[Federal Register: October 2, 2006 (Volume 71, Number 190)]
[Notices]
[Page 58034-58036]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02oc06-141]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54490; File No. SR-NYSEArca-2006-61]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change To
Amend Existing Rules for Investment Company Units
September 22, 2006.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on September 19, 2006, NYSE Arca, Inc. (the
``Exchange''), through its wholly-owned subsidiary NYSE Arca Equities,
Inc. (``NYSE Arca Equities''), filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been 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, through NYSE Arca Equities, proposes to amend
Commentary .01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3). The text of
the proposed rule change is below. Proposed new language is italicized;
proposed deletions are in brackets.
* * * * *
(b) Index Methodology and Calculation.
(1) The index underlying a series of Units will be calculated based
on [either] the market capitalization, modified market capitalization,
price, equal-dollar or modified equal-dollar weighting or a methodology
weighting components of the index based on any, some or all of the
following: sales, cash flow, book value and dividends;
* * * * *
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 has adopted listing standards applicable to Investment
Company Units (``Investment Company Units'' or ``ICUs'') that are
consistent with the listing criteria currently used by other national
securities exchanges, and trading standards pursuant to which the
Exchange may either list and trade ICUs or trade such ICUs on the
Exchange on an unlisted trading privileges (``UTP'') basis.\3\ An
Investment Company Unit is defined in NYSE Arca Equities Rule
5.1(b)(15) as a security representing an interest in a registered
investment company that could be organized as a unit investment trust,
an open-end management investment company or a similar entity. A
registered investment company is registered under the Investment
Company Act of 1940.\4\
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\3\ In October 1999, the Commission approved NYSE Arca Equities
Rule 5.2(j)(3), which sets forth the rules related to listing and
trading criteria for Investment Company Units. Securities Exchange
Act Release No. 41983 (October 6, 1999), 64 FR 56008 (October 15,
1999)(SR-PCX-1998-29). In July 2001, the Commission also approved
the Exchange's listing standards pursuant to Rule 19b-4(e) for
listing and trading, or the trading pursuant to UTP, of Investment
Company Units under NYSE Arca Equities Rule 5.2(j)(3). Securities
Exchange Act Release No. 44551 (July 12, 2001), 66 FR 37716-01 (July
19, 2001)(SR-PCX-2001-14).
\4\ 15 U.S.C. 80a.
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The ``generic'' listing criteria of Commentary .01 to NYSE Arca
Equities Rule 5.2(j)(3) permits listing or trading pursuant to UTP of
ICUs that satisfy such criteria in reliance upon Rule 19b-4(e) under
the Act \5\, without a filing pursuant to Rule 19b-4 under the Act.\6\
Commentary .01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3) requires that
if a series of ICUs approved for trading (including pursuant to UTP) on
the Exchange in reliance upon Rule 19b-4(e) under the Act,\7\ the index
underlying the series of ICUs must be calculated based on either the
market capitalization, modified market capitalization, price, equal-
dollar or
[[Page 58035]]
modified equal-dollar weighting methodology.
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\5\ 17 CFR 240.19b-4(e).
\6\ 17 CFR 240.19b-4.
\7\ 17 CFR 240.19b-4(e).
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According to the Exchange, the proposed rule change will specify
one additional methodology. The Exchange proposes to amend Commentary
.01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3) to permit a series of
ICUs to be listed or traded pursuant to UTP under the generic standards
pursuant to Rule 19b-4(e) under the Act \8\ if the underlying index for
such series is weighted based on any, some or all of the following:
sales, cash flow, book value, and dividends (``fundamentals weighted
indexes'').\9\ The Exchange states that the proposed rule change is
based on the proposed rule change of the NASDAQ Stock Market LLC
(``Nasdaq'').\10\
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\8\ Id.
\9\ In each instance, the index methodology will set forth the
means for calculating sales, cash flow, book value, and dividends.
\10\ See Securities Exchange Act Release No. 54459 (September
15, 2006), 71 FR 55533 (September 22, 2006)(SR-NASDAQ-2006-035).
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``Sales'' refers to the total of reported operating revenues less
various adjustments to gross sales, such as returns, discounts,
allowances, excise taxes, insurance charges, sales taxes, and value
added taxes. In calculating the sales value, an index provider may opt
to average the company's applicable figures for several prior years
(e.g., five prior years as reflected in the company's Annual Report on
Form 10-K).
``Cash Flow'' refers to operating income plus depreciation. For
example, a manufacturer typically reports its operating income as its
net sales plus other operating income minus the cost of goods sold and
selling, general and administrative expenses. Depreciation expense for
a manufacturer typically includes the depreciation that is directly
related to or associated with tangible fixed assets and includes
amortization of fixed assets that are part of plant, property and
equipment, such as leased assets, leasehold improvements, and internal
use software. For example, for a manufacturer depreciation, expense
excludes amortization of intangible assets. For banks, financial
companies and REITs, operating income refers to their total operating
revenue minus total operating expenses. For REITs, depreciation expense
includes depreciation relating to real estate property and includes:
corporate fixed asset depreciation if not separated from property
depreciation. In calculating cash flow, an index provider may opt to
average the company's applicable figures for several prior years (e.g.,
five prior years as reflected in the company's Annual Report on Form
10-K).
``Book Value'' refers to a company's book value at the index review
date. In accordance with accounting principles, book value generally
means total common equity, which is derived from adding share capital
and additional paid-in capital to retained earnings. In calculating
book value, an index provider may opt to average the company's
applicable figures for several prior years (e.g., five prior years as
reflected in the company's Annual Report on Form 10-K).
``Dividends'' refers to total dividend distributions, including
both special and regular dividends paid in cash. Generally, the total
dividend amount that is declared to all classes of common shareholders
includes regular cash, as well as special cash dividends, and excludes
returns of capital and in-specie dividends. In calculating dividends,
an index provider may opt to average the company's applicable figures
for several prior years (e.g., five prior years as reflected in the
company's Annual Report on Form 10-K).
The Exchange believes that the fundamentals weighting methodology
is a transparent methodology that is appropriately included in the ICU
generic listing criteria as an alternative to traditional weighting
techniques. According to the Exchange, fundamental indexing provides an
investor with additional choices in selecting exchange-traded funds
whose underlying index emphasizes financial factors that the investor
may believe are important. The Exchange notes that products based on
indexes using this methodology are already subject to the other
requirements of the generic listing standards pursuant to Rule 19b-
4(e).\11\ The Exchange has requested accelerated approval in order to
avoid delay in the listing and trading (including pursuant to UTP) of
securities linked to fundamental weighted indexes.\12\
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\11\ 17 CFR 240.19b-4(e).
\12\ Telephone conference on September 21, 2006 between Michael
Cavalier, Assistant General Counsel, NYSE Group, Inc. and Mitra
Mehr, Special Counsel, Division of Market Regulation, Commission
(``September 21st Telephone Conference'').
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \13\ of the Act, in general, and furthers the
objectives of Section 6(b)(5) \14\ of the Act, 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 mechanisms of a free and open market and a national market system.
The Exchange believes that the proposed rule change should facilitate
the listing and trading (including pursuant to UTP) of Investment
Company Units that rely on an index using a fundamental weighting
methodology and should thereby reduce the burdens on issuers and other
market participants.\15\
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ September 21st Telephone Conference.
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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 No. SR-NYSEArca-2006-61 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-2006-61. This
[[Page 58036]]
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 offices 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-2006-61 and should be submitted on or before
October 23, 2006.
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 is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\16\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\17\ which
requires, among other things, that the rules of a national securities
exchange be 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 for a free and open market and a national market system,
and, in general, to protect investors and the public interest.
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\16\ 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).
\17\ 15 U.S.C. 78f(b)(5).
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The proposed rule change amends NYSE's existing generic listing
standards pursuant to Rule 19b-4(e) \18\ for Investment Company Units
to provide that an eligible index may be calculated following the
``fundamentals weighted'' or ``fundamental index'' methodology. This
index calculation methodology weights components based on one or more
of the following: Sales, cash flow, book value, and dividends.\19\
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\18\ 17 CFR 240.19b-4(e).
\19\ According to the NYSE, in each instance, the index
methodology will set forth the means of calculating sales, cash
flow, book value, and dividends and thus will be transparent.
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Including this index calculation methodology in NYSE's generic
listing standards will provide investors with more investment choices
by offering an alternative to the other index methodologies, such as
capitalization-weighted ones. The Commission notes that the indexes
that would be based on the fundamentals weighting methodology will
already be subject to the requirements of the generic listing standards
pursuant to Rule 19b-4(e) of the Act,\20\ including trading volume and
liquidity requirements. In addition, by amending its generic listing
standards pursuant to Rule 19b-4(e) of the Act,\21\ NYSE should reduce
the time frame for listing and trading Investment Company Units that
rely on an index utilizing a fundamentals weighting methodology. The
proposed rule change should therefore facilitate the listing and
trading (including on an unlisted trading privileges basis) of such
securities and thereby reduce the burdens on issuers and other market
participants.
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\20\ 17 CFR 240.19b-4(e).
\21\ Id.
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The Exchange has requested accelerated approval of the proposed
rule change. The Commission finds good cause for approving the proposed
rule change prior to the 30th day after the date of publication of the
notice of filing in the Federal Register. The Commission believes the
proposed rule change should provide investors with an alternative to
the current index calculation methodologies. The proposed rule change
is substantially identical to that approved for another exchange.\22\
The Commission does not believe that the proposed rule change raises
any novel regulatory issues. Therefore, the Commission finds good
cause, consistent with Section 19(b)(2) of the Act,\23\ to approve the
proposed rule change on an accelerated basis.
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\22\ See Securities Exchange Act Release No. 54459 (September
15, 2006), 71 FR 55533 (September 22, 2006) (SR-NASDAQ-2006-035).
\23\ 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
Act,\24\ that the proposed rule change (SR-NYSEArca-2006-61) is
approved on an accelerated basis.
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\24\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-16111 Filed 9-29-06; 8:45 am]
BILLING CODE 8010-01-P