

[Federal Register: October 26, 2006 (Volume 71, Number 207)]
[Notices]               
[Page 62634-62636]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc06-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54628; File No. SR-NYSEArca-2006-74]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change 
Relating to the Vanguard Emerging Markets Stock Index Fund

 October 19, 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 October 10, 2006, NYSE Arca, Inc. (``Exchange''), through its wholly 
owned subsidiary NYSE Arca Equities, Inc. (``NYSE Arca Equities'' or 
the ``Corporation''), 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal 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 is proposing 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\
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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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 8, 2005, the Commission approved the Exchange's filing 
proposing to trade the ETF Shares pursuant to unlisted trading 
privileges (``UTP'').\4\ The Commission had previously approved the 
original listing and trading of the ETF Shares by the American Stock 
Exchange LLC (``Amex'').\5\ The Exchange is filing this proposal to 
obtain the Commission's approval of the substitution of the index 
tracked by the ETF Shares issued by the

[[Page 62635]]

Fund. The Amex has recently filed a similar proposal.\6\
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    \4\ See Securities Exchange Act Release No. 34-52221 (August 8, 
2005), 70 FR 48222 (August 16, 2005) (SR-PCX-2005-74) (the 
``Approval Order''). The Exchange expanded the hours during which 
the ETF Shares are eligible to trade on the NYSE Arca Marketplace 
(f/k/a the Archipelago Exchange) in December 2005. See Securities 
Exchange Act Release No. 34-52927 (December 8, 2005), 70 FR 74397 
(December 15, 2005) (SR-PCX-2005-128).
    \5\ See Securities Exchange Act Release No. 50189 (August 12, 
2004), 69 FR 51723 (August 20, 2004) (SR-Amex-2005-04) (the ``Amex 
Approval Order'').
    \6\ See SR-Amex-2006-95 (September 29, 2006) (the ``Amex 
Proposal'').
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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 (MSCI[supreg]) \7\ (``MSCI''). Pursuant to the Fund's 
prospectus for the ETF Shares and the Amex Approval Order, 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. The 
Vanguard Group, Inc., as investment adviser to the Fund (``Vanguard''), 
recently decided to substitute the Select Index with the 
Vanguard[supreg] Emerging Markets Index (``Emerging Markets Index'') 
and issued a press release announcing such substitution.\8\
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    \7\ MSCI[supreg] is a service mark of Morgan Stanley & Co. 
Incorporated.
    \8\ See http://onlinepressroom.net/vanguard/.

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    According to the Amex Proposal, the Select Index \9\ 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 noted concerns. Because 
emerging markets, such as Russia and Malaysia, have become more liquid 
and accessible, Vanguard believes that additional emerging market 
countries now warrant inclusion in the Fund. 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. As a result, it 
is proposed that the Emerging Markets Index be substituted for the 
Select Index.
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    \9\ 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%. 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. 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).
    MSCI (http://www.msci.com) administers the Emerging Markets Index 

exclusively. 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 Fund's investment objectives, policies and methodology, MSCI's 
index maintenance procedures and standards and the dissemination of 
Index information as described in the Approval Order and the Amex 
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 Index that 
have a similar investment profile as the Index.\10\ 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. It is also expected 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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    \10\ As of August 24, 2006, the Fund was comprised of 851 
constituents, according to the Amex Proposal. 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 
Index. Specifically, the Exchange represents that it will rely on 
existing surveillance procedures governing derivative products trading 
on the Exchange. 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 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 Index.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \11\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5) \12\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    In addition, the proposed rule change is consistent with Rule 12f-5 
\13\ under the Act because it deems the Shares to be equity securities, 
thus rendering the Shares subject to the Exchange's rules governing the 
trading of equity securities.
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    \13\ 17 CFR 240.12f-5.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments on the proposed rule change were solicited or 
received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 62636]]

Comments may be submitted by any of the following methods:

Electronic Comments

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

File Number SR-NYSEArca-2006-74 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2006-74. 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 offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2006-74 and should be submitted on or before 
November 16, 2006.

IV. Commission's 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.\14\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ which requires that an 
exchange have rules designed, among other things, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general to protect investors and the public interest.
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    \14\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving this proposed rule 
change before the thirtieth day after the publication of notice thereof 
in the Federal Register. As noted above, the Commission previously 
found that the trading of these ETF Shares on the Exchange is 
consistent with the Act.\16\ Substituting the Emerging Markets Index 
for the Select Index does not change the Commission's analysis, and the 
Commission believes accelerating approval of this proposed rule change 
is appropriate.
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    \16\ See Approval Order, supra note 4.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSEArca-2006-74), is hereby approved 
on an accelerated basis.\17\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-17989 Filed 10-25-06; 8:45 am]

BILLING CODE 8011-01-P
