[Federal Register: January 24, 2007 (Volume 72, Number 15)]
[Notices]
[Page 3179-3184]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ja07-93]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55113; File No. SR-NYSE-2006-101]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change as Modified by Amendments No. 1 and 2 Thereto Adopting
Generic Listing Standards for Exchange-Traded Funds Based on
International or Global Indexes or Indexes Previously Approved by the
Commission as Underlying Benchmarks for Derivative Securities
January 17, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on November 21, 2006, the New York Stock Exchange LLC
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
the Exchange. On January 11, 2007, the Exchange filed Amendment No. 1
to the proposal. On January 16, 2007, the Exchange filed Amendment No.
2 to the proposal. This order provides notice of the proposed rule
change as amended and approves the proposed rule change as amended on
an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The text of the proposed rule change is available at the Exchange,
from the Commission's Public Reference Room, and on NYSE's Web site
(http://www.nyse.com).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 3180]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to revise Section 703.16 of the NYSE Listed
Company Manual (``Manual'') to include generic listing standards for
series of Investment Company Units (``ICUs'') (which are also referred
to herein as ``exchange-traded funds'' or ``ETFs'') that are based on
international or global indexes, or on indexes described in rules
previously approved by the Commission under Section 19(b)(2) of the
Exchange Act \3\ for the trading of ETFs, options, or other index-based
securities. This proposal would enable the Exchange to list and trade
ETFs pursuant to Rule 19b-4(e) under the Exchange Act \4\ if each of
the conditions set forth in Section 703.16 of the Manual is satisfied.
Rule 19b-4(e) provides that the listing and trading of a new derivative
securities product by a self-regulatory organization (``SRO'') shall
not be deemed a proposed rule change, pursuant to paragraph (c)(1) of
Rule 19b-4, if the Commission has approved, pursuant to Section 19(b)
of the Exchange Act, the SRO's trading rules, procedures, and listing
standards for the product class that would include the new derivatives
securities product, and the SRO has a surveillance program for the
product class.\5\
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\3\ 15 U.S.C. 78s(b)(2).
\4\ 17 CFR 240.19b-4(e).
\5\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange
begins trading the new derivative securities products. See 17 CFR
240.19b-4(e)(2)(ii).
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Exchange-Traded Funds
NYSE Rule 1100 and Section 703.16 of the Manual provide standards
for listing ICUs, which are securities issued by a unit investment
trust, an open-end management investment company (i.e., an open-end
mutual fund), or similar entity based on a portfolio of stocks or fixed
income securities that seeks to provide investment results that
correspond generally to the price and yield performance of a specified
foreign or domestic stock index or fixed income securities index.
Pursuant to Section 703.16 of the Manual, an ICU eligible for listing
on the Exchange must be issued in a specified aggregate number in
return for a deposit of specified securities and/or a cash amount, with
a value equal to the next determined net asset value (``NAV''). When
aggregated in the same specified minimum number, the ICU must be
redeemable by the issuer for the securities and/or cash, with a value
equal to the next determined NAV. The NAV is calculated once a day
after the close of the regular trading day.
To meet the investment objective of providing investment returns
that correspond to the price and the dividend and yield performance of
the underlying index, an ETF may use a ``replication'' strategy or a
``representative sampling'' strategy with respect to the ETF
portfolio.\6\ An ETF using a replication strategy will invest in each
stock of the underlying index in about the same proportion as that
stock is represented in the index itself. An ETF using a representative
sampling strategy will generally invest in a significant number but not
all of the component securities of the underlying index, and will hold
stocks that, in the aggregate, are intended to approximate the full
index in terms of key characteristics, such as price/earnings ratio,
earnings growth, and dividend yield.
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\6\ In either case, an ETF, by its terms, may be considered
invested in the securities of the underlying index to the extent the
ETF invests in sponsored American Depository Receipts (``ADRs''),
Global Depository Receipts (``GDRs''), or European Depository
Receipts (``EDRs'') that trade on exchanges with last-sale reporting
representing securities in the underlying index.
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In addition, an ETF portfolio may be adjusted in accordance with
changes in the composition of the underlying index or to maintain
compliance with requirements applicable to a regulated investment
company under the Internal Revenue Code (``IRC'').\7\
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\7\ For an ETF to qualify for tax treatment as a regulated
investment company, it must meet several requirements under the IRC.
Among these is the requirement that, at the close of each quarter of
the ETF's taxable year, (1) at least 50% of the market value of the
ETF's total assets must be represented by cash items, U.S.
government securities, securities of other regulated investment
companies, and other securities, with such other securities limited
for purposes of this calculation in respect of any one issuer to an
amount not greater than 5% of the value of the ETF's assets and not
greater than 10% of the outstanding voting securities of such
issuer; and (2) not more than 25% of the value of its total assets
may be invested in the securities of any one issuer, or two or more
issuers that are controlled by the ETF (within the meaning of
Section 851(b)(4)(B) of the IRC) and that are engaged in the same or
similar trades or businesses or related trades or businesses (other
than U.S. government securities or the securities of other regulated
investment companies).
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Generic Listing Standards for Exchange-Traded Funds
The Commission has previously approved generic listing standards
for ETFs based on indexes that consist of stocks listed on U.S.
exchanges.\8\ In general, the proposed criteria for the underlying
component securities in the international and global indexes are
similar to those for the domestic indexes, but with modifications as
appropriate for the issues and risks associated with non-U.S.
securities.
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\8\ In 1996, the Commission approved Section 703.16 of the
Listed Company Manual, which sets forth the rules related to the
listing of ICUs. See Securities Exchange Act Release No. 36923
(March 5, 1996), 61 FR 10410 (March 13, 1996) (SR-NYSE-95-23). In
2000, the Commission approved the Exchange's generic listing
standards for the listing and trading, or the trading pursuant to
unlisted trading privileges, of ICUs under Section 703.16 of the
Manual and Exchange Rule 1100. See Securities Exchange Act Release
No. 43679 (December 5, 2000), 65 FR 77949 (December 13, 2000) (SR-
NYSE-00-46).
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In addition, the Commission has previously approved rules governing
the listing and trading of ETFs based on international indexes--those
based on non-U.S. component stocks--as well as global indexes--those
based on non-U.S. and U.S. component stocks.\9\
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\9\ See, e.g., Securities Exchange Act Release No. 52178 (July
29, 2005), 70 FR 46244 (August 9, 2005) (SR-NYSE-2005-41) (approving
listing of iShares MSCI EAFE Growth Fund and iShares MSCI EAFE Value
Fund); Securities Exchange Act Release No. 54458 (September 15,
2006), 71 FR 55248 (September 21, 2006) (SR-NYSE-2006-60) (approving
listing of iShares S&P Global Index Funds).
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The Commission also has approved rules of other exchanges that
permit the listing pursuant to Rule 19b-4(e) of index-based derivatives
where the Commission had previously approved rules contemplating the
trading of specified index-based derivatives on the same index, on the
condition that all of the standards set forth in those orders, in
particular with respect to surveillance sharing agreements, continued
to be satisfied.\10\
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\10\ See, e.g., Securities Exchange Act Release No. 51563 (April
15, 2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001);
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR
46559 (August 10, 2005) (SR-PCX-2005-63).
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In approving ETFs for Exchange trading, the Commission thoroughly
considered the structure of the ETFs, their usefulness to investors and
to the markets, and NYSE rules that govern their trading. The Exchange
believes that adopting additional generic listing standards for these
securities and applying Rule 19b-4(e) should fulfill the intended
objective of that rule by allowing those ETFs that satisfy the proposed
generic listing standards to commence trading, without the need for the
public comment period and Commission approval. The proposed rules have
the potential to reduce the time frame for bringing ETFs to market,
thereby reducing the burdens on issuers and other market participants.
The failure of a particular index to comply with the proposed generic
listing standards under Rule 19b-4(e) would
[[Page 3181]]
not, however, preclude the Exchange from submitting a separate filing
pursuant to Section 19(b)(2) requesting Commission approval to list and
trade a particular ETF.
Requirements for Listing and Trading ETFs Based on International and
Global Indexes
Exchange-traded funds listed pursuant to these generic listing
standards would be traded, in all other respects, under the Exchange's
existing trading rules and procedures that apply to ETFs and would be
covered under the Exchange's surveillance program for ETFs.\11\
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\11\ See e.g., NYSE Rule 1100.
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To list an ETF pursuant to the proposed generic listing standards
for international and global indexes, the index underlying an ETF must
satisfy all the conditions contained in proposed Section
703.16(C)(2)(b) of the Manual. As with the existing generic standards
for ETFs based on domestic indexes, these generic listing standards are
intended to ensure that stocks with substantial market capitalization
and trading volume account for a substantial portion of the weight of
an index or portfolio. While the standards in this proposal are based
on the standards contained in the current generic listing standards for
ETFs based on domestic indexes, they have been adapted as appropriate
to apply to international and global indexes.
As proposed, Section 703.16(B) of the Manual would be amended to
include definitions of U.S. Component Stock and Non-U.S. Component
Stock. These new definitions would provide the basis for the standards
for indexes with either domestic or international stocks, or a
combination of both. A ``Non-U.S. Component Stock'' would mean an
equity security that is not registered under Section 12(b) or 12(g) of
the Exchange Act,\12\ and that is issued by an entity that (1) is not
organized, domiciled, or incorporated in the United States, and (2) is
an operating company (including a real estate investment trust (REIT)
or income trust, but excluding an investment trust, unit trust, mutual
fund, or derivative). This definition is designed to create a category
of component stocks that are issued by companies that are not based in
the United States, are not subject to oversight through Commission
registration, and would include sponsored GDRs and EDRs. A ``U.S.
Component Stock'' would mean an equity security that is registered
under Section 12(b) or 12(g) of the Exchange Act or an ADR the
underlying equity security of which is registered under Section 12(b)
or 12(g) of the Exchange Act. An ADR with an underlying equity security
that is registered pursuant to the Exchange Act is considered a U.S.
Component Stock because the issuer of that security is subject to
Commission jurisdiction and must comply with Commission rules.
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\12\ 15 U.S.C. 78l(b) or (g).
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The Exchange proposes that, to list an ICU based on an
international or global index or portfolio pursuant to the generic
listing standards, such index or portfolio must meet the following
criteria:
Component stocks that in the aggregate account for at
least 90% of the weight of the index or portfolio each must have a
minimum market value of at least $100 million (Section
703.16(C)(2)(b)(i));
Component stocks representing at least 90% of the weight
of the index or portfolio each must have a minimum worldwide monthly
trading volume during each of the last six months of at least 250,000
shares (Section 703.16(C)(2)(b)(ii));
The most heavily weighted component stock may not exceed
25% of the weight of the index or portfolio and the five most heavily
weighted component stocks may not exceed 60% of the weight of the index
or portfolio (Section 703.16(C)(2)(b)(iii));
The index or portfolio shall include a minimum of 20
component stocks (Section 703.16(C)(2)(b)(iv)); and
Each U.S. Component Stock must be listed on a national
securities exchange and an NMS stock as defined in Rule 600 of
Regulation NMS under the Exchange Act, and each Non-U.S. Component
Stock must be listed on an exchange that has last-sale reporting
(Section 703.16(C)(2)(b)(v)).
The Exchange believes that the proposed standards are reasonable
for international and global indexes, and, when applied in conjunction
with the other listing requirements, would result in the listing and
trading on the Exchange of ETFs that are sufficiently broad-based in
scope and not readily susceptible to manipulation. The Exchange also
believes that the proposed standards would result in ETFs that are
adequately diversified in weighting for any single security or small
group of securities to significantly reduce concerns that trading in an
ETF based on an international or global index could become a surrogate
for trading in unregistered securities.
The Exchange further notes that, while these standards are similar
to those for indexes that include only U.S. Component Stocks, they
differ in certain important respects and are generally more
restrictive, reflecting greater concerns over portfolio diversification
with respect to ETFs investing in components that are not individually
registered with the Commission. First, in the proposed standards,
component stocks that in the aggregate account for at least 90% of the
weight of the index or portfolio each shall have a minimum market value
of at least $100 million, compared to a minimum market value of at
least $75 million for indexes with only U.S. Component Stocks. (Market
value is calculated by multiplying the total shares outstanding by the
price per share of the component stock.) Second, in the proposed
standards, the most heavily weighted component stock cannot exceed 25%
of the weight of the index or portfolio, in contrast to a 30% standard
for an index or portfolio comprised of only U.S. Component Stocks.
Third, in the proposed standards, the five most heavily weighted
component stocks shall not exceed 60% of the weight of the index or
portfolio, compared to a 65% standard for indexes comprised of only
U.S. Component Stocks. Fourth, the minimum number of stocks in the
proposed standards is 20, in contrast to a minimum of 13 in the
standards for an index or portfolio with only U.S. Component Stocks.
Finally, the proposed standards require that each Non-U.S. Component
Stock included in the index or portfolio be listed and traded on an
exchange that has last-sale reporting.
The Exchange also proposes to modify Section 703.16(C)(3) to
require that the index value for an ETF listed pursuant to the proposed
standards for international and global indexes be widely disseminated
by one or more major market data vendors at least every 60 seconds
during the time when the ETF shares trade on the Exchange. If the index
value does not change during some or all of the period when trading is
occurring on the Exchange, the last official calculated index value
must remain available throughout Exchange trading hours. In contrast,
the index value for an ETF listed pursuant to the existing standards
for domestic indexes must be disseminated at least every 15 seconds
during the trading day. This modification reflects limitations, in some
instances, on the frequency of intra-day trading information with
respect to Non-U.S. Component Stocks and that, in many cases, trading
hours for overseas markets overlap only in part, or not at all, with
Exchange trading hours.
In addition, Section 703.16(C)(3) would be modified to define the
term
[[Page 3182]]
``Intraday Indicative Value'' (``IIV'') as the estimate, updated at
least every 15 seconds, of the value of a share of each ETF, for ease
of reference. The Exchange also proposes to clarify in Section
703.16(C)(3) that the IIV would be updated during the hours the ETF
shares trade on the Exchange to reflect changes in the exchange rate
between the U.S. dollar and the currency in which any component stock
is denominated.
The Exchange is also proposing to add a Section 703.16(C)(6)
regarding the creation and redemption process for ETFs and compliance
with federal securities laws for, in particular, ETFs listed pursuant
to the new generic listing standards. This new subsection would apply
to ICUs listed pursuant to Section 703.16(C)(2)(b) or (c). It would
require that the statutory prospectus or the application for exemption
from provisions of the Investment Company Act of 1940 \13\ for the ETF
being listed pursuant to these new standards must state that the ETF
must comply with the federal securities laws in accepting securities
for deposits and satisfying redemptions with redemption securities,
including that the securities accepted for deposits and the securities
used to satisfy redemption requests are sold in transactions that would
be exempt from registration under the Securities Act of 1933.\14\
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\13\ 15 U.S.C. 80a et seq.
\14\ 15 U.S.C. 77a et seq.
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The Commission has approved generic standards providing for the
listing pursuant to Rule 19b-4(e) of other derivative products based on
indexes described in rules previously approved by the Commission under
Section 19(b)(2) of the Exchange Act. The Exchange proposes to include
in the generic standards for the listing of ICUs indexes that have been
approved by the Commission in connection with the listing of options,
ICUs, Index-Linked Exchangeable Notes, or Index-Linked Securities. The
Exchange believes that the application of that standard to ETFs is
appropriate because the underlying index would have been subject to
detailed and specific Commission review in the context of the approval
of listing of those other derivatives.\15\
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\15\ For example, rules of the American Stock Exchange LLC
(``Amex'') and NYSE Arca, Inc. provide that one element of the
standards for listing Index-Linked Securities pursuant to Rule 19b-
4(e) is the previous review and approval for trading of options or
other derivatives by the Commission under Section 19(b)(2) of the
Exchange Act and rules thereunder. See supra note 10.
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This new generic standard would be limited to stock indexes and
would require that each component stock be either: (1) a U.S. Component
Stock that is listed on a national securities exchange and is an NMS
stock as defined in Rule 600 of Regulation NMS; or (2) a Non-U.S.
Component Stock that is listed and traded on an exchange that has last-
sale reporting.
The Exchange is also proposing to include additional continued
listing standards relating to ETFs. The Exchange would commence
delisting proceedings if the value of the index or portfolio of
securities on which the ETF is based is no longer calculated or
disseminated.
The Exchange proposes to modify the Original Unit Listing Standards
in Section 703.16(A) of the Manual to formalize in the rules existing
best practices for providing equal access to material information about
the value of ETFs. Pursuant to proposed Section 703.16(A)(6), prior to
approving an ETF for listing, the Exchange would obtain a
representation from the ETF issuer that the NAV per share would be
calculated daily and made available to all market participants at the
same time.
Proposed Rule 1100(f) sets out the trading halt parameters for
ETFs. In particular, proposed Rule 1100(f)(1) sets out that, where the
Exchange is the listing market for an ICU, if the IIV or the index
value applicable to that series of ICUs 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 index value occurs.
If the interruption to the dissemination of the IIV or the 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.
Proposed Rule 1100(f)(2) provides that, for series of ICUs admitted
to dealings by the Exchange on the basis of unlisted trading privileges
(``UTP''), during the hours for trading of ICUs on the Exchange, if a
temporary interruption occurs in the calculation or wide dissemination
of the applicable IIV or value of the underlying index by a major
market data vendor and the listing market halts trading in a series of
ICUs, the Exchange, upon notification by the listing market of such
halt due to such temporary interruption, also shall immediately halt
trading in the series of ICUs on the Exchange. If the IIV or the value
of the underlying index continues not to be calculated or widely
available as of the commencement of trading on the Exchange on the next
business day, the Exchange shall not commence trading of the series of
ICUs that day. If an interruption in the calculation or wide
dissemination of the IIV or the value of the underlying index
continues, the Exchange may resume trading in the series of ICUs only
if calculation and wide dissemination of the IIV or the value of the
underlying index resumes or trading in such series resumes in the
listing market.
The Exchange is proposing other minor and clarifying changes to
Section 703.16. Section 703.16(C)(2)(a)(v) has been modified to reflect
the adoption of Regulation NMS. Proposed Section 703.16(C)(4)(c) has
been added to make sure that an entity that advises index providers or
calculators and related entities has in place procedures designed to
prevent the use and dissemination of material non-public information
regarding the index underlying the ETF.
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of ICUs listed pursuant to the
proposed new listing standards or traded pursuant to UTP. In addition,
the Exchange has a general policy prohibiting the dissemination of
material, non-public information by its employees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Exchange Act \16\ in general and furthers the
objectives of Section 6(b)(5) \17\ in particular in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system.
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\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange did not receive any written comments on the proposed
rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing,
[[Page 3183]]
including whether the proposed rule change is consistent with the
Exchange Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2006-101 on the subject line.
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-NYSE-2006-101. 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 (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of NYSE. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-NYSE-2006-101 and should be submitted on or before February 14,
2007.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\18\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Exchange Act \19\ in
that it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\18\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b)(5).
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Currently, the Exchange must file a proposed rule change with the
Commission pursuant to Section 19(b)(1) of the Exchange Act \20\ and
Rule 19b-4 thereunder \21\ to list and trade any ETF based on an index
comprised of foreign securities. The Exchange also must file a proposed
rule change to list and trade ETFs based on indexes or portfolios
previously approved by the Commission as underlying benchmarks for
derivative securities. However, Rule 19b-4(e) provides that the listing
and trading of a new derivative securities product by an SRO will not
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the
Commission has approved, pursuant to Section 19(b) of the Exchange Act,
the SRO's trading rules, procedures, and listing standards for the
product class that would include the new derivative securities product,
and the SRO has a surveillance program for the product class. The
Exchange's proposed rules for the listing and trading of ETFs pursuant
to Rule 19b-4(e) based on (1) certain indexes with components that
include foreign securities or (2) indexes or portfolios previously
approved by the Commission as underlying benchmarks for derivative
securities fulfill these requirements. Use of Rule 19b-4(e) by NYSE to
list and trade such ETFs should promote competition, reduce burdens on
issuers and other market participants, and make such ETFs available to
investors more quickly.\22\
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\20\ 15 U.S.C. 78s(b)(1).
\21\ 17 CFR 240.19b-4.
\22\ The Commission notes, however, that the failure of a
particular ETF to meet these generic listing standards would not
preclude the Exchange from submitting a separate proposed rule
change to list and trade the ETF.
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The Commission previously has approved generic listing standards
for another exchange, Amex, that are substantially similar to those
proposed here by NYSE.\23\ This proposal does not appear to raise any
novel regulatory issues. Therefore, the Commission finds that NYSE's
proposal is consistent with the Exchange Act on the same basis that it
approved Amex's generic listing standards for ETFs based on
international or global indexes or on indexes or portfolios previously
approved by the Commission as underlying benchmarks for derivative
securities.
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\23\ See Securities Exchange Act Release No. 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (approving
generic listing standards for series of portfolio depositary
receipts and index fund shares based on international or global
indexes); Securities Exchange Act Release No. 55018 (December 28,
2006), 72 FR 1040 (January 9, 2007) (SR-Amex-2006-109) (making
clarifying changes to the generic listing standards set forth in SR-
Amex-2006-78).
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Proposed Section 703.16(C)(2)(b) of the Manual establishes
standards for the composition of an index or portfolio underlying an
ETF. These requirements are designed, among other things, to require
that components of an index or portfolio underlying the ETF are
adequately capitalized and sufficiently liquid, and that no one
security dominates the index. The Commission believes that, taken
together, these standards are reasonably designed to ensure that
securities with substantial market capitalization and trading volume
account for a substantial portion of any underlying index or portfolio,
and that when applied in conjunction with the other applicable listing
requirements, will permit the listing and trading only of ETFs that are
sufficiently broad-based in scope to minimize potential manipulation.
The Commission further believes that the proposed listing standards are
reasonably designed to preclude NYSE from listing and trading ETFs that
might be used as surrogate for trading in unregistered securities. The
requirement that each component security underlying an ETF be an NMS
stock (in the case of a U.S. Component Stock) or listed on an exchange
and subject to last-sale reporting (in the case of a Non-U.S. Component
Stock) should contribute to the transparency of the market for these
ETFs.
The proposed generic listing standards also will permit NYSE to
list and trade an ETF if the Commission has previously approved an SRO
rule change that contemplates listing and trading a derivative product
based on the same underlying index. NYSE would be able to rely on that
earlier approval order, provided that (1) the securities comprising the
underlying index consist of U.S. Component Stocks or Non-U.S. Component
Stocks as set
[[Page 3184]]
forth in Section 703.16(B) of the Manual and (2) NYSE complies with the
commitments undertaken by the other SRO set forth in the prior order,
including any surveillance-sharing arrangements with a foreign market.
The Commission believes that NYSE's proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Exchange Act,\24\ which sets forth
Congress' finding that it is in the public interest and appropriate for
the protection of investors and the maintenance of fair and orderly
markets to assure the availability to brokers, dealers, and investors
of information with respect to quotations for and transactions in
securities. The Exchange's proposal also requires the value of the
index or portfolio underlying an ETF based on a global or international
index to be disseminated at least once every 60 seconds during Exchange
trading hours.\25\ In addition, an IIV, which represents an estimate of
the value of a share of each ETF, must be updated and disseminated at
least once every 15 seconds during the time an ETF trades on the
Exchange.\26\ The IIV will be updated to reflect changes in the
exchange rate between the U.S. dollar and the currency in which any
index or portfolio component stock is denominated. In the event that an
underlying index or portfolio value is no longer calculated or
disseminated, the Exchange has represented that it would commence
delisting proceedings for the associated ETF. Furthermore, the issuer
of an ETF listed under the proposed rules will be required to represent
that it will calculate the NAV and make it available daily to all
market participants at the same time.\27\
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\24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\25\ See proposed Section 703.16(C)(3) of the Manual. If an
index or portfolio value does not change for some of the time that
the ETF trades on the Exchange, the last official calculated value
must remain available throughout Exchange trading hours.
\26\ See id.
\27\ See proposed Section 703.16(A)(6) of the Manual.
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The Exchange's trading halt rules are reasonably designed to
prevent trading in an ETF when transparency cannot be assured. Proposed
NYSE Rule 1100(f)(1) provides that, when the Exchange is the listing
market, if the IIV or index value applicable to an ETF is not
disseminated as required, the Exchange may halt trading during the day
in which the interruption occurs. If the interruption continues, then
the Exchange will halt trading no later than the beginning of the next
trading day. In addition, proposed NYSE Rule 1100(f)(2) sets forth
trading halt procedures when the Exchange trades the ETF pursuant to
UTP. This proposed rule is substantially similar to that recently
adopted by another exchange, NYSEArca.\28\
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\28\ See Securities Exchange Act Release No. 54997 (December 21,
2006), 71 FR 78501 (December 29, 2006) (SR-NYSEArca-2006-77).
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In approving this proposal, the Commission relied on NYSE's
representation that its surveillance procedures are adequate to
properly monitor the trading of ICUs listed pursuant to the proposed
new listing standards or traded pursuant to unlisted trading
privileges. This approval is conditioned on the continuing accuracy of
that representation.
Acceleration
The Commission finds good cause for approving the proposed rule
change, as amended, prior to the 30th day after the date of publication
of the notice of filing thereof in the Federal Register. The Commission
notes that NYSE's proposal is substantially similar to an Amex proposal
that has been approved by the Commission.\29\ The Commission does not
believe that NYSE's proposal raises any novel regulatory issues and,
therefore, that good cause exists for approving the filing before the
conclusion of a notice-and-comment period. Accelerated approval of the
proposal will expedite the listing and trading of additional ETFs by
the Exchange, subject to consistent and reasonable standards.
Therefore, the Commission finds good cause, consistent with Section
19(b)(2) of the Exchange Act,\30\ to approve the proposed rule change,
as amended, on an accelerated basis.
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\29\ See supra note 23.
\30\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\31\ that the proposed rule change (SR-NYSE-2006-101), as
amended, be, and it hereby is, approved on an accelerated basis.
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\31\ Id.
\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\32\
Nancy M. Morris,
Secretary.
[FR Doc. E7-956 Filed 1-23-07; 8:45 am]
BILLING CODE 8011-01-P