

[Federal Register: October 25, 2006 (Volume 71, Number 206)]
[Notices]               
[Page 62493-62495]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25oc06-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54625; File No. SR-Amex-2006-95]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Vanguard 
Emerging Markets Stock Index Fund

October 18, 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 September 29, 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 and 
II below, which Items have been prepared by the Amex. On October 17, 
2006, the Amex filed Amendment No. 1 to the proposal. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
and Amendment No. 1 from interested persons and is simultaneously 
approving the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to substitute the index tracked by a class of 
exchange-traded securities (formerly referred to as Vanguard Emerging 
Market VIPERs, the ``ETF Shares'') issued by the Vanguard Emerging 
Markets Stock Index Fund (``Fund'').\3\ The complete filing is 
available on the Amex's Web site, http://www.amex.com, at the Amex's 

Office of the Secretary, and at the Commission's Public Reference Room.
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    \3\ In addition to the ETF Shares, the Fund offers a class of 
shares that are not exchange-traded, which are referred to as 
``Investor Shares.''
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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 Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Amex 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
    On August 12, 2004, the Commission approved the Exchange's proposal 
to list and trade the ETF Shares under Amex Rules 1000A et seq.\4\ Amex 
Rules 1000A et seq. provide standards for the listing and trading of 
Index Fund Shares \5\ issued by registered open-end investment 
companies, such as the Fund. In approving the ETF Shares for Exchange 
trading, the Exchange states that the Commission thoroughly

[[Page 62494]]

considered the structure of the Fund, the usefulness of the ETF Shares 
to investors and to the markets, and the Amex rules that govern their 
trading.\6\
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    \4\ See Securities Exchange Act Release No. 50189, 69 FR 51723 
(August 20, 2004) (SR-Amex-2004-05) (``Original Approval Order'').
    \5\ Amex Rule 1000A defines ``Index Fund Shares'' 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.
    \6\ See supra, note 4.
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    The ETF Shares originally sought to track, as closely as possible, 
the performance of the Select Emerging Markets Index (``Select 
Index''), a regional index compiled by Morgan Stanley Capital 
International Inc. (MSCI[supreg]) \7\ (``MSCI''). Pursuant to the 
Fund's prospectus for the ETF Shares and the Original Approval Order, 
the Exchange states that the Fund has the right to substitute a 
different index for the Select Index, provided, that the reason for the 
substitution is determined in good faith, the substitute index measures 
the same general market as the Select Index, and investors are notified 
of the index substitution.\8\ On August 23, 2006, The Vanguard Group, 
Inc., as investment adviser to the Fund (``Vanguard''), announced that 
the Fund had substituted the Select Index with the MSCI Emerging 
Markets Index (formerly known as the MSCI Emerging Markets (Free) 
Index) (``Emerging Markets Index'').\9\ In accordance with the Original 
Approval Order, the purpose of this filing is to obtain the 
Commission's approval for the listing and trading of the ETF Shares on 
the Exchange now that the Fund is based on the Emerging Markets 
Index.\10\
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    \7\ MSCI[supreg] is a service mark of Morgan Stanley & Co. 
Incorporated.
    \8\ See supra, note 4.
    \9\ See http://onlinepressroom.net/vanguard/.

    \10\ See supra, note 4.
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    The Select Index \11\ is modeled on the more expansive Emerging 
Markets Index with certain adjustments designed to reduce risk, 
including the exclusion of countries because of concerns about 
illiquidity, repatriation of capital, or entry barriers to those 
markets. As of June 13, 2006, Colombia, Egypt, Jordan, Malaysia, 
Morocco, Pakistan, Russia, Sri Lanka, and Venezuela were excluded from 
the Select Index due to the above concerns. As specific emerging 
markets such as Russia and Malaysia have become more liquid and 
accessible, Vanguard believes that additional emerging markets 
countries now warrant inclusion in the Fund. The Exchange states that 
the addition of these emerging markets to the Select Index would result 
in a benchmark that is effectively the same as the Emerging Markets 
Index and, as a result, the Exchange proposes that the substitution of 
the Emerging Markets Index for the Select Index be approved.
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    \11\ The Select Index includes approximately 668 common stocks 
of companies located in Argentina, Brazil, Chile, China, Czech 
Republic, Hungary, India, Indonesia, Israel, Korea, Mexico, Peru, 
Philippines, Poland, South Africa, Taiwan, Thailand, and Turkey.
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    The Emerging Markets Index provides exposure to 25 emerging market 
countries, whereas the Select Index only provides exposure to 18 
emerging market countries. As of August 24, 2006, the Emerging Markets 
Index was comprised of 848 constituents with the top five constituents 
representing the following weights: 4.07%, 2.84%, 2.1%, 1.84% and 
1.77%. As of June 30, 2006, the average market capitalization of the 
constituents was approximately $2.18 billion. Countries represented in 
the Emerging Markets Index include Argentina, Brazil, Chile, China, 
Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, 
Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, 
Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and 
Turkey. The Exchange states that MSCI periodically adjusts the list of 
included countries to keep pace with the evolution in world markets 
(such adjustments are made on a forward-looking basis, so past 
performance of the Emerging Markets Index always reflects actual 
country representation during the relevant period).
    The Exchange states that MSCI exclusively administers the Emerging 
Markets Index. Similar to the Select Index, the Emerging Markets Index 
is a capitalization-weighted index whose component securities are 
adjusted for available float and must meet objective criteria for 
inclusion in the Index. The Emerging Markets Index aims to capture 85% 
of the publicly available total market capitalization in each emerging 
market included in the Emerging Markets Index. The Emerging Markets 
Index is rebalanced quarterly, calculated in U.S. dollars on a real 
time basis, and disseminated every 60 seconds during market trading 
hours. The Commission has previously approved the listing and trading 
on the Amex of an exchange-traded fund based on the Emerging Markets 
Index.\12\
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    \12\ See Securities Exchange Act Release No. 44900 (October 25, 
2001), 66 FR 55712 (November 2, 2001) (SR-Amex-2001-45), as 
corrected by Securities Exchange Act Release No. 44990 (October 25, 
2001), 66 FR 56869 (November 13, 2001).
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    The Fund's investment objectives, policies and methodology, MSCI's 
index maintenance procedures and standards, and the dissemination of 
index information as described in the Original Approval Order will not 
be affected by the index substitution. For example, the Fund will 
continue to employ a ``representative sampling'' methodology to track 
the Emerging Markets Index, which means that the Fund invests in a 
representative sample of securities in the Emerging Markets Index that 
have a similar investment profile as the Emerging Markets Index.\13\ 
The Exchange believes that the Fund's investment policies will continue 
to prevent the Fund from being excessively weighted in any single 
security or small group of securities and significantly reduce concerns 
that trading in the ETF Shares could become a surrogate for trading in 
unregistered securities. The Exchange also expects that the expense 
ratios of the ETF Shares will remain at 0.30%, and the Fund will not 
generate any capital gains as a result of the substitution.
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    \13\ As of August 24, 2006, the Fund was comprised of 851 
constituents. The aggregate percentage weighting of the top 5, 10, 
and 20 constituents in the Fund were 11.07%, 18.17%, and 28.09%, 
respectively.
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    The Exchange has reviewed the Emerging Markets Index and believes 
that sufficient mechanisms exist that would provide the Exchange with 
adequate surveillance and regulatory information with respect to the 
Emerging Markets Index. Specifically, the Exchange represents that it 
will rely on existing surveillance procedures governing Index Fund 
Shares. In addition, the Exchange, Vanguard, and MSCI have a general 
policy prohibiting the distribution of material, non-public information 
by their employees. Due to MSCI's role as a broker-dealer that 
maintains the Emerging Markets Index, MSCI has represented that a 
functional separation, such as a firewall, exists between its trading 
desk and the research persons responsible for maintaining the Emerging 
Markets Index.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\15\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not

[[Page 62495]]

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2006-95 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-2006-95. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Amex-2006-95 and should be submitted on or before 
November 15, 2006.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of Section 6(b)(5) of the Act.\16\ In 
particular, the Commission finds that the Amex's proposal is designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \16\ 15 U.S.C. 78f(b)(5). In approving the proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Exchange has requested that the Commission approve the proposal 
on an accelerated basis. The Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\17\ for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice in the Federal Register. The Commission notes 
that the proposal is consistent with the listing and trading standards 
in Amex Rule 1000A et seq. (Index Fund Shares). Furthermore, in the 
Original Approval Order, the Commission approved a similar product 
based on a substantially similar index covering the same general 
market. The Commission has also previously approved the listing and 
trading on the Amex of an exchange-traded fund based on the Emerging 
Markets Index.\18\ The Exchange represents that the Fund's investment 
objectives, policies and methodology, MSCI's index maintenance 
procedures and standards, and the dissemination of index and other 
information as described in the Original Approval Order will not be 
affected by the index substitution. The Exchange also represents that 
its representations in the Original Approval Order with regard to the 
adequacy of its surveillance procedures and trading rules applicable to 
this product continue to be in effect. Accordingly, the Commission 
finds that there is good cause, consistent with Section 6(b)(5) of the 
Act,\19\ to approve the proposed rule change, as amended, on an 
accelerated basis.\20\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ See supra, note 12.
    \19\ 15 U.S.C. 78s(b)(5).
    \20\ The Commission's approval of the Exchange's listing and 
trading of the ETF Shares based on the Emerging Markets Index is not 
retroactive in effect.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change, as amended (SR-Amex-2006-95), 
is approved on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-17845 Filed 10-24-06; 8:45 am]

BILLING CODE 8011-01-P
