

[Federal Register: April 18, 2007 (Volume 72, Number 74)]
[Notices]               
[Page 19571-19577]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ap07-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55621; File No. SR-NYSEArca-2006-86]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change and Amendments No. 1, 2, 3, and 4 Thereto and 
Order Granting Accelerated Approval of the Proposed Rule Change as 
Modified by Amendments No. 2 and 4 Thereto Adopting Generic Listing 
Standards for Exchange-Traded Funds Based on International or Global 
Indexes or Indexes Described in Exchange Rules Previously Approved by 
the Commission as Underlying Benchmarks for Derivative Securities

April 12, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on November 13, 2006, NYSE Arca, Inc. (``NYSE Arca'' 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 substantially prepared by the Exchange. 
On March 19, 2007, the Exchange filed Amendment No. 1 to the proposal. 
On March 20, 2007, the Exchange filed Amendment No. 2 to the 
proposal.\3\ On April 4, 2007, the Exchange filed Amendment No. 3 to 
the filing. On April 10, 2007, the Exchange filed Amendment No. 4 to 
the filing.\4\ This order provides notice of the proposal, as amended, 
and approves the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 replaced and superseded the original filing 
and Amendment No. 1 in their entirety.
    \4\ Amendment No. 4 superseded Amendment No. 3 in its entirety. 
In Amendment No. 4, the Exchange made clarifying changes to Exhibit 
5 and the purpose section, including reflecting a recent approval of 
an exchange rule that changed the current rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE Arca, through its wholly owned subsidiary NYSE Arca Equities, 
Inc. (``NYSE Arca Equities''), proposes to amend its rules governing 
NYSE Arca, L.L.C. (also referred to as the ``NYSE Arca Marketplace''), 
the equities trading facility of NYSE Arca Equities. The Exchange 
proposes to amend NYSE Arca Equities Rules 5.2(j)(3), 5.5(g)(2), and 
8.100 to include generic listing standards for Investment Company

[[Page 19572]]

Units (``Units'') and Portfolio Depositary Receipts (``PDRs'') 
(``Units'' and ``PDRs'' together referred to herein as ``exchange-
traded funds'' or ``ETFs'') that are based on international or global 
indexes or on indexes described in exchange rules that have been 
previously approved by the Commission for the trading of ETFs and other 
index-based securities. The text of the proposed rule change is 
available at the Exchange, from the Commission's Public Reference Room, 
and on NYSE Arca's Web site (http://www.nysearca.com).


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
    The Exchange proposes to amend NYSE Arca Equities Rules 5.2(j)(3), 
5.5(g)(2), and 8.100 to include generic listing standards for series of 
Units and PDRs that are based on international or global indexes or on 
indexes described in rules previously approved by the Commission under 
Section 19(b)(2) of the Exchange Act \5\ for the trading of ETFs, 
options, or other specified index-based securities. This proposal would 
enable the Exchange to list and trade ETFs pursuant to Rule 19b-4(e) 
under the Exchange Act \6\ if each of the conditions set forth in 
Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3) or Commentary .01 
to NYSE Arca Equities Rule 8.100 is satisfied. Rule 19b-4(e) provides 
that the listing and trading of a new derivative securities product by 
a self-regulatory organization (``SRO'') shall not be deemed a proposed 
rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if the 
Commission has approved, pursuant to Section 19(b) of the Exchange Act, 
the SRO's trading rules, procedures, and listing standards for the 
product class that would include the new derivatives securities 
product, and the SRO has a surveillance program for the product 
class.\7 \Similar proposals for the New York Stock Exchange LLC 
(``NYSE''), The NASDAQ Stock Market LLC (``Nasdaq''), and the American 
Stock Exchange LLC (``Amex'') have been approved by the Commission.\8\
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ 17 CFR 240.19b-4(e).
    \7\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange 
begins trading a new derivative securities product. See 17 CFR 
240.19b-4(e)(2)(ii). See also Securities Exchange Act Release No. 
40761 (December 8, 1998), 63 FR 70952 (December 22, 1998).
    \8\ See Securities Exchange Act Release No. 55269 (February 9, 
2007), 72 FR 7490 (February 15, 2007) (SR-Nasdaq-2006-050); 
Securities Exchange Act Release No. 55113 (January 18, 2007), 72 FR 
3179 (January 24, 2007) (SR-NYSE-2006-101); Securities Exchange Act 
Release No. 54739 (November 9, 2006), 71 FR 66993 (November 17, 
2006) (SR-Amex-2006-78); and Securities Exchange Act Release No. 
55018 (December 28, 2006), 72 FR 1040 (January 9, 2007) (SR-Amex-
2006-109) (making clarifying changes to the generic listing 
standards set forth in SR-Amex-2006-78).
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Exchange-Traded Funds

    NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2) provide standards 
for initial and continued listing of Units, which are securities 
representing interests in a registered investment company that could be 
organized as a unit investment trust, an open-end management investment 
company, or a similar entity. The investment company must hold 
securities comprising, or otherwise based on or representing an 
interest in, an index or portfolio of securities, or the investment 
company must hold securities in another registered investment company 
that holds securities in such a manner.\9\ NYSE Arca Equities Rule 
8.100 allows for the listing and trading on the Exchange of PDRs. PDRs 
represent securities based on a unit investment trust that holds the 
securities that comprise an index or portfolio underlying a series of 
PDRs. Pursuant to NYSE Arca Equities Rules 5.2(j)(3) and 8.100, Units 
and PDRs must be issued in a specified aggregate minimum number in 
return for a deposit of specified securities and/or a cash amount. When 
aggregated in the same specified minimum number, Units and PDRs must be 
redeemable by the issuer for the underlying securities and/or cash.
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    \9\ See NYSE Arca Equities Rule 5.2(j)(3)(A)(i)(a)-(b).
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    To meet the objective of providing investment returns that 
correspond to the price, dividend, and yield performance of the 
underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF 
portfolio.\10\ An ETF using a replication strategy invests in each 
stock of the underlying index in about the same proportion as that 
stock is represented in the index itself. An ETF using a representative 
sampling strategy generally invests in a significant number but not all 
of the component securities of its underlying index, and will hold 
stocks that, in the aggregate, are intended to approximate the full 
index in terms of key characteristics, such as price/earnings ratio, 
earnings growth, and dividend yield.
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    \10\ In either case, an ETF, by its terms, may be considered 
invested in the securities of the underlying index to the extent the 
ETF invests in sponsored American Depositary Receipts (``ADRs''), 
Global Depositary Receipts (``GDRs''), or European Depositary 
Receipts (``EDRs'') that trade on exchanges with last-sale reporting 
of securities in the underlying index.
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    In addition, an ETF portfolio may be adjusted in accordance with 
changes in the composition of the underlying index or to maintain 
compliance with requirements applicable to a regulated investment 
company under the Internal Revenue Code (``IRC'').\11\
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    \11\ For an ETF to qualify for tax treatment as a regulated 
investment company, it must meet several requirements under the IRC, 
including requirements with respect to the nature and the value of 
the ETF's assets.
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Generic Listing Standards for Exchange-Traded Funds

    The Commission has previously approved generic listing standards 
for ETFs based on indexes that consist of stocks listed on U.S. 
exchanges.\12\ In general, the proposed criteria for the underlying 
component securities in the international and global indexes are 
similar to those for the domestic indexes, but with modifications as 
appropriate for the issues and risks associated with non-U.S. 
securities.
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    \12\ See Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3); 
Commentary .01 to NYSE Arca Equities Rule 8.100; Securities Exchange 
Act Release No. 44551 (July 12, 2001), 66 FR 37716 (July 19, 2001) 
(SR-PCX-2001-14) (approving generic listing standards for Units and 
PDRs).
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    In addition, the Commission has previously approved rules governing 
the listing and trading of ETFs based on international indexes--those 
based on non-U.S. component stocks--as well as global indexes--those 
based on non-U.S. and U.S. component stocks.\13\
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    \13\ See, e.g., Securities Exchange Act Release No. 53999 (June 
15, 2006), 71 FR 35981 (June 22, 2006) (SR-NYSEArca-2006-30) 
(approving the trading of certain Wisdom Trade exchange-traded 
funds); and Securities Exchange Act Release No. 53230 (February 6, 
2006), 71 FR 7594 (February 13, 2006) (SR-PCX-2005-116) (approving 
the listing and trading of funds of iShares, Inc. based on certain 
MSCI country-specific indexes).
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    The Commission has also approved rules of other exchanges that 
permit the listing pursuant to Rule 19b-4(e) of index-based derivatives 
where the Commission had previously approved rules contemplating the 
trading of

[[Page 19573]]

specified index-based derivatives on the same index, on the condition 
that all of the standards set forth in those orders, in particular with 
respect to surveillance sharing agreements, continued to be 
satisfied.\14\
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    \14\ See NYSE Arca Equities Rule 5.2(j)(6); Securities Exchange 
Act Release No. 52204 (August 3, 2005), 70 FR 46559 (August 10, 
2005) (SR-PCX-2005-63) (approving generic listing standards for 
index-linked securities).
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    The Exchange believes that adopting additional generic listing 
standards for ETFs and applying Rule 19b-4(e) thereto should fulfill 
the intended objective of that rule by allowing those ETFs that satisfy 
the proposed generic listing standards to commence trading without the 
need for the public comment period and Commission approval. The 
proposed rules have the potential to reduce the time frame for bringing 
ETFs to market, thereby reducing the burdens on issuers and other 
market participants. The failure of a particular ETF to comply with the 
proposed generic listing standards under Rule 19b-4(e) would not, 
however, preclude the Exchange from submitting a separate filing 
pursuant to Section 19(b)(2) requesting Commission approval to list and 
trade a particular ETF.

Requirements for Listing and Trading ETFs Based on International and 
Global Indexes or Previously Approved Indexes

    ETFs listed pursuant to these proposed generic listing standards 
for international and global indexes, and for indexes described in 
rules previously approved by the Commission for trading of options or 
other derivative securities, would be traded, in all other respects, 
under the Exchange's existing trading rules and procedures that apply 
to ETFs \15\ and would be covered under the Exchange's surveillance 
program for derivative products. The Exchange represents that its 
surveillance procedures are adequate to properly monitor the trading of 
Units and PDRs listed pursuant to the proposed new listing standards 
and those traded pursuant to UTP. Specifically, the Exchange will rely 
on its existing surveillance procedures governing derivative products, 
which apply both to Exchange-listed Units and PDRs and those traded 
pursuant to UTP. In addition, the Exchange also has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.
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    \15\ See NYSE Arca Equities Rules 5.2(j)(3), 5.5(g)(2), and 
8.100.
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    To list an ETF pursuant to the proposed generic listing standards 
for international or global indexes, and for indexes described in 
exchange rules previously approved by the Commission for trading of 
options or other derivative securities, the index underlying the Units 
or PDRs must satisfy all the conditions contained in proposed 
Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3) (for Units) or 
proposed Commentary .01 to NYSE Arca Equities Rule 8.100 (for PDRs). 
However, for Units or PDRs traded on the Exchange pursuant to UTP, only 
the provisions of paragraphs (c), (e), (f), (g), and (h) of Commentary 
.01 to NYSE Arca Equities Rule 5.2(j) and NYSE Arca Equities Rule 
8.100(c) and paragraphs (c), (e), (f), and (g) of Commentary .01 to 
NYSE Arca Equities Rule 8.100 would apply. These paragraphs relate to 
trading increments, trading hours, dissemination of IIV, implementation 
of surveillance procedures, information circulars, and prospectus 
delivery.
    As with the existing generic standards for ETFs based on domestic 
indexes, these generic listing standards are intended to ensure that 
stocks with substantial market capitalization and trading volume 
account for a substantial portion of the weight of an index or 
portfolio. While the standards in this proposal are based on the 
standards contained in the current generic listing standards for ETFs 
based on domestic indexes, they have been adapted as appropriate to 
apply to international and global indexes.
    As proposed, the definition section of each of NYSE Arca Equities 
Rules 5.2(j)(3) and 8.100 would be revised to include definitions of 
U.S. Component Stock and Non-U.S. Component Stock. These new 
definitions would provide the basis for the standards for indexes with 
either domestic or international stocks, or a combination of both. A 
``Non-U.S. Component Stock'' would mean an equity security that is not 
registered under Section 12(b) or 12(g) of the Exchange Act,\16\ and 
that is issued by an entity that (1) is not organized, domiciled, or 
incorporated in the United States, and (2) is an operating company 
(including a real estate investment trust) or income trust, but 
excluding an investment trust, unit trust, mutual fund, or derivative). 
This definition is designed to create a category of component stocks 
that are issued by companies that are not based in the United States, 
but that also are not subject to oversight through Commission 
registration, and would include sponsored GDRs and EDRs. This 
definition would appear in an amended introductory paragraph in NYSE 
Arca Equities Rule 5.2(j)(3) and new subsection (4) of NYSE Arca 
Equities Rule 8.100(a).
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    \16\ 15 U.S.C. 781(b) or (g).
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    A ``U.S. Component Stock'' would mean an equity security that is 
registered under Section 12(b) or 12(g) of the Exchange Act or an ADR, 
the underlying equity security of which is registered under Section 
12(b) or 12(g) of the Exchange Act. An ADR with an underlying equity 
security that is registered pursuant to the Exchange Act is considered 
a U.S. Component Stock because the issuer of that underlying security 
is subject to Commission jurisdiction and must comply with Commission 
rules. This definition would appear in an amended introductory 
paragraph in NYSE Arca Equities Rule 5.2(j)(3) and new subsection (3) 
of NYSE Arca Equities Rule 8.100(a).
    The Exchange proposes that, to list a Unit or PDR based on an 
international or global index or portfolio pursuant to the generic 
listing standards, such index or portfolio must meet the following 
criteria:
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each shall have a 
minimum market value of at least $100 million (proposed NYSE Arca 
Equities Rules 5.2(j)(3), Commentary .01(a)(B)(1), and 8.100, 
Commentary .01(a)(B)(1));
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each shall have a 
minimum worldwide monthly trading volume during each of the last six 
months of at least 250,000 shares (proposed NYSE Arca Equities Rules 
5.2(j)(3), Commentary .01(a)(B)(2) and 8.100, Commentary .01(a)(B)(2));
     The most heavily weighted component stock may not exceed 
25% of the weight of the index or portfolio and the five most heavily 
weighted component stocks may not exceed 60% of the weight of the index 
or portfolio (proposed NYSE Arca Equities Rules 5.2(j)(3), Commentary 
.01(a)(B)(3) and 8.100, Commentary .01(a)(B)(3));
     The index or portfolio shall include a minimum of 20 
component stocks (proposed NYSE Arca Equities Rules 5.2(j)(3), 
Commentary .01(a)(B)(4) and 8.100, Commentary .01(a)(B)(4)); and
     Each U.S. Component Stock in the index or portfolio shall 
be listed on a national securities exchange and shall be an NMS Stock 
as defined in Rule 600 of Regulation NMS under the Exchange Act, and 
each Non-U.S. Component Stock in the index or portfolio shall be listed 
on an exchange that has last-sale reporting (proposed NYSE Arca 
Equities Rules 5.2(j)(3), Commentary .01(a)(B)(5) and 8.100, Commentary 
.01(a)(B)(5)).

[[Page 19574]]

    The Exchange believes that these proposed standards are reasonable 
for international and global indexes, and, when applied in conjunction 
with the other listing requirements, would result in the listing and 
trading on the Exchange of ETFs that are sufficiently broad-based in 
scope and not readily susceptible to manipulation. The Exchange also 
believes that the proposed standards would result in ETFs that are 
adequately diversified in weighting for any single security or small 
group of securities, which should significantly reduce concerns that 
trading in an ETF based on an international or global index could 
become a surrogate for the trading of securities not registered in the 
United States.
    The Exchange further notes that, while these standards are similar 
to those for indexes that include only U.S. Component Stocks, they 
differ in certain important respects and are generally more 
restrictive, reflecting greater concerns over portfolio diversification 
with respect to ETFs investing in components that are not individually 
registered with the Commission. First, in the proposed standards, 
component stocks that in the aggregate account for at least 90% of the 
weight of the index or portfolio each shall have a minimum market value 
of at least $100 million, compared to a minimum market value of at 
least $75 million for indexes with only U.S. Component Stocks.\17\ 
Second, in the proposed standards, the most heavily weighted component 
stock may not exceed 25% of the weight of the index or portfolio, in 
contrast to a 30% standard for an index or portfolio comprised of only 
U.S. Component Stocks (in the case of Units, but not PDRs, which has a 
25% standard). Third, in the proposed standards, the five most heavily 
weighted component stocks may not exceed 60% of the weight of the index 
or portfolio, compared to a 65% standard for indexes comprised of only 
U.S. Component Stocks. Fourth, the minimum number of component stocks 
in the proposed standards is 20, in contrast to a minimum of 13 in the 
standards for an index or portfolio with only U.S. Component Stocks. 
Finally, the proposed standards require that each Non-U.S. Component 
Stock included in the index or portfolio be listed and traded on an 
exchange that has last-sale reporting.
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    \17\ Market value is calculated by multiplying the total shares 
outstanding by the price per share of the component stock.
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    The Exchange also proposes to modify Commentary .01(b)(2) to NYSE 
Arca Equities Rule 5.2(j)(3) and Commentary .01(b)(3) to NYSE Arca 
Equities Rule 8.100 to require that the index value for an ETF listed 
pursuant to the proposed standards for international and global indexes 
be widely disseminated by one or more major market data vendors at 
least every 60 seconds during the time when the ETF shares trade on the 
NYSE Arca Marketplace. In contrast, the index value for an ETF listed 
pursuant to the existing standards for domestic indexes must be 
disseminated at least every 15 seconds during the trading day. This 60-
second standard reflects limitations, in some instances, on the 
frequency of intra-day trading information with respect to Non-U.S. 
Component Stocks and that in many cases, trading hours for overseas 
markets overlap only in part, or not at all, with NYSE Arca Marketplace 
trading hours.
    In addition, Commentary .01(c) to NYSE Arca Equities Rule 5.2(j)(3) 
and Commentary .01(c) to NYSE Arca Equities Rule 8.100 are being 
modified to define the term ``Intraday Indicative Value'' (``IIV'') as 
the estimate, updated at least every 15 seconds, during the Core 
Trading Session (9:30 a.m. to 4 p.m., Eastern Time), and, if applicable 
the Opening Session (4 a.m. to 9:30 a.m., Eastern Time) of the value of 
a share of each ETF, for ease of reference in these rules and also in 
NYSE Arca Equities Rules 5.5(g)(2)(b) and 8.100(e)(2)(ii) regarding 
continued listing standards. The Exchange also proposes to clarify in 
Commentary .01(c) to NYSE Arca Equities Rule 5.2(j)(3) and Commentary 
.01(c) to NYSE Arca Equities Rule 8.100 that the IIV would be updated 
at least every 15 seconds during regular market hours and during any 
pre-market trading sessions for the ETF to reflect changes in the 
exchange rate between the U.S. dollar and the currency in which any 
component stock is denominated. In addition, if the IIV does not change 
during some or all of the period when trading is occurring on the 
Exchange, then the last official calculated IIV must remain available 
throughout Exchange trading hours.
    The Exchange is proposing that it may designate a series of Units 
or PDRs for trading during the Opening Session or Late Trading Session 
(4 p.m. to 8 p.m., Eastern Time) as long as the index value and IIV 
dissemination requirements of Commentary .01(b)(2) and (c) to NYSE Arca 
Equities Rule 5.2(j)(3) and Commentary .01(b)(3) and (c) to NYSE Arca 
Equities Rule 8.100 are met. If there is no overlap with the trading 
hours of the primary market trading the underlying components of a 
series of Units or PDRs, the Exchange may designate such series for 
trading in the Opening Session as long as the last official calculated 
IIV remains available. Although the IIV does not need to be calculated 
during the Exchange's Late Trading Session, the last official 
calculated IIV must also remain available during such session.
    The Exchange is also proposing to add a subsection (i) to 
Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3) and a subsection 
(h) to Commentary .01 to NYSE Arca Equities Rule 8.100 regarding the 
creation and redemption process for ETFs and compliance with Federal 
securities laws for ETFs listed pursuant to the new generic listing 
standards. These new subsections would apply to Units listed pursuant 
to Commentary .01(a)(B) or (C) to NYSE Arca Equities Rule 5.2(j)(3) and 
for PDRs listed pursuant to Commentary .01(a)(B) or (C) to NYSE Arca 
Equities Rule 8.100. They would require that the statutory prospectus 
or the application for exemption from provisions of the Investment 
Company Act of 1940 for the ETF being listed pursuant to these new 
standards must state that the ETF must comply with the federal 
securities laws in accepting securities for deposits and satisfying 
redemptions with redemption securities, including that the securities 
accepted for deposits and the securities used to satisfy redemption 
requests are sold in transactions that would be exempt from 
registration under the Securities Act of 1933.
    The Commission has approved generic standards providing for the 
listing pursuant to Rule 19b-4(e) of other derivative products based on 
indexes described in rules previously approved by the Commission under 
Section 19(b)(2) of the Exchange Act.\18\ The Exchange proposes to 
include in the generic standards for the listing of Units and PDRs, in 
new Commentary .01(a)(C) to NYSE Arca Equities Rule 5.2(j)(3) and 
Commentary .01(a)(C) to NYSE Arca Equities Rule 8.100, indexes 
described in rule changes that have been approved by the Commission in 
connection with the trading of options, PDRs, Units, Index-Linked 
Exchangeable Notes, or Index-Linked Securities. The Exchange believes 
that the application of that standard to ETFs is appropriate because 
the underlying index would have been subject to Commission review in 
the context of the approval of rules contemplating the trading of other 
derivatives. This new generic standard would be limited to stock 
indexes and portfolios and would require that each component stock be 
either: (1) A U.S. Component Stock that

[[Page 19575]]

is listed on a national securities exchange and is an NMS Stock as 
defined in Rule 600 of Regulation NMS under the Exchange Act; or (2) a 
Non-U.S. Component Stock that is listed and traded on an exchange that 
has last-sale reporting.
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    \18\ See supra note 12.
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    The Exchange proposes to modify the initial and continued listing 
standards relating to disseminated information relating to ETFs to 
formalize in the rules existing best practices for providing equal 
access to material information about the value of ETFs. Pursuant to 
NYSE Arca Equities Rules 5.2(j)(3)(A)(v) and NYSE Arca Equities 
8.100(e)(1)(ii), prior to approving an ETF for listing, the Exchange 
would obtain a representation from the ETF issuer that the net asset 
value (``NAV'') per share would be calculated daily and made available 
to all market participants at the same time. Proposed NYSE Arca 
Equities Rules 5.5(g)(2)(b) and 8.100(e)(2)(ii) would set forth the 
trading halt parameters for ETFs. In particular, the proposed rules 
specifically provide that, if the IIV (as defined in Commentary .01 to 
NYSE Arca Equities Rule 5.2(j)(3) and Commentary .01 to NYSE Arca 
Equities Rule 8.100) or the index value applicable to that series of 
ETFs is not being disseminated as required when the Exchange is the 
listing market, the Exchange may halt trading during the day in which 
the interruption to the dissemination of the IIV or the index value 
occurs. If the interruption to the dissemination of the IIV or the 
index value persists past the trading day in which it occurred, the 
Exchange would halt trading no later than the beginning of the trading 
day following the interruption.
    In addition, proposed NYSE Arca Equities Rules 5.5(g)(2)(b) and 
8.100(e)(2)(ii) have been modified to provide that the Exchange: (1) 
Would halt trading in a series of ETFs if the circuit breaker 
parameters of Rule 7.12 have been reached; and (2) in exercising its 
discretion to halt trading in a series of ETFs, would consider factors 
such as the extent to which trading in the underlying securities is not 
occurring or whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present, in addition to other relevant factors.
    The Exchange is proposing other minor and clarifying changes to 
NYSE Arca Equities Rules 5.2(j)(3) and 8.100. The standards set forth 
in Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) and 
Commentary .01(a)(A) to NYSE Arca Equities Rule 8.100 are being 
modified to make the wording of each requirement consistent. In 
addition, Commentary .01(a)(A)(5) to each of NYSE Arca Equities Rules 
5.2(j)(3) and 8.100 would be modified to reflect the adoption of 
Regulation NMS. Proposed Commentary .01(b)(4) to NYSE Arca Equities 
Rule 5.2(j)(3) and Commentary .01(b)(4) to NYSE Arca Equities Rule 
8.100 would be added to make sure that an entity that advises index 
providers or calculators has in place procedures designed to prevent 
the use and dissemination of material non-public information regarding 
the index underlying the ETF.
    The Exchange is also proposing the following clean-up changes to 
NYSE Arca Equities Rule 8.100 in order to make it consistent with NYSE 
Arca Equities Rule 5.2(j)(3). The Exchange proposes changing the term 
``Reporting Authority'' to ``one or more major market data vendors'' in 
Commentary .01(c) to NYSE Arca Equities Rule 8.100.\19\ Also, 
Commentary .01(c) to NYSE Arca Equities Rules 5.2(j)(3) and 8.100 would 
be modified to clarify that the obligation to disseminate an IIV 
applies to Units and PDRs that are listed or traded on the Exchange 
(which would include Units or PDRs traded pursuant to UTP).
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    \19\ See Securities Exchange Act Release No. 52809 (November 18, 
2005), 70 FR 71590 (November 29, 2005) (SR-PCX-2005-108) (approving 
change to listing standards for Units to allow ``one or more major 
market data vendors'' to satisfy dissemination requirements rather 
than ``Reporting Authority'').
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\20\ in general, and furthers the 
objectives of Section 6(b)(5),\21\ 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 mechanism of a 
free and open market and a national market system.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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 would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange 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 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-NYSEArca-2006-86 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-NYSEArca-2006-86. 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 NYSE Arca. 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-2006-86 and should be submitted on or before 
May 9, 2007.

[[Page 19576]]

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\22\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Exchange Act \23\ 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, 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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    \22\ 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).
    \23\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange must file a proposed rule change with the 
Commission pursuant to Section 19(b)(1) of the Exchange Act \24\ and 
Rule 19b-4 thereunder \25\ to list and trade any ETF based on an index 
comprised of foreign securities. The Exchange also must file a proposed 
rule change to list and trade ETFs based on indexes or portfolios 
described in rule changes that have previously been approved by the 
Commission as underlying benchmarks for derivative securities. However, 
Rule 19b-4(e) provides that the listing and trading of a new derivative 
securities product by an SRO will not be deemed a proposed rule change 
pursuant to Rule 19b-4(c)(1) if the Commission has approved, pursuant 
to Section 19(b) of the Exchange Act, the SRO's trading rules, 
procedures, and listing standards for the product class that would 
include the new derivative securities product, and the SRO has a 
surveillance program for the product class. The Exchange's proposed 
rules for the listing and trading of ETFs pursuant to Rule 19b-4(e) 
based on (1) certain indexes with components that include foreign 
securities or (2) indexes or portfolios previously described in 
exchange rules that have been approved by the Commission as underlying 
benchmarks for derivative securities, fulfill these requirements. Use 
of Rule 19b-4(e) by NYSE Arca to list and trade such ETFs should 
promote competition, reduce burdens on issuers and other market 
participants, and make such ETFs available to investors more 
quickly.\26\
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    \24\ 15 U.S.C. 78s(b)(1).
    \25\ 17 CFR 240.19b-4.
    \26\ The Commission notes, however, that the failure of a 
particular ETF to meet these generic listing standards would not 
preclude the Exchange from submitting a separate proposed rule 
change to list and trade the ETF.
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    The Commission previously has approved generic listing standards 
for other exchanges that are substantially similar to those proposed 
here by NYSE Arca.\27\ This proposal does not appear to raise any novel 
regulatory issues. Therefore, the Commission finds that NYSE Arca's 
proposal is consistent with the Exchange Act on the same basis that it 
approved the other exchanges' generic listing standards for ETFs based 
on international or global indexes or on indexes or portfolios 
described in exchange rules that have been previously approved by the 
Commission as underlying benchmarks for derivative securities.
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    \27\ See Securities Exchange Act Release No. 55269 (February 9, 
2007), 72 FR 7490 (February 15, 2007) (SR-Nasdaq-2006-050); 
Securities Exchange Act Release No. 55113 (January 18, 2007), 72 FR 
3179 (January 24, 2007) (SR-NYSE-2006-101); and Securities Exchange 
Act Release No. 54739 (November 9, 2006), 71 FR 66993 (November 17, 
2006) (SR-Amex-2006-78).
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    Proposed Commentary .01(a)(A) and (B) to NYSE Arca Equities Rules 
5.2(j)(3) and 8.100 establish standards for the composition of an index 
or portfolio underlying an ETF. These requirements are designed, among 
other things, to require that components of an index or portfolio 
underlying the ETF are adequately capitalized and sufficiently liquid, 
and that no one security dominates the index. The Commission believes 
that, taken together, these standards are reasonably designed to ensure 
that securities with substantial market capitalization and trading 
volume account for a substantial portion of any underlying index or 
portfolio, and that when applied in conjunction with the other 
applicable listing requirements, will permit the listing and trading 
only of ETFs that are sufficiently broad-based in scope to minimize 
potential manipulation. The Commission further believes that the 
proposed listing standards are reasonably designed to preclude NYSE 
Arca from listing and trading ETFs that might be used as surrogate for 
trading in unregistered securities. The requirement that each component 
security underlying an ETF be an NMS Stock (in the case of a U.S. 
Component Stock) or listed on an exchange and subject to last-sale 
reporting (in the case of a Non-U.S. Component Stock) also should 
contribute to the transparency of the market for these ETFs.
    The proposed generic listing standards will permit NYSE Arca to 
list and trade an ETF if the Commission has previously approved an SRO 
rule change that contemplates listing and trading a derivative product 
based on the same underlying index. NYSE Arca would be able to rely on 
that earlier approval order, provided that: (1) The securities 
comprising the underlying index consist of U.S. Component Stocks or 
Non-U.S. Component Stocks, as set forth in proposed NYSE Arca Equities 
Rules 5.2(j)(3), 8.100(a)(3), and 8.100(a)(4); and (2) NYSE Arca 
complies with the commitments undertaken by the other SRO set forth in 
the prior order, including any surveillance-sharing arrangements with a 
foreign market.
    The Commission believes that NYSE Arca's proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Exchange Act,\28\ which sets 
forth Congress' finding that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities. The Exchange's proposal requires the value 
of the index or portfolio underlying an ETF based on a global or 
international index to be disseminated at least once every 60 seconds 
during Exchange trading hours.\29\ Furthermore, these generic listing 
standards provide that the issuer of an ETF must represent that it will 
calculate the NAV and make it available daily to all market 
participants at the same time.\30\ In addition, an IIV, which 
represents an estimate of the value of a share of each ETF, must be 
updated and disseminated at least once every 15 seconds during the time 
an ETF trades on the Exchange.\31\ The IIV will be updated to reflect 
changes in the exchange rate between the U.S. dollar and the currency 
in which any index or portfolio component stock is denominated.\32\ 
When there is no overlap with the trading hours of the primary market 
or markets trading the underlying components of an ETF,

[[Page 19577]]

NYSE Arca may trade such ETF during the Opening Session without an IIV 
being updated, as long as the last official calculated IIV remains 
available. Although the IIV is not calculated during the Late Trading 
Session, the last official calculated IIV must also remain available 
during such session. The Commission believes that the proposed rules 
regarding the dissemination of the index value and the IIV are 
reasonably designed to promote transparency in the pricing of ETFs and 
thus are consistent with the Exchange Act.
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    \28\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \29\ See proposed NYSE Arca Equities Rules 5.2(j)(3), Commentary 
.01(b)(2) and 8.100, Commentary .01(b)(3). If an index or portfolio 
value does not change for some of the time that the ETF trades on 
the Exchange, the last official calculated value must remain 
available throughout Exchange trading hours.
    \30\ See proposed NYSE Arca Equities Rules 5.2(j)(3)(A)(v) and 
8.100(e)(1)(ii).
    \31\ See proposed NYSE Arca Equities Rules 5.2(j)(3), Commentary 
.01(c) and 8.100, Commentary .01(c).
    \32\ See id.
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    Similarly, the Exchange's trading halt rules are reasonably 
designed to prevent trading in an ETF when transparency cannot be 
assured. Proposed NYSE Arca Equities Rule 5.5(g)(2)(b) provides that, 
when the Exchange is the listing market, if the IIV or index value 
applicable to an ETF is not disseminated as required, the Exchange may 
halt trading during the day in which the interruption occurs. If the 
interruption continues, the Exchange will halt trading no later than 
the beginning of the next trading day.\33\ This proposed rule is 
substantially similar to those recently adopted by other exchanges and 
found by the Commission to be consistent with the Exchange Act.\34\
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    \33\ In addition, NYSE Arca Equities Rule 7.34 sets forth 
trading halt procedures when the Exchange trades ETFs pursuant to 
UTP.
    \34\ See e.g., Securities Exchange Act Release No. 54997 
(December 21, 2006), 71 FR 78501 (December 29, 2006) (SR-NYSEArca-
2006-77).
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    In approving this proposal, the Commission relied on NYSE Arca's 
representation that its surveillance procedures are adequate to 
properly monitor the trading of the Units and PDRs listed pursuant to 
the proposed new listing standards or traded on a UTP basis. This 
approval is conditioned on the continuing accuracy of that 
representation.

Acceleration

    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of the amended proposal in the Federal Register. The 
Commission notes that NYSE Arca's proposal is substantially similar to 
other proposals that have been approved by the Commission.\35\ The 
Commission does not believe that NYSE Arca's proposal raises any novel 
regulatory issues and, therefore, that good cause exists for approving 
the filing before the conclusion of a notice-and-comment period. 
Accelerated approval of the proposal will expedite the listing and 
trading of additional ETFs by the Exchange, subject to consistent and 
reasonable standards. Therefore, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Exchange Act,\36\ to approve 
the proposed rule change, as amended, on an accelerated basis.
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    \35\ See supra note 27.
    \36\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\37\ that the proposed rule change (SR-NYSEArca-2006-86), 
as amended, be, and it hereby is, approved on an accelerated basis.
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    \37\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-7324 Filed 4-17-07; 8:45 am]

BILLING CODE 8010-01-P
