

[Federal Register: June 30, 2006 (Volume 71, Number 126)]
[Notices]               
[Page 37629-37635]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jn06-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54040; File No. SR-Amex-2006-41]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change and Amendment No. 1 and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 2 Relating to the Listing and Trading of Shares of the ProShares 
Trust

June 23, 2006.

I. Introduction

    On April 28, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') a proposed rule 
change to list and trade of 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''). On May 5, 2006, the 
Amex submitted Amendment No. 1 to the proposed rule change.\2\ The 
proposed rule change, as amended by Amendment No. 1 thereto, was 
published for comment in the Federal Register on May 17, 2006.\3\ The 
Commission received no comments on the proposal. On June 23, 2006, the 
Amex submitted Amendment No. 2 to the proposed rule change.\4\ This 
order approves the proposed rule change, as amended. Simultaneously, 
the Commission provides notice of Amendment No. 2, grants accelerated 
approval of Amendment No. 2, and solicits comments from interested 
persons on Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Amendment No. 1 (``Amendment No. 1'') replaced the original 
filing in its entirety.
    \3\ See Securities Exchange Act Release No. 53784 (May 10, 
2006), 71 FR 28721 (``Notice'').
    \4\ In Amendment No. 2 (``Amendment No. 2''), the Exchange 
states that the Advisor (as defined below) has informed the Exchange 
that: (1) The net asset value (``NAV'') for the Funds will be made 
available to all market participants at the same time; (2) if the 
NAV is not disseminated to all market participants at the same time, 
the Exchange will halt trading in the shares of the Funds; and (3) 
if the Fund temporarily does not disseminate the NAV to all market 
participants at the same time, the Exchange will immediately contact 
the Commission staff to discuss measures that may be appropriate 
under the circumstances.
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II. Description of the Proposed Rule Change

    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, upon Commission approval, 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, if the Exchange 
files separate proposals under section 19(b) \5\ of the Act, before 
listing and trading. 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.
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    \5\ 15 U.S.C. 78s(b).
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    The Commission recently approved the listing and trading on Amex 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).\6\ 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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    \6\ 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

[[Page 37630]]

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[supreg] Index (``S&P 500''), 
the Nasdaq-100[supreg] Index (``Nasdaq 100''), the Dow Jones Industrial 
AverageSM (``DJIA'') and the S&P MidCap400TM 
Index (``S&P MidCap''), respectively. (These indexes are referred to 
herein as ``Underlying Indexes''.) \7\ If each of these Funds is 
successful in meeting its objective, the NAV \8\ 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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    \7\ 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. 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.
    \8\ 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''). The Advisor has informed the Exchange that 
the NAV for each Fund will be calculated and disseminated at the 
same time to all market participants. See Amendment No. 2.
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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.\9\ While the Advisor will manage 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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    \9\ 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).
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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'').\10\ 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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    \10\ The Fund is also registered as a business trust under the 
Delaware Corporate Code.
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Investment Objective and Techniques 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 \11\ (the ``Money Market Instruments'').
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    \11\ 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,\12\ 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.
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    \12\ 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.
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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.\13\ Each Fund may also invest in Money Market Instruments, in 
pursuit of its investment objectives, as ``cover'' for Financial 
Investments, as required by the 1940 Act, or to earn interest. 
Additional details about the funds' investment techniques, including 
additional regulatory requirements, are described in the Notice.
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    \13\ 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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    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.\14\ The Exchange states that the Funds are expected to be 
highly inversely correlated to each Underlying Index and investment 
objective (-.95 or greater).\15\ 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)

[[Page 37631]]

multiple of the performance of the relevant Underlying Index.
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    \14\ Factors that may cause a Fund to vary from the relevant 
Underlying Index and investment objective are described in the 
Original Order and Notice.
    \15\ 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 (``Methodology'').
    The 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. AP orders 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.

Availability of Information About the Shares and Underlying Indexes

    The Trust's Web site (http://www.proshares.com) and/or that of the Exchange (http://www.amex.com), which is and will be publicly 

accessible at no charge, will contain the following information for 
each Fund's Shares: (a) The prior business day's closing NAV, the 
reported closing price, and a calculation of the premium or discount of 
such price in relation to the closing NAV; (b) data for a period 
covering at least the four previous calendar quarters (or the life of a 
Fund, if shorter) indicating how frequently each Fund's Shares traded 
at a premium or discount to NAV based on the daily closing price and 
the closing NAV, and the magnitude of such premiums and discounts, (c) 
its Prospectus and Product Description and (d) other quantitative 
information such as daily trading volume. The 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.proshares.com).\17\ 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 Unit \18\ Accordingly, each investor will have access to the 
current portfolio composition of each Fund through the Trust Web site 
at http://www.proshares.com.\19\

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    \17\ Telephone Conversation between Nyieri Nazarian, Assistant 
General Counsel, Amex, and David Hsu, Special Counsel, Division, 
Commission, on June 13, 2006.
    \18\ The composition will be used to calculate the NAV later 
that day.
    \19\ See supra note 17. Telephone Conversation between Jeffrey 
Burn, Vice President and Associate General Counsel, Amex, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
June 23, 2006 (confirming Web site disclosures).
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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

[[Page 37632]]

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 at least every 15 seconds 
throughout the trading day by the Amex or another major market data 
vendor 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.\20\ 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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    \20\ 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 each business day 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 Shares of the Funds will be created 
and redeemed entirely for cash (``All-Cash Payments''). 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. 
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.
    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.
    The Exchange believes that Shares will not trade at a material 
discount or premium to the underlying portfolio assets \21\ 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 portfolio assets 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.\22\
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    \21\ Telephone Conversation between Jeffrey Burn, Vice President 
and Associate General Counsel, Amex, and Florence Harmon, Senior 
Special Counsel, Division, Commission, on June 23, 2006 (clarifying 
arbitrage description).
    \22\ 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 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).
    Creation Unit Aggregations of the Funds will be redeemable for an 
All-Cash Payment equal to the NAV, less the transaction fee, generally 
on a T+3 basis.

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

[[Page 37633]]

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) at least every 15 seconds throughout the trading day, a 
calculation of the Indicative Intra-Day Value or ``IIV'' \23\ as 
calculated by a third party calculator (the ``IIV Calculator'').\24\ 
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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    \23\ 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.
    \24\ The Exchange will calculate the IIV for each Fund.
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    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. A minimum of two 
Creation Units (at least 100,000 Shares) will be required to be 
outstanding at the start of trading.\25\ 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.
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    \25\ Telephone Conversation between Nyieri Nazarian, Assistant 
General Counsel, Amex, and David Hsu, Special Counsel, Division, 
Commission, on June 13, 2006.
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    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.\26\
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    \26\ 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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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.

[[Page 37634]]

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. 
If the NAV is not disseminated to all market participants at the same 
time, the Exchange will halt trading in the Shares of the Funds.\27\
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    \27\ See Amendment No. 2. However, if the Fund temporarily does 
not disseminate the NAV to all market participants at the same time, 
the Exchange will immediately contact Commission staff to discuss 
measures that may be appropriate under the circumstances. Id.
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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.

III. Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with section 6 of the Act,\28\ 
and the rules and regulations thereunder, applicable to a national 
securities exchange.\29\ The Commission believes that the Exchange's 
proposed listing standards, trading rules, suitability and disclosure 
rules for the Funds are consistent with the Act.
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    \28\ 15 U.S.C. 78f(b).
    \29\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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A. Surveillance

    The Commission believes that because the Underlying Indexes are 
broad-based and are composed of securities having significant trading 
volumes and market capitalization, improper trading practices in the 
Shares and the ability to use the Shares to manipulate the underlying 
securities will be limited. Moreover, the issuers of the securities 
comprising the Underlying Indexes are subject to reporting requirements 
under the Act, and all of the component stocks are either listed or 
traded on, or traded through the facilities of, U.S. securities 
markets, and thus subject to real-time transaction reporting, which 
should further deter manipulation.

B. Dissemination of Information about the Shares

    In approving the Funds for trading on the Amex, the Commission 
notes that the Underlying Indexes are broad-based, widely-disseminated 
indexes, which underlie numerous listed products. These index values 
are widely-disseminated on a real-time basis at least every 15 seconds 
throughout the trading day during the period in which the Shares will 
trade on Amex. Additionally, the Commission notes that the Exchange 
will disseminate through the facilities of CTA at least every 15 
seconds a calculation of the IIV, along with an updated market value of 
the Shares. Comparing these two figures will help investors to 
determine whether, and to what extent, the Shares may be selling at a 
premium or discount to NAV and thus will facilitate arbitrage of the 
Shares in relation to the Index component securities.
    The Commission also notes that 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 Shares' prior business day NAV, the 
reported closing price, and a calculation of the premium or discount of 
such price in relation to the closing NAV.
    The Funds' NAV and total portfolio composition will be disclosed to 
all market participants at the same time on the Web site of the Trust 
(http://www.proshares.com). The Commission believes that such 

disclosure is reasonably designed to facilitate a functional arbitrage 
mechanism and mitigate the risks of improper market activity that could 
arise from inconsistent disclosure of information.

C. Listing and Trading

    The Commission finds that the Exchange's proposed rules and

[[Page 37635]]

procedures for the listing and trading of the Shares are consistent 
with the Act. Shares will trade as equity securities subject to Amex 
rules including, among others, rules governing trading halts, 
specialist activities, stop and stop limit orders, prospectus delivery, 
and customer suitability requirements. In addition, the Shares will be 
subject to Amex listing and delisting/suspension rules and procedures 
governing the trading of Index Fund Shares on the Exchange. The 
Commission believes that listing and delisting criteria for the Shares 
should help to maintain a minimum level of liquidity and therefore 
minimize the potential for manipulation of the Shares. Finally, the 
Commission believes that the information circular the Exchange will 
distribute will inform members and member organizations about the 
terms, characteristics, and risks in trading the Shares.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether the amendment 
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 July 21, 2006.

V. Accelerated Approval

    The changes proposed by Amendment No. 2 are designed to ensure that 
certain material information--i.e., the NAV for the Trust--is made 
available to all market participants at the same time. The Commission 
believes that these proposed changes strengthen the proposed rule 
change and do not raise any new regulatory issues. Therefore, the 
Commission finds good cause to approve Amendment No. 2 to the proposed 
rule change prior to the 30th day after the amendment is published for 
comment in the Federal Register.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\30\ that the proposed rule change, as amended, (SR-Amex-2006-41) 
is hereby approved, and that Amendment No. 2 to the proposed rule 
change be, and hereby is, approved on an accelerated basis.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. 06-5907 Filed 6-29-06; 8:45 am]

BILLING CODE 8010-01-P
