[Federal Register: June 15, 2007 (Volume 72, Number 115)]
[Notices]
[Page 33264-33271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn07-102]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55890; File No. SR-NYSEArca-2007-37]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change to List
and Trade Shares of the Four Funds of StateShares, Inc.
June 8, 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 April 10, 2007, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange''),
through its wholly owned subsidiary NYSE Arca Equities, Inc. (``NYSE
Arca Equities''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
The Commission is publishing this notice and order to solicit comments
on the proposed rule change from interested persons and to approve the
proposed rule change 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 Exchange proposes to list and trade shares (``Shares'') of the
following four funds (``Funds'') of StateSharesTM, Inc.
(``Company'') based on certain underlying securities indexes
(``Indexes'' or the ``Underlying Indexes'') pursuant to NYSE Arca
Equities Rule 5.2(j)(3):
StateSharesTM Georgia 50 Exchange-Traded Fund
StateSharesTM North Carolina 50 Exchange-Traded
Fund
StateSharesTM Virginia 50 Exchange-Traded Fund
StateSharesTM Washington 50 Exchange-Traded
Fund
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nyse.com, at the Exchange's principal office,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list the Shares of the Funds. The Company
is an investment company with 22 series of underlying fund portfolios
and is registered under the Investment Company Act of 1940 (``1940
Act'').\3\ Each Fund is registered with the Commission under the 1940
Act as an open-end, non-diversified management investment company. Each
Fund's investment objective is to seek to track the performance, before
fees and expenses, of a particular Underlying Index, as described more
fully below. Each Fund focuses on a different geographic index.
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\3\ See Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form N-1A, as filed with the Commission on
February 28, 2007 and accompanying Statement of Additional
Information (``SAI'') (File No. 333-139823) (``Registration
Statement''). The Company was organized as a Maryland corporation on
December 26, 2006.
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Under NYSE Arca Equities Rule 5.2(j)(3), the Exchange may list and/
or trade pursuant to unlisted trading privileges (``UTP'') ``Investment
Company Units'' (``ICUs'').\4\ The Funds do not meet the ``generic''
listing requirements of NYSE Arca Equities Rule 5.2(j)(3) applicable to
the listing of ICUs pursuant to Rule 19b-4(e) under the Act,\5\ and
thus cannot be listed without a filing made pursuant to Rule 19b-4
under the Act.\6\ Specifically, the Indexes underlying these four
Shares do not meet the requirement of Commentary .01(a)(2) to NYSE Arca
Equities Rule 5.2(j)(3) that, for component stocks representing at
least 90% of the weight of the Underlying Index, each of such stocks
has a minimum monthly trading volume during each of the last six months
of at least 250,000 shares.\7\
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\4\ See Securities Exchange Act Release No. 41983 (October 6,
1999), 64 FR 56008 (October 15, 1999) (SR-PCX-1998-29) (approving
NYSE Arca Equities Rule 5.2(j)(3)); Securities Exchange Act Release
No. 44551 (July 12, 2001), 66 FR 37716 (July 19, 2001) (SR-PCX-2001-
14) (approving generic listing standards for ICUs).
\5\ 17 CFR 240.19b-4(e).
\6\ 17 CFR 240.19b-4.
\7\ As of April 4, 2007, stocks with a monthly trading volume
during each of the last six months of at least 250,000 shares
represented 88.26%, 87.63%, 84.28%, and 89.34% of the weight of the
S&P Custom/StateSharesTM Georgia 50 Index, S&P Custom/
StateSharesTM North Carolina 50 Index, S&P Custom/
StateSharesTM Virginia 50 Index, and S&P Custom/
StateSharesTM Washington 50 Index, respectively. Source:
Bloomberg.
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Operation of the Funds. XShares Advisors LLC, a subsidiary of
XShares Group LLC (``XG'') would be the investment adviser
(``Advisor'') to the Funds. The Advisor is registered as an investment
adviser under Section 203 of the Investment Advisers Act of 1940
(``Advisers Act'').\8\ The Advisor would have overall responsibility
for the general management and administration of each Fund, subject to
the supervision of the Funds' Board of Directors. Under the Investment
Advisory Agreement, the Advisor would be responsible for arranging sub-
advisory, transfer agency, custody, fund administration, and all
[[Page 33265]]
other non-distribution-related services for each Fund. The Advisor
would also be responsible for employing any sampling strategy for each
Fund. Pursuant to the Investment Advisory Agreement, the Advisor would
be authorized to engage one or more sub-advisors to perform any of the
services contemplated to be performed by the Advisor under the
Investment Advisory Agreement.
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\8\ 15 U.S.C. 80b.
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BNY Investment Advisors (``Sub-Advisor''), a separate identifiable
division of The Bank of New York (``BONY''), a New York State banking
corporation, would act as investment sub-advisor to each Fund. Pursuant
to a Sub-Advisory Agreement between the Advisor and the Sub-Advisor,
the Sub-Advisor would be responsible for the day-to-day management of
each Fund, subject to the supervision of the Advisor and the Funds'
Board of Directors. The Sub-Advisor would be responsible for
implementing the replication strategy for each Fund with regard to its
Underlying Index and for general administration, compliance, and
management services, as may be agreed between the Advisor and the Sub-
Advisor from time to time.
The Index Administrator. Standard & Poor's is the index
administrator (``Index Administrator'') and in that capacity has sole
responsibility and authority for maintaining each Underlying Index and
determining, in accordance with the objective criteria, which
securities are to be added or removed from an Underlying Index. Each
Underlying Index is compiled, maintained, and calculated without regard
to the Advisor, Sub-Advisor, or Distributor (described below). The
Index Administrator has no obligation to take the specific needs of the
Advisor, Sub-Advisor, or Distributor into account in the determination
and calculation of the Underlying Index.
Administrator, Accounting Agent, Custodian, and Transfer Agent.
BONY would serve as administrator, accounting agent, custodian, and
transfer agent for each Fund (``Administrator''). As the Administrator,
BONY would be obligated on a continuous basis to provide certain
administration, valuation, accounting, and computational services
necessary for the proper administration of the Company and each Fund.
BONY also would hold each Fund's assets, calculate the NAV of each
Fund's Shares, and calculate net income and realized capital gains or
losses for each Fund.
The Distributor. ALPS Distributors, Inc. (``Distributor'') would be
the distributor of Creation Units (as described more fully below) for
each Fund on an agency basis. The Distributor has entered into a
Distribution Agreement with the Company pursuant to which it would
distribute the Shares of each Fund. Shares would be offered
continuously for sale by each Fund through the Distributor only in
Creation Unit Aggregations (as described more fully below). Fund Shares
in less than Creation Unit Aggregations would not be distributed by the
Distributor. The Distributor would deliver the prospectuses and, upon
request, the Statement of Additional Information (``SAI'') to persons
purchasing Creation Unit Aggregations and would maintain records of
orders placed with it. The Distributor is a broker-dealer registered
under the Act and a member of NASD.
Each Fund has elected and intends to continue to qualify as a
``regulated investment company'' (a ``RIC'') under the Internal Revenue
Code (``Code''). Among other things, each Fund must meet certain
diversification tests imposed by the Code to satisfy RIC
requirements.\9\
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\9\ Among these is a requirement that, at the close of each
quarter of each Fund's taxable year: (1) 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 the purpose of
this calculation with respect to 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
(2) not more than 25% of the value of its total assets may be
invested in 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 Code) and that are engaged in the same or
similar trades or business (other than U.S. government securities or
other RICs).
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Description of the Funds and the Underlying Indexes. According to
the Funds' Registration Statement, each Fund's investment objective is
to seek to track the performance, before fees and expenses, of a
particular Underlying Index. Each Underlying Index is designed to track
various geographic sub-sectors of the economy and serve as: (1)
Performance benchmarks for portfolio managers and investors who invest
in securities of these issuers; (2) performance yardsticks for issuers
in these geographic areas; and (3) vehicles for directing attention to
regional investments and allocations within the U.S. economy. Each Fund
focuses on a different geographic index. The Underlying Indices have
been designed geographically in each of the following areas: Georgia,
North Carolina, Virginia, and Washington.
Each Underlying Index was created and developed by XG based on its
own proprietary model. In developing each Underlying Index, XG has
established specific characterization/inclusion/exclusion criteria
governing the stocks that are included in each Underlying Index. Each
Underlying Index is maintained by the Index Administrator based on such
criteria and is generally reconstituted on an annual basis. Decisions
regarding additions to, and removals from, each individual Underlying
Index are made by the Index Administrator, on an annual basis, in its
sole discretion.
The Advisor uses a ``passive,'' or ``indexing,'' approach in
managing each Fund. The Funds do not seek to outperform any particular
market sector and would not assume temporary defensive positions when
markets decline or appear overvalued. Each Fund would invest at least
90% of its assets in the common stocks of companies in the Underlying
Index. Because each Underlying Index is comprised only of stocks from
companies headquartered in the named State, as indicated by its name
(e.g., only ``Georgia'' companies are contained in the S&P Custom/
StateSharesTM Georgia 50 Index), each Fund would invest at
least 90% of its assets in such companies. Each Fund may also invest up
to 10% of its assets in futures contracts, options on futures
contracts, options, or swaps on securities of companies in the
Underlying Index, as well as cash and cash equivalents, such as money
market instruments (subject to applicable limitations of the 1940 Act).
Each Fund would attempt to replicate the Underlying Index by matching
the weighting of securities in its portfolio with such securities'
weightings in the Underlying Index.\10\ In managing the Funds, the
Advisor seeks a correlation of 0.95 or better between each Fund's
performance and the performance of the Underlying Index. A figure of
1.00 would represent perfect correlation. There is no guarantee that
the Advisor will be able to obtain this level of correlation.
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\10\ Each company in the applicable Underlying Index is assigned
a weight factor based upon total employees. Companies with more
employees are assigned higher weighting than companies with fewer
employees.
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From time to time, it may not be possible, for regulatory or other
legal reasons, to replicate each Underlying Index and in such cases the
Advisor may pursue a sampling strategy in managing the portfolio.
Pursuant to this strategy, a Fund may invest the remainder of its
assets in securities of companies not included in an Underlying Index
if the Advisor believes that such securities would
[[Page 33266]]
assist the Fund in tracking the Underlying Index. If a Fund pursues a
sampling strategy, it would continue to invest at least 90% of its
assets in the common stocks of the companies in the Underlying Index.
The component securities of the Underlying Indexes are all listed
on a national securities exchange.\11\ Only companies with market
capitalizations greater than $100 million for at least two of the
preceding three quarters are eligible for inclusion in each of the
Indexes. The StateSharesTM Georgia 50 Exchange-Traded Fund
seeks to track the performance, before fees and expenses, of the S&P
Custom/StateSharesTM Georgia 50 Index. The
StateSharesTM North Carolina 50 Exchange-Traded Fund seeks
to track the performance, before fees and expenses, of the S&P Custom/
StateSharesTM North Carolina 50 Index. The
StateSharesTM Virginia 50 Exchange-Traded Fund seeks to
track the performance, before fees and expenses, of the S&P Custom/
StateSharesTM Virginia 50 Index. The
StateSharesTM Washington 50 Exchange-Traded Fund seeks to
track the performance, before fees and expenses, of the S&P Custom/
StateSharesTM Washington 50 Index.
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\11\ See e-mail from Tim Malinowski, Director, NYSE Group, Inc.
on May 30, 2007 to Mitra Mehr, Special Counsel, Division of Market
Regulation (``Division''), Commission (``NYSE Arca May 30th e-
mail'').
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Information about each Underlying Index, including the component
securities in each Underlying Index and value of the securities in each
Underlying Index are disseminated every 15 seconds during the Core
Trading Session through Reuters.
Each Fund would impose transaction fees on in-kind purchases and
redemptions of the Fund to cover the custodial and other costs incurred
by the Fund in effecting in-kind trades. To compensate the Company for
transfer and other transaction costs involved in creation transactions
through the clearing process (as described below), investors would be
required to pay a fixed creation transaction fee, payable to the
Company regardless of the number of creations made each day. A
redemption transaction fee would be imposed to offset transfer and
other transaction costs that may be incurred by a Fund. An additional
variable charge for cash redemptions (when cash redemptions are
available or specified) for a Fund may be imposed. The creation and
redemption transaction fees for creations and redemptions in-kind for
the Funds are described in the Funds' prospectuses.
Each Fund would issue and redeem, on a continuous basis, shares at
its net asset value (``NAV'') only in blocks of 100,000 shares or
multiples thereof (each, a ``Creation Unit'' or a ``Creation Unit
Aggregation''), generally in exchange for a basket of equity securities
included in the Underlying Index, together with the deposit of a
specified cash payment. Shares would be redeemable only in Creation
Unit Aggregations, and, generally, in exchange for portfolio securities
and a specified cash payment.
All orders to purchase Shares of each Fund in Creation Units must
be placed with the Distributor by or through an ``Authorized
Participant,'' which is either: (1) A ``Participating Organization,''
i.e., a broker-dealer or other participant in the clearing process
through the Continuous Net Settlement System of the National Securities
Clearing Corporation (``NSCC''), a clearing agency that is registered
with the Commission (the ``Clearing Process''); or (2) a Depository
Trust Company (``DTC'') Participant that has executed a ``Participant
Agreement'' with the Distributor governing the purchase and redemption
of Creation Units.
Consideration for Purchase of Creation Units. The consideration for
purchase of a Creation Unit from each Fund generally consists of the
in-kind deposit of a designated portfolio of equity securities
(``Deposit Securities'') per each Creation Unit Aggregation
constituting a substantial replication of the stocks included in each
Fund's Underlying Index and an amount of cash (``Cash Component'')
consisting of a Balancing Amount (described below) and a transaction
fee. Together, the Deposit Securities and the Cash Component constitute
the Fund Deposit.
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 (``Deposit Amount''). It ensures that the NAV of a Fund
Deposit (not including the transaction fee) is identical to the NAV of
the Creation Unit it is used to purchase. If the Balancing Amount is a
positive number (i.e., the NAV per Creation Unit exceeds the market
value of the Deposit Securities), then that amount would be paid by the
purchaser to the Fund in cash. If the Balancing Amount is a negative
number (i.e., the NAV per Creation Unit is less than the market value
of the Deposit Securities), then that amount would be paid by the Fund
to the purchaser in cash (except as offset by the transaction fee).
The Company, through the NSCC, makes available on each business
day, immediately prior to the opening of business on the NYSE
(currently 9:30 a.m. Eastern Time), a list of the names and the
required number of shares of each Deposit Security to be included in
the current Fund Deposit for each Fund (based on information at the end
of the previous business day). The Fund Deposit is applicable, subject
to any adjustments as described below, to effect purchases of Creation
Units of a Fund until such time as the next-announced Fund Deposit
composition is made available. Each Fund reserves the right to accept a
nonconforming Fund Deposit.
The identity and number of shares of the Deposit Securities
required for a Fund Deposit may change to reflect rebalancing
adjustments and corporate actions by a Fund, or in response to
adjustments to the weighting or composition of the component stocks of
the Underlying Index. In addition, the Company reserves the right to
permit or require the substitution of an amount of cash--i.e., a ``cash
in lieu'' amount--to be added to the Cash Component to replace any
Deposit Security that: (1) May not be available in sufficient quantity
for delivery; (2) may not be eligible for transfer through the Clearing
Process; or (3) may not be eligible for trading by a Participating
Organization or the investor for which a Participating Organization is
acting. Brokerage commissions incurred in connection with acquisition
of Deposit Securities not eligible for transfer through the systems of
DTC and hence not eligible for transfer through the Clearing Process
would be an expense of each Fund. However, the Advisor, subject to the
approval of the Board of Directors, may adjust the transaction fee to
protect existing shareholders from this expense.
In addition to the list of names and numbers of securities
constituting the current Deposit Securities, the Company, through the
NSCC, would also make available on each business day the estimated Cash
Component, effective through and including the previous business day,
per outstanding Creation Unit of each Fund. All questions as to the
number of shares of each security in the Deposit Securities and the
validity, form, eligibility, and acceptance for deposit of any
securities to be delivered should be determined by the appropriate
Fund, and the Fund's determination should be final and binding.
Redemption of Shares in Creation Units. Fund Shares may be redeemed
only in Creation Unit Aggregations at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the
Administrator
[[Page 33267]]
and only on a business day. A Fund would not redeem Shares in amounts
less than Creation Unit Aggregations. A beneficial owner must
accumulate enough Shares in the secondary market to constitute a
Creation Unit Aggregation to have such Shares redeemed by the Company.
There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly
of a Creation Unit Aggregation. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient
number of Fund Shares to constitute a redeemable Creation Unit
Aggregation.
With respect to a Fund, the Administrator, through the NSCC, makes
available prior to the opening of business on the NYSE (currently 9:30
a.m. Eastern Time) on each business day, the identity of the Fund
securities that would be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as
described below) on that day. Fund Shares received on redemption may
not be identical to Deposit Securities that are applicable to creations
of Creation Unit Aggregations.
Unless cash redemptions are available or specified for a Fund, the
redemption proceeds for a Creation Unit Aggregation would generally
consist of Fund Shares, as announced on the business day of the request
for redemption received in proper form, plus or minus cash in an amount
equal to the difference between the NAV of the Fund Shares being
redeemed, as next determined after a receipt of a request in proper
form, and the value of the Fund Shares (the ``Cash Redemption
Amount''), less a redemption transaction fee. If the Fund Shares have a
value greater than the Fund Shares' NAV, a compensating cash payment
equal to the difference must be made by or through an Authorized
Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment
postponed for each Fund: (1) For any period during which the NYSE is
closed (other than customary weekend and holiday closings); (2) for any
period during which trading on the NYSE is suspended or restricted; (3)
for any period during which an emergency exists as a result of which
disposal of the shares of a Fund or determination of a Fund's NAV is
not reasonably practicable; or (4) in such other circumstances as is
permitted by the Commission.
Dividends, Distributions, and Taxes. Dividends from net investment
income, if any, would be declared and paid annually by each Fund.
Distributions of net realized securities gains, if any, generally would
be declared and paid once a year, but the Company may make
distributions on a more frequent basis for a Fund to improve index
tracking or to comply with the distribution requirements of the Code,
in all events in a manner consistent with the provisions of the 1940
Act.
Dividends and other distributions on Shares would be distributed on
a pro-rata basis to beneficial owners of such Shares. Dividend payments
would be made through DTC Participants and Indirect Participants to
beneficial owners then of record with proceeds received from the
Company.
The Company would make additional distributions to the extent
necessary: (1) To distribute the entire annual taxable income of the
Company, plus any net capital gains; and (2) to avoid imposition of the
excise tax imposed by Section 4982 of the Code. Management of the
Company reserves the right to declare special dividends if, in its
reasonable discretion, such action is necessary or advisable to
preserve the status of each Fund as a RIC or to avoid imposition of
income or excise taxes on undistributed income.
Dividend Reinvestment Service. The Company would not make the DTC
book-entry dividend reinvestment service available for use by
beneficial owners for reinvestment of their cash proceeds, but certain
individual broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by beneficial owners of Funds
through DTC Participants for reinvestment of their dividend
distributions. Investors would have to contact their brokers to
ascertain the availability and description of these services. A broker-
dealer could require investors to adhere to specific procedures and
timetables to participate in the dividend reinvestment service, and
investors would have to ascertain from their brokers such necessary
details. If this service is available and used, dividend distributions
of both income and realized gains would be automatically reinvested in
additional whole Shares issued by the same Fund based on a payable date
NAV.
Availability of Information Regarding Shares and Underlying
Indexes. The Company, through the NSCC, would make available on each
business day, immediately prior to the opening of business on the
Exchange (currently 9:30 a.m. Eastern Time), a list of the names and
the required number of shares of each Deposit Security to be included
in the current Fund Deposit for each Fund (based on information at the
end of the previous business day).
According to the Funds' Registration Statement, the NAV of each
Fund's shares would be calculated each business day as of the close of
regular trading on the NYSE, generally 4 p.m. Eastern Time. NAV per-
share would be computed by dividing the net assets by the number of
shares outstanding.
Additional information regarding the indicative value of shares of
each Fund, also known as the ``indicative optimized portfolio value''
(``IOPV''), would be disseminated every 15 seconds through the
Consolidated Tape throughout the Opening, Core, and Late Trading
Sessions (4 a.m. to 8 p.m. Eastern Time) by the Exchange. The IOPV does
not necessarily reflect the precise composition of the current
portfolio of securities held by a Fund at a particular point in time or
the best possible valuation of the current portfolio. Therefore, the
IOPV should not be viewed as a ``real-time'' update of the NAV, which
is computed only once a day. The IOPV is generally determined by using
both current market quotations and/or quotations obtained from broker-
dealers that may trade in the portfolio securities held by a Fund.
The Funds' Web site (http://www.StateSharesinc.com) would show the
prior day's closing NAV and closing market price for each Shares. In
addition, the Funds' Web site will contain the following information,
on a per-Share basis, for each Fund: (1) The prior business day's NAV
and the Bid/Ask Price and a calculation of the premium or discount of
the Bid/Ask Price at the time of calculation of the NAV against such
NAV; and (2) data in chart format displaying the frequency distribution
of discounts and premiums of the daily Bid/Ask Price against the NAV,
within appropriate ranges, for each of the four previous calendar
quarters. In addition, the Funds' Web site would contain information
regarding the premiums and discounts at which shares of each Fund has
traded. The Exchange would also disseminate a variety of data such as
Total Cash Amount Per Creation Unit, Shares Outstanding, and NAV with
respect to each Fund on a daily basis by means of CTA and CQ High Speed
Lines. In addition, quotation and last-sale information for the Shares
would be widely disseminated pursuant to the CTA Plan.\12\
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\12\ See e-mail from Tim Malinowski, Director, NYSE Group, Inc.
on May 24, 2007 to Mitra Mehr, Special Counsel, Division,
Commission.
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Each Fund's portfolio holdings would be publicly disseminated each
day that
[[Page 33268]]
a Fund is open for business through financial reporting and news
services including publicly available Web sites. In addition, a basket
composition file, which includes the security names and share
quantities required to be delivered in exchange for Fund Shares,
together with estimates and actual cash components, would be publicly
disseminated daily prior to the opening of the NYSE, via the NSCC.
The Company has informed the Exchange that each Fund would make the
NAV for each Fund available to all market participants at the same
time. If the NAV is not disseminated to all market participants at the
same time, the Exchange would halt trading in the Fund Shares.
Information about each Underlying Index, including the component
securities in each Underlying Index and the value of the securities in
each Underlying Index, would be disseminated every 15 seconds during
NYSE Arca's Core Trading Session through Reuters.\13\
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\13\ See e-mail from Tim Malinowski, Director, NYSE Group, Inc.
on June 7, 2007 to Mitra Mehr, Special Counsel, Division,
Commission.
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The Underlying Indexes
S&P Custom/StateSharesTM Georgia 50 Index. As of April
4, 2007, the S&P Custom/StateSharesTM Georgia 50 Index
component securities had a modified market capitalization of
approximately $72,107,201,000, representing 50 securities. The five
highest weighted securities represented approximately 15.37% of the
index weight. The heaviest weighted security represented approximately
3.20% of the index weight. Component stocks accounting for only 88.26%
of the weight of the Index satisfied the requirement of having monthly
trading volume during each of the last six months of at least 250,000
shares.\14\
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\14\ Source: Bloomberg.
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S&P Custom/StateShares TM North Carolina 50 Index. As of
April 4, 2007, the S&P Custom/StateSharesTM North Carolina
50 Index component securities had a modified market capitalization of
approximately $75,522,378,000, representing 50 securities. The five
highest weighted securities represented approximately 15.22% of the
index weight. The heaviest weighted security represented approximately
3.30% of the index weight. Component stocks accounting for only 87.63%
of the weight of the Index satisfied the requirement of having monthly
trading volume during each of the last six months of at least 250,000
shares.\15\
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\15\ See Id.
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S&P Custom/StateSharesTM Virginia 50 Index. As of April
4, 2007, the S&P Custom/StateSharesTM Virginia 50 Index
component securities had a modified market capitalization of
approximately $69,886,467,000, representing 50 securities. The five
highest weighted securities represented approximately 15.79% of the
index weight. The heaviest weighted security represented approximately
3.67% of the index weight. Component stocks accounting for only 84.28%
of the weight of the index satisfied the requirement of having monthly
trading volume during each of the last six months of at least 250,000
shares.\16\
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\16\ See Id.
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S&P Custom/StateSharesTM Washington 50 Index. As of
April 4, 2007, the S&P Custom/StateSharesTM Washington 50
Index component securities had a modified market capitalization of
approximately $70,059,732,000, representing 50 securities. The five
highest weighted securities represented approximately 15.48% of the
index weight. The heaviest weighted security represented approximately
3.34% of the index weight. Component stocks accounting for only 89.34%
of the weight of the index satisfied the requirement of having monthly
trading volume during each of the last six months of at least 250,000
shares.\17\
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\17\ See Id.
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Criteria for Initial and Continued Listing. The Shares would be
subject to the criteria for initial and continued listing of ICUs under
NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2). A minimum of one
Creation Unit (at least 100,000 Shares) would be required to be
outstanding at the start of trading. This requirement would be
comparable to requirements that have been applied to previously listed
series of ICUs. The Exchange believes that the proposed minimum number
of Shares outstanding at the start of trading is sufficient to provide
market liquidity.
The continued listing criteria for ICUs under NYSE Arca Equities
Rule 5.5(g)(2) provide that the Exchange would consider the suspension
of trading and delisting (if applicable) of the Shares in any of the
following circumstances:
Following the initial 12-month period beginning upon the
commencement of trading of the Shares of a Fund, there are fewer than
50 record and/or beneficial holders of such Shares for 30 or more
consecutive trading days; or
The value of the Underlying Index of a Fund is no longer
calculated or available; or
Such other event occurs or condition exists that, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
In addition, the Exchange would remove the Shares from trading and
listing upon termination of the Company.
The Exchange represents the Company and is required to comply with
Rule 10A-3 under the Act \18\ for the initial and continued listing of
the Shares.
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\18\ 17 CFR 240.10A-3.
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Trading Rules. The Exchange deems the Shares to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
The trading hours for each Fund on the Exchange are the same as those
set forth in NYSE Arca Equities Rule 7.34 (4 a.m. to 8 p.m. Eastern
Time). The minimum trading increment for shares of the Funds on the
Exchange would be $0.01.
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of each Fund. Trading may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities comprising
an Underlying Index and/or the financial instruments of a Fund; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares would be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's ``circuit
breaker'' rule \19\ or by the halt or suspension of trading of the
underlying securities. If the IOPV or the Index value applicable to a
series of ICUs is not being calculated or widely disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the calculation or wide dissemination of the IOPV or
the Index value occurs. If the interruption to the dissemination of the
IOPV 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.
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\19\ NYSE Arca Equities Rule 7.12.
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Surveillance. The Exchange intends to utilize its existing
surveillance procedures applicable to derivative products to monitor
trading in the Shares. The Exchange represents that
[[Page 33269]]
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules.
The Exchange's current trading surveillance focuses on detecting
when securities trade outside their normal patterns. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange may obtain information via the Intermarket
Surveillance Group (``ISG'') from other exchanges who are members or
affiliates of the ISG.\20\
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\20\ For a list of the current members and affiliate members of
ISG, see http://www.isgportal.com.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin. Prior to the commencement of trading, the
Exchange would inform its ETP Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin would discuss the
following: (1) The procedures for purchases and redemptions of Shares
in Creation Unit Aggregations (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a),\21\ which imposes a
duty of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) how
information regarding the IOPV is disseminated; (4) the requirement
that each ETP Holder deliver a prospectus to an investor purchasing
newly issued Shares prior to or concurrently with the confirmation of a
transaction; and (5) trading information.
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\21\ NYSE Arca Equities Rule 9.2(a) provides that an ETP Holder,
before recommending a transaction, must have reasonable grounds to
believe that the recommendation is suitable for its customer based
on any facts disclosed by the customer as to his other security
holdings and as to his financial situation and needs. Further, the
rule provides, with a limited exception, that prior to the execution
of a transaction recommended to a non-institutional customer the ETP
Holder shall make reasonable efforts to obtain information
concerning the customer's financial status, tax status, investment
objectives, and any other information that it believes would be
useful to make a recommendation. See Securities Exchange Act Release
No. 34-54045 (June 26, 2006), 71 FR 37971 (July 3, 2006) (SR-PCX-
2005-115).
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In addition, the Bulletin would reference that each Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin would also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from Section 11(d)(1) of
the Act \22\ and certain rules under the Act, including Rule 10a-1,
Regulation SHO, Rule 10b-10, Rule 14e-5, Rule 10b-17, Rule 11d1-2,
Rules 15c1-5 and 15c1-6, and Rules 101 and 102 of Regulation M under
the Act. The Bulletin would also disclose that the NAV for the Shares
would be calculated after 4 p.m. Eastern Time each trading day.
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\22\ 15 U.S.C. 78k(d)(1).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \23\ in general, and furthers the
objectives of Section 6(b)(5) \24\ 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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\23\ 15 U.S.C. 78f(b).
\24\ 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 will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2007-37 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-NYSEArca-2007-37. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (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 the Exchange. 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-NYSEArca-2007-37 and should be submitted on or before
July 6, 2007.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
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.\25\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\26\ which
requires that an exchange have rules designed, among other things, 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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\25\ In approving this rule change, the Commission notes that it
has considered the proposal's impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
\26\ 15 U.S.C. 78f(b)(5).
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The Shares of the four Funds do not meet the ``generic'' listing
standards of NYSE Arca Rule 5.2(j)(3) and thus cannot be listed in
reliance upon Rule
[[Page 33270]]
19b-4(e) under the Act. The Underlying Indexes do not meet the
requirement of Commentary .01(a)(2) to NYSE Arca Equities Rule
5.2(j)(3), which requires that component stocks of an Underlying Index
representing at least 90% of the weight of the Underlying Index have a
minimum monthly trading volume during each of the last six months of at
least 250,000 shares. Instead, as of April 4, 2007, for each Fund,
component stocks representing just under 90% of the weight of each
Underlying Index had a minimum monthly trading volume during each of
the last six months of at least 250,000.\27\ The Commission believes
that the listing and trading of the Shares is consistent with the Act.
The Commission notes that it previously has approved exchange rules
that contemplate the listing and trading of derivative securities
products based on indices that were composed of stocks that did not
meet certain quantitative generic listing criteria by only a slight
amount.\28\
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\27\ The percentages ranged from 84.28% for the S&P Custom/
StateShares\TM\ Virginia 50 Index to 89.34% for the S&P Custom/
StateShares\TM\ Washington 50 Index. See supra note 7.
\28\ See Securities Exchange Act Release No. 55699 (May 3,
2007), 72 FR 26435 (May 9, 2007) (SR-NYSEArca-2007-27) (approving
the listing and trading of shares of the iShares FTSE NAREIT
Residential Index Fund where the weighting of the five highest
components of the underlying index was only marginally higher than
that required by NYSE Arca's generic listing standards); Securities
Exchange Act Release No. 52826 (November 22, 2005), 70 FR 71874
(November 30, 2005) (SR-NYSEArca-2005-67) (approving the listing and
trading of shares of the iShares Dow Jones U.S. Energy Sector Index
Fund and the iShares Dow Jones U.S. Telecommunications Sector Index
Fund where the weighting of the five highest components of the
respective underlying indexes was higher than that required by NYSE
Arca's generic listing standards). See also Securities Exchange Act
Release No. 46306 (August 2, 2002), 67 FR 51916 (August 9, 2002)
(SR-NYSE-2002-28) (approving the trading pursuant to UTP of shares
of Vanguard Total Stock Market (VIPERs), iShares Russell 2000 Index
Funds, iShares Russell 2000 Value Index Funds and iShares Russell
2000 Growth Funds, none of which met the volume requirement of the
generic listing criteria for NYSE).
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The Commission believes that the proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Exchange Act,\29\ 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. Quotation and last-sale information for the Shares will be
widely disseminated pursuant to the CTA Plan. Moreover, the IOPV will
be calculated and disseminated at least every 15 seconds throughout
NYSE Arca's three trading sessions, and the Index value will be
calculated and disseminated every 15 seconds during the Exchange's Core
Trading Session. The NAV of each Fund will be calculated and
disseminated once each trading day. The Funds' Web site would include,
among other things, each Fund's prospectus and SAI, information
regarding the Underlying Index for each Fund,\30\ the prior day's
closing NAV, a calculation of the premium or discount of the Bid/Ask
Price at the time of calculation of the NAV against the NAV on a per-
share basis, and information regarding the premiums and discounts at
which shares of each Fund have traded. In sum, the Commission believes
that the proposal is reasonably designed to facilitate access to
information that will assist investors in properly valuing the Shares.
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\29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\30\ See NYSE Arca May 30th e-mail.
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The Commission believes that the proposed rules are reasonably
designed to promote fair disclosure of information that may be
necessary to price an ETF appropriately. The Exchange has represented
that if the NAV is not disseminated to all market participants at the
same time, the Exchange would halt trading in the Fund shares.
The Commission believes that the proposal is reasonably designed to
preclude trading of the Shares when transparency is impaired. If the
IOPV or the Index value applicable to a series of Shares is not being
calculated and disseminated as required, the Exchange may halt trading
during the day in which the interruption to the dissemination of the
IOPV or the Index value occurs. If the interruption to the calculation
and dissemination of the IOPV 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.
The Commission finds that the Exchange's proposed rules and
procedures for trading of the Shares are consistent with the Act. The
Exchange deems the Shares to be equity securities, thus rendering
trading in the Shares subject to the Exchange's existing rules
governing the trading of equity securities.
In support of this proposal, the Exchange has made the following
representations:
1. The Exchange will rely on its existing surveillance procedures
applicable to derivative products to monitor trading in the Shares.
These procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules. The Exchange may obtain information via the ISG from
other exchanges that are members or affiliates of the ISG.
2. Prior to the commencement of trading, the Exchange will inform
its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares.
3. If the IOPV or the Index value applicable to a series of Shares
is not being calculated and disseminated as required, the Exchange may
halt trading during the day in which the interruption to the
dissemination of the IOPV or the Index value occurs. If the
interruption to the calculation and dissemination of the IOPV 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.
This Order is conditioned on NYSE Arca'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.\31\ Except
for one criterion relating to the monthly trading volume of the
components of the Underlying Indexes, each Fund meets the ``generic''
listing standards of NYSE Arca Equities Rule 5.2(j)(3). In this case,
as of April 4, 2007, component stocks representing just under 90% of
the weight of each Underlying Index had a minimum monthly trading
volume during each of the last six months of at least 250,000, as
required by NYSE Arca generic listing standards.\32\ The Commission
notes that it previously has approved exchange rules that contemplate
the listing and trading of derivative securities based on indices with
underlying component stocks that did not meet certain quantitative
criteria of the generic listing standards by a slight amount.\33\ The
listing and trading of the Shares do not appear to present any new or
significant regulatory concerns. Accelerating approval will allow the
Shares to trade on NYSE Arca without undue delay and should generate
[[Page 33271]]
additional competition in the market for such products.
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\31\ 15 U.S.C. 78s(b)(2).
\32\ Component stocks representing only 88.26% (S&P Custom/
StateShares\TM\ Georgia 50 Index), 87.63% (S&P Custom/
StateShares\TM\ North Carolina 50 Index), 84.28% (S&P Custom/
StateShares\TM\ Virginia 50 Index), and 89.34% (S&P Custom/
StateShares\TM\ Washington 50 Index) of the weight of each
Underlying Index had a minimum monthly trading volume during each of
the last six months of at least 250,000.
\33\ See supra note 28.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-NYSEArca-2007-37), be and it
hereby is, approved on an accelerated basis.
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\34\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-11552 Filed 6-14-07; 8:45 am]
BILLING CODE 8010-01-P