

[Federal Register: May 17, 2006 (Volume 71, Number 95)]
[Notices]               
[Page 28721-28727]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my06-93]                         


[[Page 28721]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53784; File No. SR-Amex-2006-41]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Listing and Trading of Shares of the ProShares Trust

May 10, 2006.
    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 28, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On May 
5, 2006, the Amex submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 (``Amendment No. 1'') replaced the original 
filing in its entirety.
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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 (``Index Fund 
Shares'') based on the following four (4) new funds of the ProShares 
Trust (the ``Trust''): Ultra Short 500 Fund; Ultra Short 100 Fund; 
Ultra Short 30 Fund; and the Ultra Short Mid-Cap 400 Fund (the 
``Funds''). The listing of Index Fund Shares that seek to provide 
investment results that provide investment results that correspond to 
twice (i.e., two times) the inverse of the underlying index's 
performance.
    The text of the proposed rule change is available on the Amex's Web 
site at http://www.amex.com, the Office of the Secretary, the Amex, 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, as 
amended. The text of these statements may be examined at the places 
specified in Item IV 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, pursuant to Amex Rule 1000A(b)(2), proposes to list 
and trade the Funds that seek to provide investment results that 
correspond to twice (or two times) the inverse or opposite (-200%) of 
the index's performance.
    Amex Rules 1000A et seq. provide standards for the listing of Index 
Fund Shares, which are securities issued by an open-end management 
investment company for exchange trading. These securities are 
registered under the Investment Company Act of 1940 (``1940 Act''), as 
well as under the Act. Index Fund Shares are defined in Amex Rule 
1000A(b)(1) as securities based on a portfolio of stocks or fixed 
income securities that seek to provide investment results that 
correspond generally to the price and yield of a specified foreign or 
domestic stock index or fixed income securities index.
    Recent amendments adopting Amex Rule 1000A(b)(2) now permit the 
Exchange to list and trade Index Fund Shares that seek to provide 
investment results that exceed the performance of an underlying 
securities index by a specified multiple or that seek to provide 
investment results that correspond to a specified multiple of the 
inverse or opposite of the index's performance. Accordingly, consistent 
with Amex Rule 1000A(b)(2), the Exchange now proposes to list and trade 
Index Fund Shares seeking investment results that correspond to twice 
the inverse of the underlying index's performance.
    The Commission recently approved the listing and trading of the 
Bullish and Bearish Funds (Ultra500 Fund; Ultra100 Fund; Ultra30 Fund; 
Ultra Mid-Cap 400 Fund; Short500Fund; Short100 Fund; Short30 Fund; and 
Short Mid-Cap 400 Fund).\4\ In particular, the Original Order provides 
that the Bearish Funds seek to provide investment results that 
correspond to the inverse of the relevant underlying index's 
performance. The Exchange's proposal seeks to expand the Bearish Fund 
offerings by permitting certain Index Fund Shares to such investments 
results that are two (2) times the inverse of the index.
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    \4\ See Securities Exchange Act Release No. 52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (``Original Order'').
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    The Exchange proposes to list under Amex Rule 1000A, the shares of 
the Funds. The Funds seek daily investment results, before fees and 
expenses, that correspond to twice the inverse (-200%) of the daily 
performance of the Standard and Poor's 500[reg] Index (``S&P 500''), 
the Nasdaq-100[reg] Index (``Nasdaq 100''), the Dow Jones Industrial 
Average\SM\ (``DJIA'') and the S&P MidCap400\TM\ Index (``S&P 
MidCap''), respectively. (These indexes are referred to herein as 
``Underlying Indexes''). \5\ If each of these Funds is successful in 
meeting its objective, the net asset value (the ``NAV'') \6\ of shares 
of each Fund should increase approximately twice as much, on a 
percentage basis, as the respective Underlying Index loses when the 
prices of the securities in the Index decline on a given day, or should 
decrease approximately twice as much as the respective Underlying Index 
gains when the prices of the securities in the index rise on a given 
day.
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    \5\ Exchange-traded funds (``ETFs'') based on each of the 
Underlying Indexes are listed and traded on the Exchange. See 
Securities Exchange Act Release Nos. 31591 (December 11, 1992), 57 
FR 60253 (December 18, 1992)(S&P 500 SPDR); 39143 (September 29, 
1997), 62 FR 51917 (October 3, 1997)(DIAMONDS); 41119 (February 26, 
1999), 64 FR 11510 (March 9, 1999)(QQQ); and 35689 (May 8, 1995), 60 
FR 26057 (May 16, 1995)(S&P MidCap 400). The Statement of Additional 
Information (``SAI'') for the Funds discloses that each Fund 
reserves the right to substitute a different Index. Substitution 
could occur if the Index becomes unavailable, no longer serves the 
investment needs of shareholders, the Fund experiences difficulty in 
achieving investment results that correspond to the Index, or for 
any other reason determined in good faith by the Board. In such 
instance, the substitute index will attempt to measure the same 
general market as the current index. Shareholders will be notified 
(either directly or through their intermediary) in the event a 
Fund's current index is replaced. In the event a Fund substitutes a 
different index, the Exchange will file a new Rule 19b-4 filing with 
the Commission, which the Commission would have to approve to permit 
continued trading of the product based on a substitute index. 
Telephone Conversation between Jeffrey P. Burns, Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division 
of Market Regulation (``Division''), Commission, on May 10, 2006.
    \6\ The NAV of each Fund is calculated and determined each 
business day at the close of regular trading, typically 4 p.m. 
Eastern Time (``ET'').
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    ProShare Advisors LLC is the investment advisor (the ``Advisor'') 
to each Fund. The Advisor is registered under the Investment Advisers 
Act of 1940.\7\ While the Advisor will manage

[[Page 28722]]

each Fund, the Trust's Board of Trustees (the ``Board'') will have 
overall responsibility for the Funds'' operations. The composition of 
the Board is, and will be, in compliance with the requirements of 
Section 10 of the 1940 Act.
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    \7\ The Trust, Advisor and Distributor (``Applicants'') have 
filed with the Commission an Application for an Order under Sections 
6(c) and 17(b) of the 1940 Act (the ``Application'') for the purpose 
of exempting the Funds of the Trust from various provisions of the 
1940 Act. (File No. 812-12354). The Exchange states that information 
provided in this Rule 19b-4 filing relating to the Funds is based on 
information included in the Application, which contains additional 
information regarding the Trust and Funds.
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    SEI Investments Distribution Company (the ``Distributor''), a 
broker-dealer registered under the Act, will act as the distributor and 
principal underwriter of the Shares. JPMorgan Chase Bank will act as 
the index receipt agent (``Index Receipt Agent''), for which it will 
receive fees. The Index Receipt Agent will be responsible for 
transmitting the Deposit List to the National Securities Clearing 
Corporation (``NSCC'') and for the processing, clearance, and 
settlement of purchase and redemption orders through the facilities of 
the Depository Trust Company (``DTC'') and NSCC on behalf of the Trust. 
The Index Receipt Agent will also be responsible for the coordination 
and transmission of files and purchase and redemption orders between 
the Distributor and the NSCC.
    Shares of the Funds issued by the Trust will be a class of 
exchange-traded securities that represent an interest in the portfolio 
of a particular Fund (the ``Shares'').\8\ Shares will be registered in 
book-entry form only, and the Trust will not issue individual share 
certificates. The DTC or its nominee will be the record or registered 
owner of all outstanding Shares. Beneficial ownership of Shares will be 
shown on the records of DTC or DTC Participants.
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    \8\ The Fund is also registered as a business trust under the 
Delaware Corporate Code.
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Investment Objective of the Funds

    The Funds will seek daily investment results, before fees and 
expenses, of double the inverse or opposite (-200%) of the Underlying 
Index. Each Fund will not invest directly in the component securities 
of the relevant Underlying Index, but instead, will create short 
exposure to such Index. Each Fund will rely on establishing positions 
in financial instruments (as defined below) that provide, on a daily 
basis, double the inverse or opposite of the investment results of the 
relevant Underlying Index. Normally 100% of the value of the portfolios 
of each Fund will be devoted to such financial instruments and money 
market instruments, including U.S. government securities and repurchase 
agreements \9\ (the ``Money Market Instruments'').
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    \9\ Repurchase agreements held by the Funds will be consistent 
with Rule 2a-7 under the 1940 Act, i.e., remaining maturities of 397 
days or less and rated investment-grade.
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    The financial instruments to be held by any of the Funds may 
include stock index futures contracts, options on futures contracts, 
options on securities and indices, equity caps, collars and floors as 
well as swap agreements, forward contracts, repurchase agreements and 
reverse repurchase agreements (the ``Financial Instruments''), and 
Money Market Instruments.
    While the Advisor will attempt to minimize any ``tracking error'' 
between the investment results of a particular Fund and the inverse 
performance (and specified multiple thereof) of its Underlying Index, 
certain factors may tend to cause the investment results of a Fund to 
vary from such relevant Underlying Index or specified multiple 
thereof.\10\ The Funds are expected to be highly inversely correlated 
to each Underlying Index and investment objective (-.95 or 
greater).\11\ In each case, the Funds are expected to have a daily 
tracking error of less than 5% (500 basis points) relative to the 
specified (inverse) multiple of the performance of the relevant 
Underlying Index.
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    \10\ Several factors may cause a Fund to vary from the relevant 
Underlying Index and investment objective including: (1) A Fund's 
expenses, including brokerage (which may be increased by high 
portfolio turnover) and the cost of the investment techniques 
employed by that Fund; (2) less than all of the securities in the 
benchmark index being held by a Fund and securities not included in 
the benchmark index being held by a Fund; (3) an imperfect 
correlation between the performance of instruments held by a Fund, 
such as futures contracts, and the performance of the underlying 
securities in the cash market; (4) bid-ask spreads (the effect of 
which may be increased by portfolio turnover); (5) holding 
instruments traded in a market that has become illiquid or 
disrupted; (6) a Fund's share prices being rounded to the nearest 
cent; (7) changes to the benchmark index that are not disseminated 
in advance; (8) the need to conform a Fund's portfolio holdings to 
comply with investment restrictions or policies or regulatory or tax 
law requirements; and (9) early and unanticipated closings of the 
markets on which the holdings of a Fund trade, resulting in the 
inability of the Fund to execute intended portfolio transactions.
    \11\ Correlation is the strength of the relationship between (1) 
the change in a Fund's NAV and (2) the change in the benchmark index 
(investment objective). The statistical measure of correlation is 
known as the ``correlation coefficient.'' A correlation coefficient 
of +1 indicates a high direct correlation while a value of -1 
indicates a strong inverse correlation. A value of zero would mean 
that there is no correlation between the two variables.
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The Portfolio Investment Methodology

    The Advisor will seek to establish an investment exposure in each 
portfolio corresponding to each Fund's investment objective based upon 
its Portfolio Investment Methodology. The Exchange states that 
Portfolio Investment Methodology is a mathematical model based on well-
established principles of finance that are widely used by investment 
practitioners, including conventional index fund managers.
    As set forth in the Application, the Portfolio Investment 
Methodology was designed to determine for each Fund the portfolio 
investments needed to achieve its stated investment objectives. The 
Portfolio Investment Methodology takes into account a variety of 
specified criteria and data (the ``Inputs''), the most important of 
which are: (1) Net assets (taking into account creations and 
redemptions) in each Fund's portfolio at the end of each trading day, 
(2) the amount of required exposure to the Underlying Index, and (3) 
the positions in Financial Instruments and/or Money Market Instruments 
at the beginning of each trading day. The Advisor pursuant to the 
methodology will then mathematically determine the end-of-day positions 
to establish the required amount of exposure to the Underlying Index 
(the ``Solution''), which will consist of Financial Instruments and 
Money Market Instruments. The difference between the start-of-day 
positions and the required end-of-day positions is the actual amount of 
Financial Instruments and/or Money Market Instruments that must be 
bought or sold for the day. The Solution represents the required 
exposure and, when necessary, is converted into an order or orders to 
be filled that same day.
    Generally, portfolio trades effected pursuant to the Solution are 
reflected in the NAV on the first business day (T+1) after the date the 
relevant trade is made. Therefore, the NAV calculated for a Fund on a 
given day should reflect the trades executed pursuant to the prior 
day's Solution. For example, trades pursuant to the Solution calculated 
on a Monday afternoon are executed on behalf of the Fund in question on 
that day. These trades will then be reflected in the NAV for that Fund 
that is calculated as of 4 p.m. ET on Tuesday.
    The timeline for the Methodology is as follows. Authorized 
Participants (``APs'' or ``Authorized Participants'') have a 3 p.m. ET 
cut-off for orders submitted by telephone, facsimile, and other 
electronic means of communication and a 4 p.m. ET cut-off for orders 
received via mail.\12\ AP orders

[[Page 28723]]

by mail are exceedingly rare. Orders are received by the distributor, 
SEI Corporation (``SEI'') and relayed to the Advisor within ten (10) 
minutes. The Advisor will know by 3:10 p.m. ET the number of creation/
redemption orders by APs for that day. Orders are then placed at 
approximately 3:40 p.m. ET as market-on-close (MOC) orders. At 4 p.m. 
ET, the Advisor will again look at the exposure to make sure that the 
orders placed are consistent with the Solution, and as described above, 
the Advisor will execute any other transactions in Financial 
Instruments to assure that the Fund's exposure is consistent with the 
Solution.
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    \12\ An Authorized Participant is either (1) a broker-dealer or 
other participant in the continuous net settlement system of the 
NSCC or (2) a DTC participant, and which has entered into a 
participant agreement with the Distributor.
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Description of Investment Techniques

    In attempting to achieve its individual investment objectives, a 
Fund may invest its assets in Financial Instruments and Money Market 
Instruments (collectively, the ``Portfolio Investments''). To the 
extent applicable, each Fund will comply with the requirements of the 
1940 Act with respect to ``cover'' for Financial Instruments and thus 
may hold a significant portion of its assets in liquid instruments in 
segregated accounts.
    Each Fund may engage in transactions in futures contracts on 
designated contract markets where such contracts trade and will only 
purchase and sell futures contracts traded on a U.S. futures exchange 
or board of trade. Each Fund will comply with the requirements of Rule 
4.5 of the regulations promulgated by the Commodity Futures Trading 
Commission (the ``CFTC'').\13\
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    \13\ CFTC Rule 4.5 provides an exclusion for investment 
companies registered under the 1940 Act from the definition of the 
term ``commodity pool operator'' upon the filing of a notice of 
eligibility with the National Futures Association.
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    Each Fund may enter into swap agreements and forward contracts for 
the purposes of attempting to gain exposure to the equity securities of 
its Underlying Index without actually transacting such securities. The 
Exchange states that counterparties to the swap agreements and/or 
forward contracts will be major broker-dealers and banks. The 
creditworthiness of each potential counterparty is assessed by the 
Advisor's credit committee pursuant to guidelines approved by the 
Board. Existing counterparties are reviewed periodically by the Board. 
Each Fund may also enter into repurchase and reverse repurchase 
agreements with terms of less than one year and will only enter into 
such agreements with (i) members of the Federal Reserve System, (ii) 
primary dealers in U.S. government securities, or (iii) major broker-
dealers.\14\ Each Fund may also invest in Money Market Instruments, in 
pursuit of its investment objectives, as ``cover'' for Financial 
Investments, as described above, or to earn interest.
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    \14\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on May 10, 2006 (as to insertion of term 
``major'' in describing broker-dealer counterparties).
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    The Trust will adopt certain fundamental policies consistent with 
the 1940 Act and each Fund will be classified as ``non-diversified'' 
under the 1940 Act. Each Fund, however, intends to maintain the 
required level of diversification and otherwise conduct its operations 
so as to qualify as a ``regulated investment company'' (``RIC'') for 
purposes of the Internal Revenue Code (the ``Code''), in order to 
relieve the Trust and the Funds of any liability for Federal income tax 
to the extent that its earnings are distributed to shareholders.\15\
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    \15\ In order for a fund to qualify for tax treatment as a RIC, 
it must meet several requirements under the Code. Among these is the 
requirement that, at the close of each quarter of the Fund's taxable 
year, (i) at least 50% of the market value of the Fund's total 
assets must be represented by cash items, U.S. government 
securities, securities of other RICs, and other securities, with 
such other securities limited for purposes of this calculation in 
respect of any one issuer to an amount not greater than 5% of the 
value of the Fund's assets and not greater than 10% of the 
outstanding voting securities of such issuer, and (ii) not more than 
25% of the value of its total assets may be invested in the 
securities of any one issuer, or two or more issuers that are 
controlled by the Fund (within the meaning of Section 851(b)(4)(B) 
of the Internal Revenue Code) and that are engaged in the same or 
simular 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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Availability of Information About the Shares and Underlying Indexes

    The Trust's or Advisor's Web site and/or that of the Exchange, 
which is and will be publicly accessible at no charge, will contain the 
following information for each Fund's Shares: (a) The prior business 
day's closing NAV, the reported closing price, and a calculation of the 
premium or discount of such price in relation to the closing NAV; (b) 
data for a period covering at least the four previous calendar quarters 
(or the life of a Fund, if shorter) indicating how frequently each 
Fund's Shares traded at a premium or discount to NAV based on the daily 
closing price and the closing NAV, and the magnitude of such premiums 
and discounts; (c) its Prospectus and Product Description; and (d) 
other quantitative information such as daily trading volume. The 
Prospectus and/or Product Description for each Fund will inform 
investors that the Trust's Web site has information about the premiums 
and discounts at which the Fund's Shares have traded.\16\
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    \16\ See ``Prospectus Delivery'' below regarding the Product 
Description. The Application requests relief from Section 24(d) of 
the 1940 Act, which would permit dealers to sell Shares in the 
secondary market unaccompanied by a statutory prospectus when 
prospectus delivery is not required by the Securities Act of 1933. 
Additionally, Commentary .03 of Amex Rule 1000A requires that Amex 
members and member organizations provide to all purchasers of a 
series of Index Fund Shares a written description of the terms and 
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later 
than the time of confirmation of the first transaction in such 
series is delivered to such purchaser. Furthermore, any sales 
material will reference the availability of such circular and the 
prospectus.
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    The Amex will disseminate for each Fund on a daily basis by means 
of Consolidated Tape Association (``CTA'') and CQ High Speed Lines 
information with respect to an Indicative Intra-Day Value (the ``IIV'') 
(as defined and discussed below under ``Dissemination of Indicative 
Intra-Day Value (IIV)''), recent NAV, shares outstanding, estimated 
cash amount and total cash amount per Creation Unit. The Exchange will 
make available on its Web site daily trading volume, closing price, the 
NAV and final dividend amounts to be paid for each Fund.
    Each Fund's total portfolio composition will be disclosed on the 
Web site of the Trust (http://www.profunds.com or another relevant Web site as determined by the Trust) and/or the Exchange (http://

http://www.amex.com). The Web site disclosure of portfolio holdings will be 

made daily and will include, as applicable, the specific types of 
Financial Instruments and characteristics of such instruments, cash 
equivalents and amount of cash held in the portfolio of each Fund. This 
public Web site disclosure of the portfolio composition of each Fund 
will coincide with the disclosure by the Advisor of the ``IIV File'' 
(described below). Therefore, the same portfolio information (including 
accrued expenses and dividends) will be provided on the public Web site 
as well as in the IIV File provided to Authorized Participants. The 
format of the public Web site disclosure and the IIV File will differ 
because the public Web site will list all portfolio holdings while the 
IIV File will similarly provide the portfolio holdings but in a format 
appropriate for Authorized Participants, i.e., the exact components of 
a Creation

[[Page 28724]]

Unit.\17\ Accordingly, each investor will have access to the current 
portfolio composition of each Fund through the Trust Web site at http://www.profunds.com
, or another relevant Web site as determined by the 

Trust, and/or at the Exchange's Web site at http://www.amex.com.

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    \17\ The composition will be used to calculate the NAV later 
that day.
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    Beneficial owners of Shares (``Beneficial Owners'') will receive 
all of the statements, notices, and reports required under the 1940 Act 
and other applicable laws. They will receive, for example, annual and 
semi-annual fund reports, written statements accompanying dividend 
payments, proxy statements, annual notifications detailing the tax 
status of fund distributions, and Form 1099-DIVs. Some of these 
documents will be provided to Beneficial Owners by their brokers, while 
others will be provided by the Fund through the brokers.
    The daily closing index value and the percentage change in the 
daily closing index value for each Underlying Index will be publicly 
available on various Web sites, e.g., http://www.bloomberg.com. Data 

regarding each Underlying Index is also available from the respective 
index provider to subscribers. Several independent data vendors also 
package and disseminate index data in various value-added formats 
(including vendors displaying both securities and index levels and 
vendors displaying index levels only). The value of each Underlying 
Index will be updated intra-day on a real time basis as its individual 
component securities change in price. These intra-day values of each 
Underlying Index will be disseminated every 15 seconds throughout the 
trading day by the Amex or another organization authorized by the 
relevant Underlying Index provider.

Creation and Redemption of Shares

    Each Fund will issue and redeem Shares only in initial aggregations 
of at least 50,000 (``Creation Units''). Purchasers of Creation Units 
will be able to separate the Units into individual Shares. Once the 
number of Shares in a Creation Unit is determined, it will not change 
thereafter (except in the event of a stock split or similar 
revaluation). The initial value of a Share for each of the Funds is 
expected to be in the range of $50-$250.
    Because the NSCC's system for the receipt and dissemination to its 
participants of a Portfolio Composition File (``PCF'') is not currently 
capable of processing information with respect to Financial 
Instruments, the Advisor has developed an ``IIV File,'' which it will 
use to disclose the Funds' holdings of Financial Instruments.\18\ The 
IIV File will contain, for each Fund, information sufficient for market 
participants to calculate a Fund's IIV and effectively arbitrage the 
Fund.
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    \18\ The Trust or the Advisor will post the IIV File to a 
password-protected Web site before the opening of business on each 
business day, and all Authorized Participants who are also NSCC 
participants and the Exchange will have access to the password and 
the Web site containing the IIV File. However, the Fund will 
disclose to the public identical information, but in a format 
appropriate to public investors, at the same time the Fund discloses 
the IIV and PCF files to industry participants.
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    For example, the following information would be provided in the IIV 
File for a Fund holding swaps and futures contracts: (A) The notional 
value of the swaps held by such Fund (together with an indication of 
the index on which such swap is based and whether the Fund's position 
is long or short), (B) the most recent valuation of the swaps held by 
the Fund, (C) the notional value of any futures contracts (together 
with an indication of the index on which such contract is based, 
whether the Fund's position is long or short and the contact's 
expiration date), (D) the number of futures contracts held by the Fund 
(together with an indication of the index on which such contract is 
based, whether the Fund's position is long or short and the contact's 
expiration date), (E) the most recent valuation of the futures 
contracts held by the Fund, (F) the Fund's total assets and total 
shares outstanding, and (G) a ``net other assets'' figure reflecting 
expenses and income of the Fund to be accrued during and through the 
following business day and accumulated gains or losses on the Fund's 
Financial Instruments through the end of the business day immediately 
preceding the publication of the IIV File. To the extent that any 
Bearish Fund holds cash or cash equivalents, information regarding such 
Fund's cash and cash equivalent positions will be disclosed in the IIV 
File for such Fund.
    The information in the IIV File will be sufficient for participants 
in the NSCC system to calculate the IIV for the Funds during such next 
business day. The IIV File will also be the basis for the next business 
day's NAV calculation.
    Under normal circumstances, the Funds will be created and redeemed 
entirely for cash. The IIV File published before the opening of 
business on a business day will, however, permit NSCC participants to 
calculate (by means of calculating the IIV) the amount of cash required 
to create a Creation Unit Aggregation, and the amount of cash that will 
be paid upon redemption of a Creation Unit Aggregation, for each Fund 
for that business day.
    As noted below in ``Dissemination of Indicative Intra-Day Value 
(IIV),'' the Exchange will disseminate through the facilities of the 
CTA, at regular 15 second intervals during the Exchange's regular 
trading hours, the IIV on a per Fund Share basis.\19\
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    \19\ The Funds will not be involved in, or responsible for, the 
calculation or dissemination of any such amount and will make no 
warranty as to its accuracy.
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Creation and Redemption of the Funds.

    The Funds will be purchased and redeemed entirely for cash (``All-
Cash Payments''). The use of an All-Cash Payment for the purchase and 
redemption of Creation Unit Aggregations of the Funds is due to the 
limited transferability of Financial Instruments.
    The Exchange believes that Shares will not trade at a material 
discount or premium to the underlying securities held by a Fund based 
on potential arbitrage opportunities. The arbitrage process, which 
provides the opportunity to profit from differences in prices of the 
same or similar securities, increases the efficiency of the markets and 
serves to prevent potentially manipulative efforts. If the price of a 
Share deviates enough from the Creation Unit, on a per share basis, to 
create a material discount or premium, an arbitrage opportunity is 
created allowing the arbitrageur to either buy Shares at a discount, 
immediately cancel them in exchange for the Creation Unit and sell the 
underlying securities in the cash market at a profit, or sell Shares 
short at a premium and buy the Creation Unit in exchange for the Shares 
to deliver against the short position. In both instances the 
arbitrageur locks in a profit and the markets move back into line.\20\
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    \20\ In their 1940 Act Application, the Applicants stated that 
they do not believe that All-Cash Payments will affect arbitrage 
efficiency. This is because Applicants believe it makes little 
difference to an arbitrageur whether Creation Unit Aggregations are 
purchased in exchange for a basket of securities or cash. The 
important function of the arbitrageur is to bid the share price of 
any Fund up or down until it converges with the NAV. Applicants note 
that this can occur regardless of whether the arbitrageur is allowed 
to create in cash or with a Deposit Basket. In either case, the 
arbitrageur can effectively hedge a position in a Fund in a variety 
of ways, including the use of market-on-close contracts to buy or 
sell the Financial Instruments.
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Placement of Creation Unit Aggregation Purchase and Redemption Orders

    Creation Unit Aggregations of the Funds will be purchased and 
redeemed only for cash at NAV plus a transaction

[[Page 28725]]

fee. The purchaser will make a cash payment by 12 p.m. ET on the third 
business day following the date on which the request was made (T+3). 
Purchasers of the Funds in Creation Unit Aggregations must satisfy 
certain creditworthiness criteria established by the Advisor and 
approved by the Board, as provided in the Participation Agreement 
between the Trust and Authorized Participants.
    Creation Unit Aggregations of the Funds will be redeemable for an 
All-Cash Payment equal to the NAV, less the transaction fee.

Dividends

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

Dissemination of Indicative Intra-Day Value (IIV)

    In order to provide updated information relating to each Fund for 
use by investors, professionals and persons wishing to create or redeem 
Shares, the Exchange will disseminate through the facilities of the 
CTA: (i) Continuously throughout the trading day, the market value of a 
Share, and (ii) every 15 seconds throughout the trading day, a 
calculation of the Indicative Intra-Day Value or ``IIV'' \21\ as 
calculated by a third party calculator (the ``IIV Calculator'').\22\ 
Comparing these two figures helps an investor to determine whether, and 
to what extent, the Shares may be selling at a premium or a discount to 
NAV.
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    \21\ The IIV is also referred to by other issuers as an 
``Estimated NAV,'' ``Underlying Trading Value,'' ``Indicative 
Optimized Portfolio Value (IOPV),'' and ``Intraday Value'' in 
various places such as the prospectus and marketing materials for 
different exchange-traded funds.
    \22\ The Exchange will calculate the IIV for each Fund.
---------------------------------------------------------------------------

    The IIV Calculator will calculate an IIV for each Fund in the 
manner discussed below. The IIV is designed to provide investors with a 
reference value that can be used in connection with other related 
market information. The IIV does not necessarily reflect the precise 
composition of the current portfolio held by each Fund at a particular 
point in time. Therefore, the IIV on a per Share basis disseminated 
during Amex trading hours should not be viewed as a real time update of 
the NAV of a particular Fund, which is calculated only once a day. 
While the IIV that will be disseminated by the Amex is expected to be 
close to the most recently calculated Fund NAV on a per share basis, it 
is possible that the value of the portfolio held by a Fund may diverge 
from the IIV during any trading day. In such case, the IIV will not 
precisely reflect the value of the Fund portfolio.

IIV Calculation for the Funds

    The IIV Calculator will disseminate the IIV throughout the trading 
day for the Funds. The IIV Calculator will determine such IIV by: (i) 
Calculating the mark-to-market gains or losses from the Fund's total 
return equity swap exposure based on the percentage change to the 
Underlying Index and the previous day's notional values of the swap 
contracts, if any, held by such Fund (which previous day's notional 
value will be provided by the Trust), (ii) calculating the mark-to-
market gains or losses from futures, options and other Financial 
Instrument positions by taking the difference between the current value 
of those positions held by the Fund, if any (as provided by the Trust), 
and the previous day's value of such positions, (iii) adding the values 
from (i) and (ii) above to an estimated cash amount provided by the 
Trust (which cash amount will include the swap costs), to arrive at a 
value and (iv) dividing that value by the total shares outstanding (as 
provided by the Trust) to obtain current IIV.

Criteria for Initial and Continued Listing

    The Shares are subject to the criteria for initial and continued 
listing of Index Fund Shares in Amex Rule 1002A. It is anticipated that 
a minimum of two Creation Units (at least 100,000 Shares) will be 
required to be outstanding at the start of trading. This minimum number 
of Shares required to be outstanding at the start of trading will be 
comparable to requirements that have been applied to previously listed 
series of Portfolio Depositary Receipts and Index Fund Shares. The 
Exchange believes that the proposed minimum number of Shares 
outstanding at the start of trading is sufficient to provide market 
liquidity.
    The Exchange represents the Trust is required to comply with Rule 
10A-3 under the Act for the initial and continued listing of the 
ProShares.

Original and Annual Listing Fees

    The Amex original listing fee applicable to the listing of the 
Funds is $5,000 for each Fund. In addition, the annual listing fee 
applicable to the Funds under Section 141 of the Amex Company Guide 
will be based upon the year-end aggregate number of outstanding shares 
in all Funds of the Trust listed on the Exchange.

Stop and Stop Limit Orders

    Amex Rule 154, Commentary .04(c) provides that stop and stop limit 
orders to buy or sell a security (other than an option, which is 
covered by Amex Rule 950(f) and Amex Rule 950--ANTE (f) and Commentary 
thereto) the price of which is derivatively priced based upon another 
security or index of securities, may with the prior approval of a Floor 
Official, be elected by a quotation, as set forth in Commentary 
.04(c)(i-v). The Exchange has designated Index Fund Shares, including 
the Shares, as eligible for this treatment.\23\
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    \23\ See Securities Exchange Act Release No. 29063 (April 10, 
1991), 56 FR 15652 (April 17, 1991) at note 9, regarding the 
Exchange's designation of equity derivative securities as eligible 
for such treatment under Amex Rule 154, Commentary .04(c).

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[[Page 28726]]

Amex Rule 190

    Amex Rule 190, Commentary .04 applies to Index Fund Shares listed 
on the Exchange, including the Shares. Commentary .04 states that 
nothing in Amex Rule 190(a) should be construed to restrict a 
specialist registered in a security issued by an investment company 
from purchasing and redeeming the listed security, or securities that 
can be subdivided or converted into the listed security, from the 
issuer as appropriate to facilitate the maintenance of a fair and 
orderly market.

Prospectus Delivery

    The Exchange, in an Information Circular to Exchange members and 
member organizations, prior to the commencement of trading, will inform 
members and member organizations, regarding the application of 
Commentary .03 to Amex Rule 1000A to the Funds. The Circular will 
further inform members and member organizations of the prospectus and/
or Product Description delivery requirements that apply to the Funds. 
The Application included a request that the exemptive order also grant 
relief from Section 24(d) of the 1940 Act. Any Product Description used 
in reliance on Section 24(d) exemptive relief will comply with all 
representations and conditions set forth in the Application.

Trading Halts

    In addition to other factors that may be relevant, the Exchange may 
consider factors such as those set forth in Rule 918C(b) in exercising 
its discretion to halt or suspend trading in Index Fund Shares. These 
factors would include, but are not limited to, (1) the extent to which 
trading is not occurring in securities comprising an Underlying Index 
and/or the Financial Instruments of a Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. (See Amex Rule 918C). In the case 
of the Financial Instruments held by a Fund, the Exchange represents 
that a notification procedure will be implemented so that timely notice 
from the Advisor is received by the Exchange when a particular 
Financial Instrument is in default or shortly to be in default. 
Notification from the Advisor will be made by phone, facsimile, or e-
mail. The Exchange would then determine on a case-by-case basis whether 
a default of a particular Financial Instrument justifies a trading halt 
of the Shares. Trading in shares of the Funds will also be halted if 
the circuit breaker parameters under Amex Rule 117 have been reached.

Suitability

    Prior to commencement of trading, the Exchange will issue an 
Information Circular to its members and member organizations providing 
guidance with regard to member firm compliance responsibilities 
(including suitability obligations) when effecting transactions in the 
Shares and highlighting the special risks and characteristics of the 
Funds and Shares as well as applicable Exchange rules.
    This Information Circular will set forth the requirements relating 
to Commentary .05 to Amex Rule 411 (Duty to Know and Approve 
Customers). Specifically, the Information Circular will remind members 
of their obligations in recommending transactions in the Shares so that 
members have a reasonable basis to believe that (1) the recommendation 
is suitable for a customer given reasonable inquiry concerning the 
customer's investment objectives, financial situation, needs, and any 
other information known by such member; and (2) that the customer can 
evaluate the special characteristics, and is able to bear the financial 
risks, of such investment. In connection with the suitability 
obligation, the Information Circular will also provide that members 
make reasonable efforts to obtain the following information: (1) The 
customer's financial status; (2) the customer's tax status; (3) the 
customer's investment objectives; and (4) such other information used 
or considered to be reasonable by such member or registered 
representative in making recommendations to the customer.

Purchases and Redemptions in Creation Unit Size

    In the Information Circular referenced above, members and member 
organizations will be informed that procedures for purchases and 
redemptions of Shares in Creation Unit Size are described in each 
Fund's prospectus and SAI, and that Shares are not individually 
redeemable but are redeemable only in Creation Unit Size aggregations 
or multiples thereof.

Surveillance

    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Shares. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
Index Fund Shares, which have been deemed adequate under the Act. In 
addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.

Hours of Trading/Minimum Price Variation

    The Funds will trade on the Amex until 4:15 p.m. ET each business 
day. Shares will trade with a minimum price variation of $.01.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \24\ in general and furthers the 
objectives of Section 6(b)(5) \25\ 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transaction in 
securities, and, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change, as amended, will 
impose no 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

    No written comments were solicited or received by the Exchange on 
this proposal, as amended.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve the proposed rule change, as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 28727]]

change, as amended, 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-Amex-2006-41 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-Amex-2006-41. 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 the 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-Amex-2006-41 and should be submitted on or before June 7, 2006.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-7471 Filed 5-16-06; 8:45 am]

BILLING CODE 8010-01-P
