Exchange's regular trading hours, Amex will calculate
and disseminate at least every 15 seconds through the facilities of the
Consolidated Tape Association (``CTA''), an Indicative Intra-Day Value
(``IIV'') for each of the Funds on a per Share basis, representing an
estimate of the NAV per Share for each Fund. The Exchange will also
make the IIV available on its Web site at http://www.amex.com.
For each Bullish Fund, the designated IIV Calculator (Amex) will
determine the IIV by: (i) Calculating the estimated current value of
equity securities held by such Fund by (a) calculating the percentage
change in the value of the Deposit Securities indicated on the Deposit
List (as provided by the Trust) and applying that percentage value to
the total value of the equity securities in the Fund as of the close of
trading on the prior trading day (as provided by the Trust) or (b)
calculating the current value of all of the equity securities held by
the Fund (as provided by the Trust); (ii) calculating the mark-to-
market gains or losses from the Fund's total return equity swap
exposure based on the percentage change to the Underlying Index and the
previous day's notional values of the swap contracts, if any, held by
such Fund (which previous day's notional value will be provided by the
Trust); (iii) calculating the mark-to-market gains or losses from
futures, options, and other Financial Instrument positions by taking
the difference between the current value of those positions held by the
Fund, if any (as provided by the Trust), and the previous day's value
of such positions; (iv) adding the values from (i), (ii), and (iii)
above to an estimated cash amount provided by the Trust (which cash
amount will include the swap costs), to arrive at a value; and (v)
dividing that value by the total Shares outstanding (as provided by the
Trust) to obtain current IIV.
For each Bearish Fund, the Exchange will determine the IIV by: (i)
Calculating the mark-to-market gains or losses from the Fund's total
return equity swap exposure based on the percentage change to the
Underlying Index and the previous day's notional values of the swap
contracts, if any, held by such Fund (which previous day's notional
value will be provided by the Trust); (ii) calculating the mark-to-
market gains or losses from futures, options, and other Financial
Instrument positions by taking the difference between the current value
of those positions held by the Fund, if any (as provided by the Trust),
and the previous day's value of such positions; (iii) adding the values
from (i) and (ii) above to an estimated cash amount provided by the
Trust (which cash amount will include the swap costs), to arrive at a
value; and (iv) dividing that value by the total Shares outstanding (as
provided by the Trust) to obtain current IIV.
2. Other Information
Amex will disseminate for each Fund on a daily basis through the
facilities of the CTA and CQ High Speed Lines and on its Web site at
http://www.amex.com the following information:
Daily trading volume;
the closing prices of each Fund's Shares and corresponding
NAV; and
the final dividend amounts to be paid for each Fund.
The Exchange will also make available information with respect to
recent NAV, Shares outstanding, and the estimated cash amount and total
cash amount per Creation Unit.
Additionally, the Trust's Internet Web site (http://www.proshares.com
), which is and will be publicly accessible at no
charge, will contain the following information for each Fund's Shares:
(a) The prior business day's closing NAV, the reported closing price,
and a calculation of the premium or discount of such price in relation
to the closing NAV; (b) data for a period covering at least the four
previous calendar quarters (or the life of a Fund, if shorter)
indicating how frequently each Fund's Shares traded at a premium or
discount to NAV based on the daily closing price and the closing NAV,
and the magnitude of such premiums and discounts; (c) its prospectus
and product description; and (d) other quantitative information, such
as daily trading volume.
The Web site for the Trust and/or the Exchange will also disclose
each Fund's total portfolio composition on a daily basis, including, as
applicable, the names and number of shares held of each specific equity
security, the specific types of Financial Instruments and
characteristics of such Financial Instruments, and the cash equivalents
and amount of cash held in the portfolio of each Fund. Importantly,
this public Internet Web site disclosure of the portfolio composition
of each Fund will coincide with the disclosure by the Advisor of the
``IIV File'' and the portfolio composition file (``PCF'') to Authorized
Participants. Therefore, the same portfolio information (including
accrued expenses and dividends) will be provided to all market
participants at the same time.
Also, as explained in Amex's proposal, beneficial owners of Shares
(``Beneficial Owners'') will receive all of the statements, notices,
and reports required under the 1940 Act and other applicable laws.\15\
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\15\ The Application requests relief from Section 24(d) of the
1940 Act, which would permit dealers to sell Shares in the secondary
market unaccompanied by a statutory prospectus when prospectus
delivery is not required by the Securities Act of 1933.
Additionally, if a product description is being provided in lieu of
a prospectus, Commentary .03 of Amex Rule 1000A requires that Amex
members and member organizations provide to all purchasers of a
series of Index Fund Shares a written description of the terms and
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later
than the time of confirmation of the first transaction in such
series is delivered to such purchaser. Furthermore, any sales
material will reference the availability of such circular and the
prospectus.
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[[Page 3445]]
Criteria for Initial and Continued Listing
The Shares are subject to the criteria for initial and continued
listing of Index Fund Shares under Amex Rule 1002A. Pursuant to Amex
Rule 1002A(a)(ii), the Exchange has stated that it will obtain a
representation from the Trust (for each Fund), prior to listing, that
the NAV per Share for each Fund will be calculated daily and made
available to all market participants at the same time.
The continued listing criteria provides for the delisting or
removal from listing of the Shares under any of the following
circumstances:
If, following the initial twelve-month period after
commencement of trading on the Exchange of a series of Index Fund
Shares, there are fewer than 50 beneficial holders of the series of
Index Fund Shares for 30 or more consecutive trading days; or
If the value of the applicable Underlying Index or
portfolio is no longer calculated or available on at least a 15-second
delayed basis through one or more major market data vendors during the
time the Shares trade on the Exchange; or
The IIV is no longer made available on at least a 15-
second delayed basis; or
If such other event shall occur or condition exists which,
in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Additionally, the Exchange will file a proposed rule change
pursuant to Rule 19b-4 under the Act seeking approval to continue
trading the Shares of a Fund and, unless approved, the Exchange will
commence delisting the Shares of such Fund if:
The Underlying Index provider substantially changes either
the Underlying Index component selection methodology or the weighting
methodology; or
A successor or substitute index is used in connection with
the Shares.\16\
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\16\ If the Trust uses a successor or substitute index, the
Exchange's filing will address, among other things, the listing and
trading characteristics of the successor or substitute index and the
Exchange's surveillance procedures applicable thereto.
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Furthermore, Amex Rule 1002A(b)(ii) establishes that, if the IIV or
the Underling Index value applicable to that series of Index Fund
Shares is not being disseminated as required, the Exchange may halt
trading during the day in which the interruption to the dissemination
of the IIV or the Underlying Index value occurs. If the interruption to
the dissemination of the IIV or the Underlying Index value persists
past the trading day in which it occurred, the Exchange will halt
trading no later than the beginning of the trading day following the
interruption.
For each Fund, a minimum of two Creation Units (at least 100,000
Shares) will be required to be outstanding at the commencement of
trading on the Exchange. The initial value of a Share for each of the
Funds is expected to be in the range of $50-$250.
This minimum number of Shares required to be outstanding at the
start of trading will be comparable to requirements that have been
applied to previously listed series of Portfolio Depositary Receipts
and Index Fund Shares. The Exchange believes that the proposed minimum
number of Shares outstanding at the start of trading is sufficient to
provide market liquidity.
The Exchange represents that the Trust is required to comply with
Section 803 of the Amex Company Guide and Rule 10A-3 under the Act for
the initial and continued listing of the Shares.\17\
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\17\ Telephone conversation between Nyieri Nazarian, Assistant
General Counsel, Amex, and Edward Cho, Special Counsel, Division of
Market Regulation (``Division''), Commission, on January 9, 2007
(clarifying that the Trust is required to comply with Rule 803 of
the Amex Company Guide).
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Amex Trading Rules
The Shares are equity securities subject to Amex rules governing
the trading of equity securities, including, among others, rules
governing priority, parity and precedence of orders, specialist
responsibilities, and account opening and customer suitability (Amex
Rule 411). The Shares of the Funds will trade on the Exchange until
4:15 p.m. ET each business day and will trade with a minimum price
variation of $.01.
Trading Halts
Trading in Shares of the Funds will be halted if the circuit
breaker parameters under Amex Rule 117 have been reached. The Exchange
may also halt trading in consideration of other factors, such as those
set forth in Amex Rule 918C(b). These factors include, but are not
limited to: (1) The extent to which trading is not occurring in
securities comprising an Underlying Index and/or the Financial
Instruments of a Fund; \18\ or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.
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\18\ In the case of the Financial Instruments held by a Fund,
the Exchange represents that a notification procedure will be
implemented so that timely notice from the Advisor is received by
the Exchange when a particular Financial Instrument is in default or
shortly to be in default. Notification from the Advisor will be made
by phone, facsimile, or e-mail. The Exchange would then determine on
a case-by-case basis whether a default of a particular Financial
Instrument justifies a trading halt of the Shares.
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Amex Rule 1002A(b)(ii) sets forth the trading halt parameters with
respect to Index Fund Shares. Importantly, if the IIV or the Underlying
Index value applicable to that series of Index Fund Shares is not being
disseminated as required, the Exchange may halt trading during the day
in which the interruption to the dissemination of the IIV or the
Underlying Index value occurs. If the interruption to the dissemination
of the IIV or the Underlying Index value persists past the trading day
in which it occurred, the Exchange will halt trading no later than the
beginning of the trading day following the interruption.
Suitability and Information Circular
Prior to commencement of trading, the Exchange will issue an
Information Circular to its members and member organizations providing
guidance with regard to member firm compliance responsibilities
(including suitability obligations) when effecting transactions in the
Shares and highlighting the special risks and characteristics of the
Funds and Shares as well as applicable Exchange rules. In particular,
the Information Circular will inform Amex members and member
organizations that the procedures for purchases and redemptions of
Shares, and that Shares are not individually redeemable, but are
redeemable only in Creation Unit aggregations or multiples thereof. In
addition, prior to the commencement of trading, the Exchange will
inform members and member organizations in such Information Circular of
the application of Commentary .03 of Amex Rule 1000A to the Funds. The
Circular will further inform members and member organizations of the
prospectus and/or product description delivery requirements that apply
to the Funds.
This Information Circular will set forth the requirements relating
to Commentary .05 to Amex Rule 411 (Duty to Know and Approve
Customers). Specifically, the Information Circular will remind members
of their obligations in recommending transactions in the Shares so that
members have a reasonable basis to believe that (1) The recommendation
is suitable for a customer given reasonable inquiry concerning the
customer's investment objectives, financial situation, needs, and any
other information known by such member, and (2) that the customer can
evaluate the special characteristics, and is able to bear the financial
risks, of such investment. In connection with the suitability
obligation, the Information
[[Page 3446]]
Circular will also provide that members make reasonable efforts to
obtain the following information: (a) The customer's financial status;
(b) the customer's tax status; (c) the customer's investment
objectives; and (d) such other information used or considered to be
reasonable by such member or registered representative in making
recommendations to the customer.
Surveillance
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares and to deter and
detect violations of applicable rules.\19\ Specifically, Amex will rely
on its existing surveillance procedures governing Index Fund Shares,
which have been deemed adequate under the Act. In addition, the
Exchange also has a general policy prohibiting the distribution of
material, non-public information by its employees.
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\19\ Telephone conversation between Nyieri Nazarian, Assistant
General Counsel, Amex, and Edward Cho, Special Counsel, Division,
Commission, on January 9, 2007 (confirming that the Exchange's
surveillance procedures are capable of detecting and deterring
violations of applicable rules).
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III. Discussion and Commission's Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\20\ In particular, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of Section
6(b)(5) of the Act,\21\ which requires, among other things, that the
Exchange's rules be designed to promote just and equitable principles
of trade, to remove impediments to and perfect the mechanism of a free
and open market and a national market system and, in general, to
protect investors and the public interest.
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\20\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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A. Surveillance
The Commission notes that the Exchange has represented that its
surveillance procedures are adequate to monitor the trading of the
Shares. The shares based on the Underlying Indexes are almost all
currently listed and/or traded on the Exchange. Amex stated that it
would rely on its existing surveillance procedures governing Index Fund
Shares. The Commission believes that these procedures provide a
framework for Amex to monitor fraudulent and manipulative practices in
the trading of the Shares.
In addition, the Exchange represents that, if a Fund uses a
successor or substitute index, or an Underlying Index provider
substantially changes either the Underlying Index component selection
methodology or the weighting methodology, Amex will file with the
Commission a proposed rule change, which addresses, among other things,
applicable surveillance procedures. Unless approved by the Commission,
the Exchange will commence delisting of the Shares.
B. Dissemination of Information
The Commission believes that sufficient venues exist for obtaining
reliable information so that investors in the Shares can monitor the
values of the Underlying Indexes relative to the IIV of their Shares.
The Exchange has represented that it will calculate and publish the
value of the Underlying Indexes at least every 15 seconds during Amex
trading hours through the facilities of the CTA in accordance with
Commentary .02(c) to Amex Rule 1000A. The Commission notes that the
daily closing index value and the percentage change in the daily
closing index value for each Underlying Index will be publicly
available on various Internet Web sites, such as at http://www.bloomberg.com
, from the respective Underlying Index provider to
subscribers, and from various independent data vendors that package and
disseminate Underlying Index data in various value-added formats.
Likewise, the Exchange has represented that it will calculate and
publish the IIV for each Fund on a per-Share basis at least every 15
seconds during Amex trading hours through the facilities of the CTA and
on its Web site at http://www.amex.com. The Commission believes that
dissemination of the IIV provides additional information that is not
otherwise available to the public and is useful to professionals and
investors in connection with the Shares trading on the Exchange, and
the creation and redemption of the Shares. The Commission believes that
publication of such information should promote transparency with regard
to the Shares.
The Exchange will make additional information available on its
Internet Web site at http://www.amex.com, including daily trading
volume, the closing price, the NAV, and the final dividend amounts to
be paid for each Fund. The Trust's Web site (http://www.proshares.com),
which is and will be publicly accessible at no charge, will also
contain trading and other information pertaining to the Shares of each
Fund. Notably, each Fund's total portfolio composition will be
disclosed on the Trust's Web site (or another relevant Internet Web
site as determined by the Trust) and/or Amex's Web site (http://www.amex.com
).
In sum, the Commission believes that the availability of
information about the Underlying Indexes, the composition and valuation
of each Fund, and the Shares should facilitate transparency with
respect to the proposed Shares to allow for the maintenance of fair and
orderly markets.
C. Listing and Trading
The Commission finds that the Exchange's proposed rules and
procedures for the listing and trading of the Shares are consistent
with the Act. The Shares will trade as equity securities subject to
Amex rules including, among others, rules governing priority, parity
and precedence of orders, specialist responsibilities, account opening,
and customer suitability requirements.
The Commission believes that the listing and delisting criteria for
the Shares should help to maintain a minimum level of liquidity and
therefore minimize the potential for manipulation of the Shares.
Additionally, the Commission finds that Amex Rule 1000A and Commentary
thereto are reasonably designed to govern trading in the Shares.
Finally, the Commission notes that the Information Circular distributed
by the Exchange will inform members and member organizations about the
terms, characteristics, and risks in trading the Shares, including
their prospectus delivery obligations.
D. Accelerated Approval
The Commission finds good cause to approve the proposed rule
change, as modified by Amendments No. 1 and 2 thereto, prior to the
thirtieth day after publication for comment in the Federal Register
pursuant to Section 19(b)(2) of the Act.\22\ Accelerating approval of
this proposed rule change should benefit investors who desire to
participate, through the Shares of the ProShares Trust Funds, in an
investment based on specified investment objectives which correspond to
a multiple of the performance, or the inverse performance, of a
particular equity securities benchmark index.
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\22\ 15 U.S.C. 78s(b)(2).
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[[Page 3447]]
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-Amex-2006-101), as modified by
Amendments No. 1 and 2, be, and it hereby is, approved on an
accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-1057 Filed 1-24-07; 8:45 am]
BILLING CODE 8011-01-P