

[Federal Register: March 7, 2007 (Volume 72, Number 44)]
[Notices]               
[Page 10267-10276]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr07-172]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55372; File No. SR-Amex-2006-112]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Thereto Relating to the Listing and Trading of Units of the United 
States Natural Gas Fund, LP

February 28, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 1, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. On February 14, 2007, the Exchange submitted 
Amendment No. 1 to the proposed rule change. 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.
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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 units (a ``Unit'' or 
collectively, the ``Units'') of the United States Natural Gas Fund, LP 
(``USNG'' or the ``Partnership'') pursuant to Amex Rules 1500 et seq.

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. The 
text of these statements may be examined at the places specified in 
Item IV 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
    The Exchange proposes to list and trade the Units issued by USNG 
(under the symbol: ``UNG'') pursuant to Exchange Rules 1500 et seq. \3\ 
Amex Rule 1500 provides for the listing of Partnership Units, which are 
defined as securities: (a) That are issued by a partnership that 
invests in any combination of futures contracts, options on futures 
contracts, forward contracts, commodities, and/or securities; and (b) 
that are issued and redeemed daily in specified aggregate amounts at 
net asset value. Pursuant to Commentary .01 to Rule 1502, the Exchange 
will file separate proposals under Section 19(b) of the Act before 
listing and trading separate and distinct Partnership Units designated 
on different underlying investments, commodities and/or assets. The 
Exchange submits that the Units will conform to the initial and 
continued listing criteria under Rule 1502.\4\
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    \3\ See Securities Exchange Act Release No. 53582 (March 31, 
2006), 71 FR 17510 (April 6, 2006) (SR-Amex 2005-127) (approving 
Amex Rules 1500 et seq. and the listing and trading of Units of the 
United States Oil Fund, LP).
    \4\ As set forth in the section ``Listing and Trading Rules,'' 
the Exchange will require a minimum of 100,000 Units to be 
outstanding at the start of trading.
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    The Units represent ownership of a fractional undivided beneficial 
interest in the net assets of USNG.\5\ The net assets of USNG will 
consist of investments in futures contracts based on natural gas, crude 
oil, heating oil, gasoline, and other petroleum-based fuels traded on 
the New York Mercantile Exchange (``NYMEX''), Intercontinental Exchange 
(``ICE Futures'') or other U.S. and foreign exchanges (collectively, 
``Futures Contracts''). USNG may also invest in other natural gas-
related investments such as cash-settled options on Futures Contracts, 
forward contracts for natural gas, and over-the-counter (``OTC'') 
transactions that are based on the price of natural gas, oil and other 
petroleum-based fuels, Futures Contracts and indices based on the 
foregoing (collectively, ``Other Natural Gas Related Investments''). 
Futures Contracts and Other Natural Gas Related Investments 
collectively are referred to as ``Natural Gas Interests.''
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    \5\ USNG is commodity pool that will issue Units that may be 
purchased and sold on the Exchange.
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    USNG will invest in Natural Gas Interests to the fullest extent 
possible without being leveraged or unable to satisfy its current or 
potential margin or collateral obligations. In pursuing this objective, 
the primary focus of USNG's investment manager, Victoria Bay Asset 
Management, LLC (``Victoria Bay'' or ``General Partner''), will be the 
investment in Futures Contracts and the management of its investments 
in short-term obligations of the United States

[[Page 10268]]

(``Treasuries''), cash equivalents, and cash (collectively, ``Cash'') 
for margining purposes and as collateral.
    The investment objective of USNG is for changes in percentage terms 
of a unit's net asset value (``NAV'') to reflect the changes in 
percentage terms of the price of natural gas delivered at the Henry 
Hub, Louisiana as measured by the natural gas futures contract traded 
on the NYMEX (the ``Benchmark Futures Contract''). The Benchmark 
Futures Contract employed is the near month expiration contract, except 
when the near month contract is within two (2) weeks of expiration, in 
which case it will invest in the next expiration month.\6\
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    \6\ The Benchmark Futures Contracts will be changed or 
``rolled'' from the near month contract to expire over to the next 
month to expire over a four (4) day period.
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    The General Partner will attempt to place USNG's trades in Natural 
Gas Interests and otherwise manage USNG's investments so that ``A'' 
will be within plus/minus 10 percent of ``B'', where:
     A is the average daily change in USNG's NAV for any period 
of 30 successive valuation days, i.e., any day as of which USNG 
calculates its NAV, and
     B is the average daily change in the price of the 
Benchmark Futures Contract over the same period.
    An investment in the Units will allow both retail and institutional 
investors to easily gain exposure to the natural gas market in a cost-
effective manner. In addition, the Units are also expected to provide 
additional means for diversifying an investor's investments or hedging 
exposure to changes in natural gas prices.

Description of the Natural Gas Market

    Natural Gas. The Exchange states that Natural gas accounts for 
almost a quarter of U.S. energy consumption. The price of natural gas 
is established by the supply and demand conditions in the North 
American market, and more particularly, in the main refining center of 
the U.S. Gulf Coast. The natural gas market essentially constitutes an 
auction, where the highest bidder wins the supply. When markets are 
``strong'' (i.e., when demand is high and/or supply is low), the bidder 
must be willing to pay a higher premium to capture the supply. When 
markets are ``weak'' (i.e., when demand is low and/or supply is high), 
a bidder may choose not to outbid competitors, waiting instead for 
later, possibly lower priced, supplies. Demand for natural gas by 
consumers, as well as agricultural, manufacturing and transportation 
industries, determines the demand for natural gas. Since the precursors 
of product demand are linked to economic activity, natural gas demand 
will tend to reflect economic conditions. However, other factors such 
as weather significantly influence natural gas demand.
    The Exchange states that NYMEX is the world's largest physical 
commodity futures exchange and the dominant market for the trading of 
energy and precious metals. The Benchmark Futures Contract trades in 
units of 10,000 million British thermal units (``mmBtu'') and is based 
on delivery at the Henry Hub in Louisiana, the nexus of 16 intra and 
interstate natural gas pipeline systems that draw supplies from the 
region's prolific gas deposits.\7\ The pipelines serve markets 
throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to 
the Canadian border.
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    \7\In practice, few natural gas Futures Contracts result in 
delivery of the underlying natural gas.
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    Because of the volatility of natural gas prices, a vigorous basis 
market has developed in the pricing relationships between the Henry Hub 
and other important natural gas market centers in the continental 
United States and Canada. The NYMEX makes available for trading a 
series of basis swap futures contracts that are quoted as price 
differentials between approximately 30 natural gas pricing points and 
the Henry Hub. The basis contracts trade in units of 2,500 mmBtu on the 
NYMEX ClearPort[supreg] trading platform. Transactions can also be 
consummated off NYMEX and submitted to the NYMEX for clearing via the 
NYMEX ClearPort[supreg] \8\ clearing website as an exchange of futures 
for physicals or an exchange of futures for swaps transactions.
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    \8\ The NYMEX ClearPort\sm\ is an electronic trading platform, 
through which a slate of energy futures contracts are available for 
competitive trading.
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    The price of natural gas during the period January 1995 through 
October 2006, ranged from a high of $28.38 in January 2004 to a low of 
$1.01 in December 1998. As of November 9, 2006 the spot price was 
$7.24. Annual daily contract volume on the NYMEX from 2001 through 
October 2006 was: 47,457; 97,431; 76,148; 70,048; 76,265; and 102,097, 
respectively.
    WTI Light, Sweet Crude Oil. The Exchange states that Crude oil is 
the world's most actively traded commodity. The oil futures contracts 
for light, sweet crude oil that are traded on the NYMEX are the world's 
most liquid forum for crude oil trading, as well as the most liquid 
futures contracts on a physical commodity. Due to the liquidity and 
price transparency of oil Futures Contracts, they are used as a 
principal international pricing benchmark. The oil futures contracts 
for West Texas Intermediate (``WTI'') light, sweet crude oil is traded 
on the NYMEX in units of 1,000 U.S. barrels (42,000 gallons) and, if 
not closed out before maturity, will result in delivery of oil to 
Cushing, Oklahoma, which is also accessible to the world market by two 
major interstate petroleum pipeline systems.
    The Exchange states that the price of crude oil is established by 
the supply and demand conditions in the global market overall, and more 
particularly, in the main refining centers of Singapore, Northwest 
Europe, and the U.S. Gulf Coast. Demand for petroleum products by 
consumers, as well as agricultural, manufacturing, and transportation 
industries, determines demand for crude oil by refiners. Since the 
precursors of product demand are linked to economic activity, crude oil 
demand will tend to reflect economic conditions. However, other factors 
such as weather also influence product and crude oil demand.
    The price of WTI light, sweet crude oil has historically exhibited 
periods of significant volatility. The price of WTI light, sweet crude 
oil during the period January 1995 through October 2006, ranged from a 
high of $77.03 in July 2006 to a low of $10.76 in December 1998. As of 
November 9, 2006, the spot price was $61.16. Annual daily contract 
volume on the NYMEX from 2001 through October 2006 was: 49,028; 
182,718; 181,748; 212,382; 237,651; and 298,734, respectively.
    Heating Oil. The Exchange states that heating oil, also known as 
No. 2 fuel oil, accounts for 25% of the yield of a barrel of crude oil, 
the second largest ``cut'' from oil after gasoline. The heating oil 
futures contract, listed and traded on NYMEX, trades in units of 42,000 
gallons (1,000 barrels) and is based on delivery in New York harbor, 
the principal cash market center. The price of heating oil is volatile.
    The price of heating oil during the period January 1995 through 
October 2006, ranged from a high of $215.85 in September 2006 to a low 
of $28.50 in February 1999. As of November 9, 2006, the spot price was 
$169.31. Annual daily contract volume on the NYMEX from 2001 through 
October 2006 was: 41,710; 42,781; 46,327; 51,745; 52,333; and 60,024, 
respectively.
    Gasoline. The Exchange states that gasoline is the largest single 
volume refined product sold in the U.S. and accounts for almost half of 
national oil

[[Page 10269]]

consumption. The gasoline Futures Contract, listed and traded on the 
NYMEX, trades in units of 42,000 gallons (1,000 barrels) and is based 
on delivery at petroleum products terminals in the New York harbor, the 
major East Coast trading center for imports and domestic shipments from 
refineries in the New York harbor area or from the Gulf Coast refining 
centers. The price of gasoline is volatile.
    The price of gasoline during the period January 1995 through 
October 2006, ranged from a high of $2.70 in September 2006 to a low of 
$0.3258 in December 1998. As of November 9, 2006, the spot price was 
$1.71. Annual daily contract volume on the NYMEX from 2001 through 
October 2006 was: 38,033; 43,919; 44,688; 51,315; 52,456; and 44,996, 
respectively.

Futures Regulation

    The Exchange states that the Commodity Exchange Act (``CEA'') 
governs the regulation of commodity interest transactions, markets, and 
intermediaries. The CEA, as amended by the Commodity Futures 
Modernization Act of 2000, requires commodity futures exchanges to have 
rules and procedures to prevent market manipulation, abusive trade 
practices, and fraud. The Commodity Futures Trading Commission 
(``CFTC'') administers the CEA and conducts regular reviews and 
inspections of the futures exchanges' enforcement programs.
    The Exchange states that the CEA provides for varying degrees of 
regulation of commodity interest transactions, depending upon the 
variables of the transaction. In general, these variables include: (1) 
The type of instrument being traded (e.g., contracts for future 
delivery, options, swaps or spot contracts); (2) the type of commodity 
underlying the instrument (distinctions are made between instruments 
based on agricultural commodities, energy and metals commodities, and 
financial commodities);
    (3) the nature of the parties to the transaction (retail, eligible 
contract participant, or eligible commercial entity); (4) whether the 
transaction is entered into on a principal-to-principal or 
intermediated basis; (5) the type of market on which the transaction 
occurs; and (6) whether the transaction is subject to clearing through 
a clearing organization.
    Non-U.S. futures exchanges differ in certain respects from their 
U.S. counterparts. In contrast to U.S. designated contract markets, 
some non-U.S. exchanges are principals' markets, where trades remain 
the liability of the traders involved, and the exchange or an 
affiliated clearing organization, if any, does not become substituted 
for any party. Due to the absence of a clearing system, such exchanges 
are significantly more susceptible to disruptions. Further, 
participants in such markets must often satisfy themselves as to the 
individual creditworthiness of each entity with which they enter into a 
trade. Trading on non-U.S. exchanges is often in the currency of the 
exchange's home jurisdiction.
    The CFTC and U.S. designated contract markets have established 
accountability levels and position limits on the maximum net long or 
net short Futures Contracts position that any person or group of 
persons under common trading control (other than a hedger) may hold, 
own or control in commodity interests. Among the purposes of 
accountability levels and position limits is to prevent a corner or 
squeeze on a market or undue influence on prices by any single trader 
or group of traders.
    The Exchange states that most U.S. futures exchanges limit the 
amount of fluctuation in some futures contract or options on futures 
contract prices during a single trading period. These regulations 
specify what are referred to as daily price fluctuation limits (i.e., 
daily limits). The daily limits establish the maximum amount that the 
price of a futures contract or options on futures contract may vary 
either up or down from the previous day's settlement price. Once the 
daily limit has been reached in a particular futures contract or option 
on a futures contract, no trades may be made at a price beyond the 
limit.
    The Exchange states that most Commodity prices are volatile and, 
although ultimately determined by the interaction of supply and demand, 
are subject to many other influences, including the psychology of the 
marketplace and speculative assessments of future world and economic 
events. Political climate, interest rates, treaties, balance of 
payments, exchange controls, and other governmental interventions as 
well as numerous other variables affect the commodity markets, and even 
with complete information it is impossible for any trader to reliably 
predict commodity prices.
    A portion of USNG's assets may be employed to enter into OTC 
transactions based on natural gas, oil, and other petroleum-based 
fuels. OTC transactions are subject to little, if any, regulation. OTC 
contracts are typically traded on a principal-to-principal basis 
through dealer markets that are dominated by the major money center and 
investment banks and other institutions. In connection with the trading 
of OTC instruments, USNG will not receive the protection of the CEA. 
The markets for OTC contracts rely upon the integrity of market 
participants as well as contractual margin payments, collateral, and/or 
credit supports in lieu of additional regulation.

Structure and Regulation of USNG

    USNG, a Delaware limited partnership formed in September 2006, is a 
commodity pool that will invest in Natural Gas Interests.\9\ It is 
operated by Victoria Bay, a single member Delaware limited liability 
company, which is wholly owned by Wainwright Holdings, Inc. The General 
Partner is registered as a commodity pool operator (``CPO'') with the 
CFTC and is a member of the National Futures Association (the ``NFA'').
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    \9\ USNG is not an investment company as defined in Section 3(a) 
of the Investment Company Act of 1940.
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    Information regarding USNG and the General Partner, as well as 
detailed descriptions of the manner in which the Units will be offered 
and sold, and the investment strategy of USNG, are included in the 
registration statement regarding the offering of the Units filed with 
the Commission under the Securities Act of 1933.\10\
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    \10\ See Form S-1 filed with the Commission on October 6, 2006 
(File No. 333-137871).
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    Clearing Broker. A CFTC-registered futures commission merchant 
(``FCM'') will execute and clear USNG's futures contract transactions, 
hold the margin related to its Futures Contracts investments and 
perform certain administrative services for USNG (the ``Clearing 
Broker''). USNG may use other FCMs as its investments increase or as 
may be required to trade particular Natural Gas Interests.
    Administrator and Custodian. Under separate agreements with USNG, 
Brown Brothers Harriman & Co. will serve as USNG's administrator, 
registrar, transfer agent, and custodian (the ``Administrator'' or 
``Custodian''). The Administrator will perform or supervise the 
performance of services necessary for the operation and administration 
of USNG. These services include, but are not limited to, investment 
accounting, financial reporting, broker and trader reconciliation, 
calculation of the NAV, and valuation of Treasuries and cash 
equivalents used to purchase or redeem Units and other USNG assets or 
liabilities. As Custodian, it: (i) Will receive payments from 
purchasers of Creation Baskets; (ii) will make

[[Page 10270]]

payments to Sellers for Redemption Baskets, as described below; and 
(iii) will hold the cash, cash equivalents, and Treasuries of USNG, as 
well as collateral posted by USNG's derivatives counterparties, and 
will make transfers of margin and collateral with respect to USNG's 
investments to and from its FCMs or counterparties.
    Marketing Agent. A registered broker-dealer will be the marketing 
agent for USNG (``Marketing Agent''). The Marketing Agent, on behalf of 
USNG, will continuously offer Creation and Redemption Baskets and will 
receive and process orders from Authorized Purchasers (as defined 
below) and coordinate the processing of orders for the creation or 
redemption of Units with the General Partner and the Depository Trust 
Company (``DTC'').

Investment Strategy

    USNG will pursue its investment objective by investing its assets 
in Futures Contracts and Other Natural Gas Related Investments to the 
fullest extent possible without being leveraged or unable to satisfy 
its current or potential margin or collateral obligations with respect 
to those investments. USNG will attempt to manage its investments so 
that changes in percentage terms of a Unit's net asset value reflect 
the changes in percentage terms of the price of natural gas delivered 
at the Henry Hub, Louisiana as measured by the Benchmark Futures 
Contract, that is the near month expiration contract, except when the 
near month contract is within two weeks of expiration, in which case it 
will invest in the next expiration month. In connection with tracking 
the price of the Benchmark Futures Contract, the General Partner will 
endeavor to place USNG's trades in Futures Contracts and Other Natural 
Gas Related Investments and otherwise manage USNG's investments so that 
``A'' will be within 10 percent of ``B'', where:
     ``A'' is the average daily change in USNG's NAV for any 
period of 30 successive valuation days, i.e., any day as of which USNG 
calculates its NAV; and
     ``B'' is the average daily change in the price of the 
Benchmark Futures Contract over the same period.
    The Benchmark Futures Contract will be changed or ``rolled'' from 
the near expiration month contract to the next month expiration ratably 
over a four (4) day period. The changes in the Benchmark Futures 
Contract will occur two (2) weeks prior to the expiration of the 
nearest contract month. Thereafter, the calculation of the movement in 
the Benchmark Futures Contract will be based solely on the next month 
expiration contract.
    The Exchange believes that market arbitrage opportunities should 
cause USNG's Unit price to closely track USNG's per Unit NAV which is 
targeted at the current Benchmark Futures Contract.
    Investments. USNG believes that it will be able to use a 
combination of Futures Contracts and Other Natural Gas Related 
Investments to manage the portfolio to achieve its investment 
objective. USNG further anticipates that the exact mix of Futures 
Contracts and Other Natural Gas Related Investments held by the 
portfolio will vary over time depending on, among over things, the 
amount of invested assets in the portfolio, price movements of natural 
gas, the rules and regulations of the various futures and commodities 
exchanges and trading platforms that deal in Natural Gas Interests, and 
innovations in the Natural Gas Interests' marketplace including both 
the creation of new Natural Gas Interest investment vehicles, and the 
creation of new trading venues that trade in Natural Gas Interests.
    Futures Contracts. The principal Natural Gas Interests to be 
invested in by USNG are Futures Contracts. USNG initially expects to 
purchase the Benchmark Futures Contract. USNG may also invest in 
Futures Contracts in crude oil, heating oil, gasoline, and other 
petroleum-based fuels that are traded on the NYMEX, ICE Futures or 
other U.S. and foreign exchanges.
    The Benchmark Futures Contract has historically closely tracked the 
investment objective of USNG over both the short-term, medium-term, and 
the long-term. For that reason, USNG anticipates making significant 
investments in the Benchmark Futures Contract. The Exchange notes that 
the General Partner states that other Futures Contracts have also 
tended to track the investment objective of USNG, though not as closely 
as the Benchmark Futures Contract.
    Other Natural Gas Related Investments. USNG may also purchase Other 
Natural Gas-Related Investments such as cash-settled options on Futures 
Contracts, forward contracts for natural gas, and over-the-counter 
transactions that are based on the price of natural gas, oil and other 
petroleum-based fuels, Futures Contracts, and indices based on the 
foregoing. Option contracts offer investors and hedgers another vehicle 
for managing exposure to the natural gas market. USNG may purchase 
options on natural gas Futures Contracts on the principal commodities 
and futures exchanges in pursuing its investment objective.
    The Exchange states that in addition to these listed options, there 
also exists an active OTC market in derivatives linked to natural gas. 
These OTC derivative transactions are privately-negotiated agreements 
between two (2) parties. Unlike Futures Contracts or related options, 
each party to an OTC contract bears the credit risk that the 
counterparty may not be able to perform its obligations.
    Some OTC contracts contain fairly generic terms and conditions and 
are available from a wide range of participants, while other OTC 
contracts have highly customized terms and conditions and are not as 
widely available. Many OTC contracts are cash-settled forwards for the 
future delivery of natural gas or petroleum-based fuels that have terms 
similar to the Futures Contracts. Others take the form of ``swaps'' in 
which the two parties exchange cash flows based on pre-determined 
formulas tied to the price of natural gas as determined by the spot, 
forward or futures markets. USNG may enter into OTC derivative 
contracts whose value will be tied to changes in the difference between 
the natural gas spot price, the price of Futures Contracts traded on 
NYMEX and the prices of non-NYMEX Futures Contracts that may be 
invested in by USNG.
    Counterparty Procedures. To protect itself from the credit risk 
that arises in connection with such contracts, USNG will enter into 
agreements with each counterparty that provide for the netting of its 
overall exposure to its counterparty and/or provide collateral or other 
credit support to address USNG's exposure. The counterparties to an OTC 
contract will generally be major broker-dealers and banks or their 
affiliates, though certain institutions, such as large energy companies 
or other institutions active in the natural gas commodities markets, 
may also be counterparties. The General Partner will assess or review, 
as appropriate, the creditworthiness of each potential or existing 
counterparty to an OTC contract pursuant to guidelines approved by the 
General Partner's board of directors. Furthermore, the General Partner 
on behalf of USNG will only enter into OTC contracts with: (a) Members 
of the Federal Reserve System or foreign banks with branches regulated 
by the Federal Reserve Board; (b) primary dealers in U.S. government 
securities; (c) broker-dealers; (d) commodities futures merchants; or 
(e) affiliates of the foregoing.
    USNG anticipates that the use of Other Natural Gas Related 
Investments

[[Page 10271]]

together with its investments in Futures Contracts will produce price 
and total return results that closely track the investment objective of 
USNG.
    Cash, Cash Equivalents, and Treasuries. USNG will invest virtually 
all of its assets not invested in Natural Gas Interests, in cash, cash 
equivalents, and Treasuries with a remaining maturity of two years or 
less. The cash, cash equivalents, and Treasuries will be available to 
be used to meet USNG's current or potential margin and collateral 
requirements with respect to its investments in Natural Gas Interests. 
USNG will not use cash, cash equivalents, and Treasuries as margin for 
new investments unless it has a sufficient amount of cash, cash 
equivalents, and Treasuries to meet the margin or collateral 
requirements that may arise due to changes in the value of its 
currently held Natural Gas Interests. Other than in connection with a 
redemption of Units, USNG does not intend to distribute cash or 
property to its Unit holders. Interest earned on cash, cash 
equivalents, and Treasuries held by USNG will be retained by it to pay 
its expenses, to make investments to satisfy its investment objectives, 
or to satisfy its margin or collateral requirements.
    Impact of Accountability Levels and Position Limits. The CFTC and 
U.S. designated contract markets such as the NYMEX have established 
accountability levels and position limits on the maximum net long or 
net short Futures Contracts that any person or group of persons under 
common trading control (other than hedgers) may hold, own or control in 
commodity interests. The Exchange states that accountability levels and 
position limits are intended among other things, to prevent a corner or 
squeeze on a market or undue influence on prices by any single trader 
or group of traders. The net position is the difference between an 
individual or firm's open long contracts and open short contracts in 
any one commodity.
    The Exchange states that most U.S. futures exchanges also limit the 
amount of fluctuation in the prices of some futures contracts or 
options on futures contracts during a single trading day. These 
regulations specify what are referred to as daily price fluctuation 
limits (i.e., daily limits). The daily limits establish the maximum 
amount that the price of a futures contract or an option on a futures 
contract may vary either up or down from the previous day's settlement 
price. Once the daily limit has been reached in a particular futures 
contract or option on a futures contract, no trades may be made at a 
price beyond the limit.
    The accountability levels for the Benchmark Futures Contract and 
other Futures Contracts traded on NYMEX are not a fixed ceiling, but 
rather a threshold above which the NYMEX may exercise greater scrutiny 
and control over an investor's positions. The current accountability 
level for the Benchmark Futures Contract is 12,000 contracts. If USNG 
exceeds this accountability level for the Benchmark Futures Contract, 
NYMEX will monitor USNG's exposure and ask for further information on 
USNG's activities including the total size of all positions, investment 
and trading strategy, and the extent of USNG's liquidity resources. If 
deemed necessary by NYMEX, it could also order USNG to reduce its 
position back to the accountability level.
    If NYMEX orders USNG to reduce its position back to the 
accountability level, or to an accountability level that NYMEX deems 
appropriate for USNG, such an accountability level may impact the mix 
of investments in Natural Gas Interests made by USNG. To illustrate, 
assume that the Benchmark Futures Contract and the unit price of USNG 
are each $10, and that NYMEX has determined that USNG may not own more 
than 12,000 contracts. In such case, USNG could invest up to $1.2 
billion of its daily net assets in the Benchmark Futures Contract 
(i.e., $10 per contract multiplied by 10,000 (a Benchmark Futures 
Contract is a contract for 10,000 million British Thermal Units) 
multiplied by 12,000 contracts) before reaching the accountability 
level imposed by the NYMEX. Once the daily net assets of the portfolio 
exceed $1.2 billion in the Benchmark Futures Contract, the portfolio 
may not be able to make any further investments in the Benchmark 
Futures Contract, depending on whether the NYMEX imposes limits. If 
NYMEX does impose limits at the $1.2 billion level (or another level), 
USNG anticipates that it will invest the majority of its assets above 
that level in a mix of other Futures Contracts or Other Natural Gas-
Related Investments.
    The Exchange states that in addition to accountability levels, 
NYMEX imposes position limits on contracts held in the last few days of 
trading in the near month contract. It is unlikely that USNG will run 
up against such position limits because USNG's investment strategy is 
to exit from the near month contract over a four day period beginning 
two weeks from expiration of the contract.

The Markets for USNG's Units

    There will be two markets for investors to purchase and sell Units. 
New issuances of the Units will be made only in baskets of 100,000 
Units or multiples thereof (a ``Basket''). SNG will issue and redeem 
Baskets of the Units on a continuous basis, by or through participants 
who have each entered into an authorized purchaser agreement 
(``Authorized Purchaser Agreement'' and each such participant, an 
``Authorized Purchaser'') \11\ with the General Partner, at the NAV per 
Unit next determined after an order to purchase the Units in a Basket 
is received in proper form. Baskets may be issued and redeemed on any 
``business day'' (defined as any day other than a day on which the 
Amex, the NYMEX or the New York Stock Exchange is closed for regular 
trading) through the Marketing Agent in exchange for cash and/or 
Treasuries, which the Custodian receives from Authorized Purchasers or 
transfers to Authorized Purchasers, in each case on behalf of USNG. 
Baskets are then separable upon issuance into identical Units that will 
be listed and traded on the Exchange.\12\
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    \11\ An ``Authorized Purchaser'' is a person, who at the time of 
submitting to the Marketing Agent an order to create or redeem one 
or more Baskets: (i) Is a registered broker-dealer or other market 
participants, such as banks and other financial institutions, that 
are exempt from broker-dealer registration; (ii) is a DTC 
Participant; and (iii) has in effect a valid Authorized Participant 
Agreement.
    \12\ The Exchange expects that the number of outstanding Units 
will increase and decrease as a result of creations and redemptions 
of Baskets.
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    The Units will thereafter be traded on the Exchange similar to 
other equity securities. Units will be registered in book-entry form 
through DTC. Trading in the Units on the Exchange will be effected 
until 4:15 p.m. Eastern time (``ET'') each business day. The minimum 
trading increment for such units will be $.01.
    Each Authorized Purchaser, and each distributor offering and 
selling newly issued Units as part of the distribution of such Units, 
is required to comply with the prospectus delivery and disclosure 
requirements of the Securities Act of 1933, as well as the requirements 
of the CEA including, the requirement that prospective investors 
provide an acknowledgement of receipt of such disclosure materials 
prior to the payment for any newly issued Units.
    Calculation of the Basket Amount. Baskets will be issued in 
exchange for Treasuries and/or cash in an amount equal to the NAV per 
Unit times 100,000 Units (the ``Basket Amount''). Baskets will be 
delivered by the Marketing Agent to each Authorized Purchaser only 
after execution of the Authorized Purchaser Agreement. Units in a 
Basket are issued and redeemed in accordance with the Authorized

[[Page 10272]]

Purchaser Agreement. Authorized Purchasers that wish to purchase a 
Basket must transfer the Basket Amount, for each Basket purchased, to 
the Custodian (the ``Deposit Amount''). Authorized Purchasers that wish 
to redeem a Basket will receive an amount of Treasuries and/or cash in 
exchange for each Basket surrendered in an amount equal to the NAV per 
Basket (the ``Redemption Amount'').
    On each business day, the Administrator will make available 
immediately prior to the opening of trading on the Exchange, the Basket 
Amount for the creation of a Basket based on the prior day's NAV. The 
Exchange will disseminate at least every 15 seconds throughout the 
trading day, via the facilities of the Consolidated Tape Association 
(``CTA''), an amount representing, on a per Unit basis, the current 
indicative value of the Basket Amount (see ``Indicative Partnership 
Value'' below). Shortly after 4 p.m. ET, the Administrator will 
determine the NAV for USNG as described below. At or about 4 p.m. ET on 
each business day, the Administrator will determine the Basket Amount 
for orders placed by Authorized Purchasers received before 12 p.m. ET 
that day. Because orders to purchase and/or redeem Baskets must be 
placed by 12 p.m. ET, but the Basket Amount will not be determined 
until shortly after 4 p.m. ET, on the date the purchase order or 
redemption order, as applicable, is received, Authorized Participants 
will not know the total payment required to create or redeem a Basket, 
as applicable, at the time they submit such irrevocable purchase and/or 
redemption order. This is similar to exchange-traded funds and mutual 
funds. USNG's registration statement discloses that NAV and the Basket 
Amount could rise and fall substantially between the time an 
irrevocable purchase order and/or redemption order is submitted and the 
time the Basket Amount is determined.
    Shortly after 4 p.m. ET on each business day, the Administrator, 
Amex and the General Partner will disseminate the NAV for the Units and 
the Basket Amount (for orders placed during the day). The Basket Amount 
and the NAV are communicated by the Administrator to all Authorized 
Purchasers via facsimile or electronic mail message. The Amex will also 
disclose the NAV and Basket Amount on its Web site at http://www.amex.com.
 The Basket Amount necessary for the creation of a Basket 

will change from day to day. On each day that the Amex is open for 
regular trading, the Administrator will adjust the Deposit Amount as 
appropriate to reflect the prior day's Partnership NAV and accrued 
expenses. The Administrator will then determine the Deposit Amount for 
a given business day.\13\
---------------------------------------------------------------------------

    \13\ The Exchange will obtain a representation from USNG that 
its NAV per Unit will be calculated daily and made available to all 
market participants at the same time.
---------------------------------------------------------------------------

    Calculation of USNG's NAV. The Administrator will calculate NAV as 
follows: (1) Determine the current value of USNG assets and (2) 
subtract the liabilities of USNG. The NAV will be calculated shortly 
after the close of trading on the Exchange using the settlement value 
\14\ of Futures Contracts traded on the NYMEX as of the close of open-
outcry trading on the NYMEX at 2:30 p.m. ET, and for the value of other 
Natural Gas Interests, Treasuries and cash equivalents, the value of 
such investments as of the earlier of 4 p.m. New York time or the close 
of trading on the New York Stock Exchange. The NAV is calculated by 
including any unrealized profit or loss on Futures Contracts and Other 
Natural Gas Related Investments and any other credit or debit accruing 
to USNG but unpaid or not received by USNG. The NAV is then used to 
compute all fees (including the management and administrative fees) 
that are calculated from the value of Partnership assets. The 
Administrator will calculate the NAV per Unit by dividing the NAV by 
the number of Units outstanding.
---------------------------------------------------------------------------

    \14\ See Rule 6.52A of the NYMEX Rulebook.
---------------------------------------------------------------------------

    When calculating NAV for USNG, the Administrator will value Futures 
Contracts based on the closing settlement prices quoted on the relevant 
commodities and futures exchange and obtained from various market data 
vendors such as Bloomberg or Reuters. The value of the Other Natural 
Gas Related Investments for purposes of determining the NAV will be 
based upon the determination of the Administrator as to the fair market 
value. Certain types of Other Natural Gas Related Investments, such as 
listed options on Futures Contracts, have closing prices that are 
available from the exchange upon which they are traded or from various 
market data vendors. Other Natural Gas Related Investments will be 
valued based on the last sale price on the exchange or market where 
traded. If a contract fails to trade, the value shall be the most 
recent bid quotation from the third party source. Some types of Other 
Natural Gas Related Investments, such as natural gas forward contracts 
do not trade on established exchanges, but typically have prices that 
are widely available from third-party sources. The Administrator may 
make use of such third-party sources in calculating a fair market value 
of these Other Natural Gas Related Investments.
    Certain types of Other Natural Gas Related Investments, such as OTC 
derivative contracts such as ``swaps'' also do not have established 
exchanges upon which they trade and may not have readily available 
price quotes from third parties. Swaps and other similar derivative or 
contractual-type instruments will be first valued at a price provided 
by a single broker or dealer, typically the counterparty. If no such 
price is available, the contract will be valued at a price at which the 
counterparty to such contract could repurchase the instrument or 
terminate the contract. In determining the fair market value of such 
derivative contracts, the Administrator may make use of quotes from 
other providers of similar derivatives. If these are not available, the 
Administrator may calculate a fair market value of the derivative 
contract based on the terms of the contract and the movement of the 
underlying price factors of the contract.
    Calculation and Payment of the Deposit Amount. The Deposit Amount 
of Treasuries and/or cash will be in the same proportion to the total 
net assets of USNG as the number of Units to be created is in 
proportion to the total number of Units outstanding as of the date the 
purchase order is accepted. The General Partner will determine the 
requirements for the Treasuries that may be included in the Deposit 
Amount and will disseminate these requirements at the start of each 
business day. The amount of cash that is required is the difference 
between the aggregate market value of the Treasuries required to be 
included in the Deposit Amount as of 4 p.m. ET on the date of purchase 
and the total required deposit.
    All purchase orders must be received by the Marketing Agent by 12 
p.m. ET for consideration on that business day. Delivery of the Deposit 
Amount, i.e., Treasuries and/or cash, to the Administrator must occur 
by the third business day following the purchase order date (T+3).\15\ 
Thus, the General Partner will disseminate shortly after 4 p.m. ET on 
the date the purchase order was properly submitted, the amount of 
Treasuries and/or cash to be deposited with the Custodian for each 
Basket.
---------------------------------------------------------------------------

    \15\ Authorized Purchasers are required to pay a transaction fee 
of $1,000 for each order to create one or more Baskets.
---------------------------------------------------------------------------

    Calculation and Payment of the Redemption Amount. The Units will 
not be individually redeemable but will only be redeemable in Baskets. 
To redeem, an Authorized Purchaser will

[[Page 10273]]

be required to accumulate enough Units to constitute a Basket (i.e., 
100,000 Units). An Authorized Purchaser redeeming a Basket will receive 
the Redemption Amount. Upon the surrender of the Units and payment of 
applicable redemption transaction fee,\16\ taxes or charges, the 
Custodian will deliver to the redeeming Authorized Purchaser the 
Redemption Amount. The Redemption Amount of Treasuries and/or cash will 
be in the same proportion to the total net assets of USNG as the number 
of Units to be redeemed is in proportion to the total number of Units 
outstanding as of the date the redemption order is accepted. The 
General Partner will determine the Treasuries to be included in the 
Redemption Amount. The amount of cash that is required is the 
difference between the aggregate market value of the Treasuries 
required to be included in the Redemption Amount as of 4 p.m. ET on the 
date of redemption and the total Redemption Amount. All redemption 
orders must be received by the Marketing Agent by 12 p.m. ET on the 
business day redemption is requested and are irrevocable. Delivery of 
the Basket to be redeemed to the Custodian and payment of Redemption 
Amount will occur by the third business day following the redemption 
order date (T+3).
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

Arbitrage

    The Exchange believes that the Units will not trade at a material 
discount or premium to a Unit's NAV based on potential arbitrage 
opportunities. Due to the fact that the Units can be created and 
redeemed only in Baskets at NAV, the Exchange submits that arbitrage 
opportunities should provide a mechanism to mitigate the effect of any 
premiums or discounts that may exist from time to time.

Dissemination and Availability of Information

    Futures Contracts. The daily settlement prices for the NYMEX traded 
Futures Contracts held by USNG are publicly available on the NYMEX 
website at http://www.nymex.com The Exchange on its website at http://www.amex.com.
 will also include a hyperlink to the NYMEX website for the 
purpose of disclosing futures contract pricing. In addition, various 
market data vendors and news publications publish futures prices and 
related data. The Exchange represents that quote and last sale 
information for the Futures Contracts are widely disseminated through a 
variety of market data vendors worldwide, including Bloomberg and 
Reuters. In addition, the Exchange further represents that real-time 
futures data is available by subscription from Reuters and Bloomberg. 
The NYMEX also provides delayed futures information on current and past 
trading sessions and market news free of charge on its Web site. The 
specific contract specifications for the Futures Contracts are also 
available on the NYMEX website and the ICE Futures Web site at http://www.icefutures.com
.

    USNG Units. The Web site for the Exchange at http://www.amex.com, 

which is publicly accessible at no charge, will contain the following 
information: (1) The prior business day's NAV and the reported closing 
price; (2) the mid-point of the bid-ask price \17\ in relation to the 
NAV as of the time the NAV is calculated (the ``Bid-Ask Price''); (3) 
calculation of the premium or discount of such price against such NAV; 
(4) data in chart form displaying the frequency distribution of 
discounts and premiums of the Bid-Ask Price against the NAV, within 
appropriate ranges for each of the four (4) previous calendar quarters; 
(5) the prospectus and the most recent periodic reports filed with the 
SEC or required by the CFTC; and (6) other applicable quantitative 
information.
---------------------------------------------------------------------------

    \17\ The Bid-Ask Price of Units is determined using the highest 
bid and lowest offer as of the time of calculation of the NAV.
---------------------------------------------------------------------------

    Portfolio Disclosure. USNG's total portfolio composition will be 
disclosed, each business day that the Amex is open for trading, on 
USNG's website at http://www.unitedstatesnaturalgasfund.com. USNG 

expects that website disclosure of portfolio holdings will be made 
daily and will include, as applicable, the name and value of each 
Natural Gas Interest, the specific types of Natural Gas Interests and 
characteristics of such Natural Gas Interests, Treasuries, and amount 
of cash and cash equivalents held in the portfolio of USNG. The public 
Web site disclosure of the portfolio composition of USNG will coincide 
with the disclosure by the Administrator on each business day of the 
NAV for the Units and the Basket Amount (for orders placed during the 
day). Therefore, the same portfolio information will be provided on the 
public Web site as well as in the facsimile or electronic mail message 
to Authorized Purchasers containing the NAV and Basket Amount (``Daily 
Dissemination''). The format of the public Web site disclosure and the 
Daily Dissemination will differ because the public Web site will list 
all portfolio holdings while the Daily Dissemination will provide the 
portfolio holdings in a format appropriate for Authorized Purchasers, 
i.e., the exact components of a Creation Unit.
    As described above, the NAV for USNG will be calculated and 
disseminated daily.\18\ The Amex also intends to disseminate for USNG 
on a daily basis by means of CTA/CQ High Speed Lines information with 
respect to the Indicative Partnership Value (as discussed below), 
recent NAV, Units outstanding, the Basket Amount, and the Deposit 
Amount. The Exchange will also make available on its Web site daily 
trading volume, closing prices, and the NAV. The closing price and 
settlement prices of the Futures Contracts held by USNG are also 
readily available from the NYMEX, automated quotation systems, 
published or other public sources, or on-line information services such 
as Bloomberg or Reuters. In addition, the Exchange will provide a 
hyperlink on its Web site at http://www.amex.com to USNG's Web site.

---------------------------------------------------------------------------

    \18\ The Exchange will obtain a representation from USNG that 
its NAV per Unit will be calculated daily and made available to all 
market participants at the same time.
---------------------------------------------------------------------------

    Indicative Partnership Value. In order to provide updated 
information relating to USNG for use by investors, professionals, and 
persons wishing to create or redeem the Units, the Exchange will 
disseminate through the facilities of the CTA an updated Indicative 
Partnership Value (the ``Indicative Partnership Value''). The 
Indicative Partnership Value will be disseminated on a per Unit basis 
at least every fifteen seconds during the regular Amex trading hours of 
9:30 a.m. to 4:15 p.m. ET. The Indicative Partnership Value will be 
calculated based on the Treasuries and cash required for creations and 
redemptions (i.e., NAV per limit x 100,000) adjusted to reflect the 
price changes of the Benchmark Futures Contract.
    The Indicative Partnership Value will not reflect price changes to 
the price of the Benchmark Futures Contract between the close of open-
outcry trading of such contract on the NYMEX at 2:30 p.m. ET and the 
open of trading on the NYMEX ACCESS market at 3:15 p.m. ET. The 
Indicative Partnership Value after 3:15 p.m. ET \19\ will reflect 
changes to the Benchmark Futures Contract as provided for through NYMEX 
ACCESS. The value of a Unit

[[Page 10274]]

may accordingly be influenced by non-concurrent trading hours between 
the Amex and NYMEX. While the Units will trade on the Amex from 9:30 
a.m. to 4:15 p.m. ET, the Benchmark Futures Contract will trade, in 
open-outcry, on the NYMEX from 10 a.m. ET to 2:30 pm ET and NYMEX 
ACCESS from 3:15 p.m. ET through the following morning 9:30 a.m. ET.
---------------------------------------------------------------------------

    \19\ NYMEX ACCESS[supreg], an electronic trading system, is open 
for price discovery on the Benchmark Futures Contract each Monday 
through Thursday at 3:15 p.m. ET through the following morning at 
9:30 a.m. E.T., and from 7 p.m. Sunday night until Monday morning 
9:30 a.m. E.T.
---------------------------------------------------------------------------

    While the NYMEX is open for trading, the Indicative Partnership 
Value can be expected to closely approximate the value per unit of the 
Basket Amount. However, during Amex trading hours when the Futures 
Contracts have ceased trading, spreads and resulting premiums or 
discounts may widen, and therefore, increase the difference between the 
price of the Units and the NAV of the Units. The Exchange submits that 
the Indicative Partnership Value on a per Unit basis disseminated 
during Amex trading hours should not be viewed as a real-time update of 
the NAV, which is calculated only once a day. The Exchange believes 
that dissemination of the Indicative Partnership Value based on the 
cash amount required for a Basket provides additional information that 
is not otherwise available to the public and is useful to professionals 
and investors in connection with the Units trading on the Exchange or 
the creation or redemption of the Units.

Partnership Termination Events

    USNG will continue in effect from the date of its formation in 
perpetuity, unless sooner terminated upon the occurrence of any one or 
more of the following circumstances: (1) The death, adjudication of 
incompetence, bankruptcy, dissolution, withdrawal, or removal of a 
general partner who is the sole remaining general partner, unless a 
majority in interest of limited partners within 90 days after such 
event elects to continue USNG and appoints a successor general partner; 
or (2) the affirmative vote to terminate USNG by a majority in interest 
of the limited partners subject to certain conditions.
    Upon termination of USNG, holders of the Units will surrender their 
Units and the assets of USNG shall be distributed to the Unit holders 
pro rata in accordance with the value of the Units, in cash or in kind, 
as determined by the General Partner.

Disclosure

    The Exchange, in an Information Circular (described below) to 
Exchange members and member organizations, will inform members and 
member organizations, prior to the commencement of trading, of the 
prospectus delivery requirements applicable to USNG. The Exchange notes 
that investors purchasing Units directly from USNG (by delivery of the 
Deposit Amount) will receive a prospectus. Amex members purchasing 
Units from USNG for resale to investors will deliver a prospectus to 
such investors.

Purchase and Redemptions in Baskets

    In the Information Circular, members and member organizations will 
be informed that procedures for purchases and redemptions of Units in 
Baskets are described in the Prospectus and that Units are not 
individually redeemable but are redeemable only in Baskets or multiples 
thereof.

Listing and Trading Rules

    USNG will be subject to the criteria in Rule 1502 for initial and 
continued listing of the Units. The Exchange will require a minimum of 
100,000 Units to be outstanding at the start of trading. The Exchange 
expects that the initial price of a Unit will be $50.00.\20\ The 
Exchange believes that the anticipated minimum number of Units 
outstanding at the start of trading is sufficient to provide adequate 
market liquidity and to further USNG's objective to seek to provide a 
simple and cost effective means of accessing the commodity futures 
markets. The Exchange represents that it prohibits the initial and/or 
continued listing of any security that is not in compliance with Rule 
10A-3 under the Act.\21\ The Exchange will file a proposed rule change 
with the Commission pursuant to Rule 19b-4 under the 1934 Act seeking 
approval to continue trading the Units and, unless approved, the 
Exchange will commence delisting the Units if more than a temporary 
disruption exists in connection with the pricing of the Benchmark 
Futures Contract or the calculation or dissemination of the NAV is more 
than temporarily disrupted, or the NAV is not disseminated to all 
market participants at the same time.
---------------------------------------------------------------------------

    \20\ USNG expects that the initial Authorized Purchaser will 
purchase the initial Basket of 100,000 Units at the initial offering 
price per Unit of $50.00. On the date of the public offering and 
thereafter, USNG will continuously issue Units in Baskets of 100,000 
Units to Authorized Purchasers at NAV.
    \21\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    The Amex original listing fee applicable to the listing of USNG is 
$5,000. In addition, the annual listing fee applicable under Section 
141 of the Amex Company Guide will be based upon the year-end aggregate 
number of Units in all series of USNG outstanding at the end of each 
calendar year.
    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 Rule 950(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 the Units as eligible for this treatment.\22\
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 29063 (April 10, 
1991), 56 FR 15652 (April 17, 1991) (SR-Amex 90-31) at note 9, 
regarding the Exchange's designation of equity derivative securities 
as eligible for such treatment under Amex Rule 154, Commentary 
.04(c).
---------------------------------------------------------------------------

    The Units will be deemed ``Eligible Securities'', as defined in 
Amex Rule 230, for purposes of the Intermarket Trading System Plan and 
therefore will be subject to the trade through provisions of Amex Rule 
236, which requires that Amex members avoid initiating trade-throughs 
for ITS securities.
    Specialist transactions of the Units made in connection with the 
creation and redemption of Units will not be subject to the 
prohibitions of Amex Rule 190.\23\ The Units will not be subject to the 
short sale rule, Rule 10a-1 under the Act, pursuant to no-action relief 
granted.\24\ If exemptive or no-action relief is provided, the Exchange 
will issue a notice detailing the terms of the exemption or relief. The 
Units will generally be subject to the Exchange's stabilization rule, 
Amex Rule 170, except that specialists may buy on ``plus ticks'' and 
sell on ``minus ticks,'' in order to bring the Units into parity with 
the underlying commodity or commodities and/or futures contract price. 
Proposed Commentary .01 to Amex Rule 1503 sets forth this limited 
exception to Rule 170.
---------------------------------------------------------------------------

    \23\ See Commentary .05 to Amex Rule 190.
    \24\ See letter to George T. Simon, Esq. Foley & Lardner, LLP, 
from Racquel L. Russell, Branch Chief, Office of Trading Practices 
and Processing, Commission, dated June 21, 2006.
---------------------------------------------------------------------------

    The Exchange submits that its surveillance procedures are adequate 
to deter and detect violations of Exchange rules relating to the 
trading of the Units. The surveillance procedures for the Units will be 
similar to those used for units of the United States Oil Fund, LP as 
well as other commodity-based trusts, trust issued receipts (``TIR''s) 
and exchange-traded funds. In addition, the surveillance procedures 
will incorporate and rely upon existing Amex surveillance procedures 
governing options and equities.
    Amex Rule 1503 relating to certain specialist prohibitions will 
address potential conflicts of interest in

[[Page 10275]]

connection with acting as a specialist in the Units. Specifically, Rule 
1503 provides that the prohibitions in Rule 175(c) apply to a 
specialist in the Units so that the specialist or affiliated person may 
not act or function as a market-maker in an underlying asset, related 
futures contract or option or any other related derivative. An 
affiliated person of the specialist consistent with Rule 193 may be 
afforded an exemption to act in a market making capacity, other than as 
a specialist in the Units on another market center, in the underlying 
asset, related futures or options or any other related derivative. In 
particular, Amex Rule 1503 provides that an approved person of an 
equity specialist that has established and obtained Exchange approval 
for procedures restricting the flow of material, non-public market 
information between itself and the specialist member organization, and 
any member, officer, or employee associated therewith, may act in a 
market making capacity, other than as a specialist in the Units on 
another market center, in the underlying asset or commodity, related 
futures or options on futures, or any other related derivatives.
    Amex Rule 1504 will also ensure that specialists handling the Units 
provide the Exchange with all the necessary information relating to 
their trading in physical assets or commodities, related futures 
contracts and options thereon or any other derivative. As a general 
matter, the Exchange has regulatory jurisdiction over its members, 
member organizations and approved persons of a member organization. The 
Exchange also has regulatory jurisdiction over any person or entity 
controlling a member organization as well as a subsidiary or affiliate 
of a member organization that is in the securities business. A 
subsidiary or affiliate of a member organization that does business 
only in commodities or futures contracts would not be subject to 
Exchange jurisdiction, but the Exchange could obtain information 
regarding the activities of such subsidiary or affiliate through 
surveillance sharing agreements with regulatory organizations of which 
such subsidiary or affiliate is a member.

Trading Halts

    If the Indicative Partnership Value is not being disseminated by 
one or more major market data vendors, the Exchange may halt trading 
during the day in which the interruption to the dissemination of such 
Indicative Partnership Value occurs. If the interruption to the 
dissemination of an Indicative Partnership Value persists past the 
trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption.
    Prior to the commencement of trading, the Exchange will issue an 
Information Circular to members informing them of, among other things, 
Exchange policies regarding trading halts in the Units. First, the 
Information Circular will advise that trading will be halted in the 
event the market volatility trading halt parameters set forth in Amex 
Rule 117 have been reached. Second, the Information Circular will 
advise that, in addition to the parameters set forth in Rule 117, the 
Exchange will halt trading in the Units if trading in the underlying 
Futures Contract(s) is halted or suspended. Third, with respect to a 
halt in trading that is not specified above, the Exchange may also 
consider other relevant factors and the existence of unusual conditions 
or circumstances that may be detrimental to the maintenance of a fair 
and orderly market.

Suitability

    The Information Circular will inform members and member 
organizations of the characteristics of USNG Units and of applicable 
Exchange rules, as well as of the requirements of Amex Rule 411 (Duty 
to Know and Approve Customers).
    The Exchange notes that pursuant to Rule 411, members and member 
organizations are required in connection with recommending transactions 
in the Units to have a reasonable basis to believe that a customer is 
suitable for the particular investment given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member.

Information Circular

    The Amex will distribute an Information Circular to its members in 
connection with the trading of the Units. The Information Circular will 
discuss the special characteristics of and risks of trading in the 
Units. Specifically, the Information Circular, among other things, will 
discuss what the Units are, how a basket is created and redeemed, the 
requirement that members and member firms deliver a prospectus to 
investors purchasing the Units prior to or concurrently with the 
confirmation of a transaction, applicable Amex rules, dissemination 
information regarding the per unit Indicative Partnership Value, 
trading information and applicable suitability rules. The Information 
Circular will also explain that USNG is subject to various fees and 
expenses described in the Registration Statement. The Information 
Circular will also reference the fact that there is no regulated source 
of last sale information regarding physical commodities, that the SEC 
has no jurisdiction over the trading of natural gas, crude oil, heating 
oil, gasoline or other petroleum-based fuels, and that the CFTC has 
regulatory jurisdiction over the trading of natural gas-based futures 
contracts and related options.
    The Information Circular will also notify members and member 
organizations about the procedures for purchases and redemptions of 
Units in Baskets, and that Units are not individually redeemable but 
are redeemable only in Baskets or multiples thereof. The Information 
Circular will advise members of their suitability obligations with 
respect to recommended transactions to customers in the Units. The 
Information Circular will also discuss any relief, if granted, by the 
Commission or the staff from any rules under the Act.
    The Information Circular will disclose that the NAV for Units will 
be calculated shortly after 4 p.m. ET each trading day.

Surveillance

    Exchange surveillance procedures applicable to trading in the 
proposed Units will be similar to those applicable to TIRs, Portfolio 
Depository Receipts, Index Fund Shares, and Partnership Units currently 
trading on the Exchange. The Exchange currently has in place an 
Information Sharing Agreement with the NYMEX and ICE Futures for the 
purpose of providing information in connection with trading in or 
related to futures contracts traded on the NYMEX and ICE Futures, 
respectively. To the extent that USNG invests in Natural Gas Interests 
traded on other exchanges, the Amex will seek to enter into Information 
Sharing arrangements with those particular exchanges.
2. Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act \25\ in general, and 
furthers the objectives of Section 6(b)(5),\26\ of the Act in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the

[[Page 10276]]

mechanism of a free and open market and a national market system.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

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

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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Amex has requested accelerated approval of this proposed rule 
change prior to the 30th day after the date of publication of the 
notice of the filing thereof. The Commission has determined that a 15-
day comment period is appropriate in this case.

IV. 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 Exchange 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-2006-112 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-2006-112. 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 Amex. 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-2006-112 and should be submitted on or before March 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-4040 Filed 3-6-07; 8:45 am]

BILLING CODE 8010-01-P
