

[Federal Register: May 24, 2007 (Volume 72, Number 100)]
[Notices]               
[Page 29194-29200]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24my07-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55783; File No. SR-NYSEArca-2007-36]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change and Amendment No. 1 Thereto To Establish 
Generic Listing Standards for Exchange-Traded Funds Based on Fixed 
Income Indexes and Order Granting Accelerated Approval of Proposed Rule 
Change as Amended

May 17, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 4, 2007, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange''), 
through its wholly owned subsidiary NYSE Arca Equities, Inc. (``NYSE 
Arca Equities'' or the ``Corporation''), filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared 
substantially by the Exchange. On May 17, 2007, the Exchange filed 
Amendment No. 1.\3\ This order provides notice of the proposed rule 
change as modified by Amendment No. 1 and approves the proposed rule 
change as amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through NYSE Arca Equities, proposes to amend its 
rules governing NYSE Arca, LLC, the equities trading facility of NYSE 
Arca Equities. The Exchange proposes to amend NYSE Arca Equities Rules 
5.2(j)(3) and 8.100 to include generic listing and trading standards 
for series of Investment Company Units (``Units'') and Portfolio 
Depositary Receipts (``PDRs'') that are based on indexes or portfolios 
consisting of fixed income securities (``Fixed Income Indexes'') or on 
composite indexes consisting of equity and fixed income indexes or 
indexes or portfolios consisting of both equity and fixed income 
securities (collectively, ``Combination Indexes'').
    The text of the proposed rule change is available at the NYSE Arca, 
at the Commission's Public Reference Room, and on the Exchange's Web 
site at http://www.nyse.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, NYSE Arca 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend NYSE Arca Equities Rules 5.2(j)(3) 
and 8.100 to include generic listing standards for series of Units and 
PDRs (together referred to herein as ``exchange-traded funds'' or 
``ETFs'') that are based on Fixed Income Indexes or on Combination 
Indexes. These generic listing standards would be applicable to Fixed 
Income Indexes and Combination Indexes that the Commission has yet to 
review as well as those Fixed Income Indexes described in exchange rule 
changes that have previously been approved by the Commission under 
Section 19(b)(2) of the Act for the trading of ETFs, options, or other 
index-based securities. This proposal will enable the Exchange to list 
and trade ETFs pursuant to Rule 19b-4(e) under the Act \4\ if each of 
the conditions in Commentaries .02 or .03 to Rule 5.2(j)(3) or 8.100, 
as applicable, is satisfied. Rule 19b-4(e) provides that the listing 
and trading of a new derivative securities product by a self-regulatory 
organization shall not be deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4,\5\ if the Commission has approved, 
pursuant to Section 19(b) of the Act,\6\ the self-regulatory 
organization's trading rules, procedures, and listing standards for the 
product class that would include the new derivatives securities 
product, and the self-regulatory organization has a surveillance 
program for the product class.\7\ A similar proposal by the

[[Page 29195]]

American Stock Exchange LLC (``Amex'') has been approved by the 
Commission.\8\
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ When relying on Rule 19b-4(e), the exchange must submit Form 
19b-4(e) to the Commission within five business days after it begins 
trading the new derivative securities product. See 17 CFR 240.19b-
4(e)(2)(ii).
    \8\ See Securities Exchange Act Release No. 55437 (March 9, 
2007), 72 FR 12233 (March 15, 2007) (SR-Amex-2006-118) (approving 
generic listing standards for series of ETFs based on Fixed Income 
and Combination Indexes).
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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 
are securities based on a unit investment trust that holds the 
securities that comprise an index or portfolio underlying a series of 
PDRs. Pursuant to 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 may be redeemed by the 
issuer for the 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 investment 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. 
An ETF using a replication strategy would invest in each security found 
in the underlying index in about the same proportion as that security 
is represented in the index itself. An ETF using a representative 
sampling strategy would generally invest in a significant number, but 
perhaps not all, of the component securities of the underlying index, 
and would hold securities that, in the aggregate, are intended to 
approximate the full index in terms of certain key characteristics. In 
the context of a Fixed Income Index, such characteristics may include 
liquidity, duration, maturity, and yield.
    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'').\10\

Generic Listing Standards for Exchange-Traded Funds
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    \10\ 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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    The Exchange notes that the Commission has previously approved 
generic listing standards for ETFs based on indexes that consist of 
stocks listed on U.S. and non-U.S exchanges.\11\ This proposal seeks to 
adopt generic listing standards ETFs based on Fixed Income and 
Combination Indexes that generally reflect existing generic listing 
standards for equities, but are tailored for the fixed income markets.
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    \11\ 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); Securities Exchange Act Release No. 55621 (April 12, 2007), 
72 FR 19571 (April 18, 2007) (SR-NYSEArca 2006-86) (approving 
foreign generic listing standards for Units and PDRs).
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    The Commission has previously approved listing and trading of ETFs 
based on certain fixed income indexes.\12\ The Commission has also 
approved generic listing standards for other index-based derivatives 
that permit the listing--pursuant to Rule 19b-4(e)--of such securities 
where the Commission had previously approved the trading of specified 
index-based derivatives on the same index, on the condition that all of 
the standards set forth in the original order are satisfied by the 
exchange employing generic listing standards.\13\
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    \12\ See, e.g., Securities Exchange Act Release No. 48662 
(October 20, 2003), 68 FR 61535 (October 28, 2003) (SR-PCX-2003-41) 
(approving the listing and trading pursuant to unlisted trading 
privileges (``UTP'') of fixed income funds and the UTP trading of 
certain iShares fixed income funds).
    \13\ 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 based on Fixed Income Indexes and Combination 
Indexes and applying Rule 19b-4(e) 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 
individualized 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 would not, however, preclude the Exchange from submitting a 
separate filing pursuant to Section 19(b)(2) requesting Commission 
approval to list and trade that ETF.
    The Exchange represents that any securities listed pursuant to this 
proposal will be deemed equity securities, and subject to existing NYSE 
Arca rules governing the trading of equity securities.\14\
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    \14\ See an e-mail from Tim J. Malinowski, Director, NYSE Group, 
Inc., to Natasha Cowen, Special Counsel, Division of Market 
Regulation, Commission, dated May 17, 2007.
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Requirements for Listing and Trading ETFs Based on Fixed Income Indexes

    Exchange-traded funds listed pursuant to these generic standards 
would be traded in all other respects under the Exchange's existing 
trading rules and procedures that apply to ETFs, and would be covered 
under the Exchange's surveillance procedures for derivative 
products.\15\ The Exchange represents that its surveillance procedures 
are adequate to properly monitor the trading of the Units and PDRs 
listed and/or traded pursuant to the proposed new listing and trading 
standards. The Exchange stated that it may obtain information via the 
Intermarket Surveillance Group (``ISG'') from exchanges that are 
members or affiliates of the ISG. 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. The Exchange notes that its current trading surveillance 
focuses on detecting securities trading outside their normal 
patterns. When such situations are detected, surveillance analysis 
follows and investigations are opened, where appropriate, to review 
the behavior of all relevant parties for all relevant trading 
violations.
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    To list an ETF pursuant to the proposed generic listing standards 
for Fixed Income Indexes, the index underlying the ETF would have to 
satisfy all the conditions contained in proposed Commentary .02 to Rule 
5.2(j)(3) (for Units) or Rule 8.100 (for PDRs). However, for Units 
traded on the Exchange pursuant to UTP, only the provisions of 
paragraphs (c), (e), (f), (g), and (h) of Commentary .02 to Rule 
5.2(j)(3)--regarding disseminated information, minimum price variation, 
hours of trading, written surveillance procedures, and disclosures--
would apply. For PDRs traded on the Exchange pursuant to UTP, only the 
provisions set

[[Page 29196]]

forth in Rule 8.100(c) and paragraphs (c), (e), (f), and (g) and of 
Commentary .02 to Rule 8.100--regarding disclosures, disseminated 
information, minimum price variation, hours of trading, and written 
surveillance procedures--would apply.
    As with existing generic listing standards for ETFs based on 
domestic and international or global indexes, the proposed generic 
listing standards are intended to ensure that fixed income securities 
with substantial market distribution and liquidity account for a 
substantial portion of the weight of an index or portfolio. While the 
standards in this proposal are loosely based on the standards contained 
in Commission and Commodity Futures Trading Commission (``CFTC'') rules 
regarding the application of the definition of narrow-based security 
index to debt security indexes \16\ as well as existing fixed income 
ETFs, they have been adapted as appropriate to apply generally to Fixed 
Income Indexes for ETFs.
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    \16\ See Securities Exchange Act Release No. 54106 (July 6, 
2006), 71 FR 39534 (July 13, 2006) (File No. S7-07-06) (the ``Joint 
Rules'').
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Fixed Income Securities

    As proposed, Commentary .02 to each Rule 5.2(j)(3) or Rule 8.100 
define the term ``Fixed Income Securities'' to include notes, bonds 
(including convertible bonds), debentures, or evidence of indebtedness 
that include, but are not limited to, U.S. Department of Treasury 
securities (``Treasury Securities''), government-sponsored-entity 
securities (``GSE Securities''), municipal securities, trust-preferred 
securities,\17\ supranational debt,\18\ and debt of a foreign country 
or subdivision thereof.
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    \17\ Trust-preferred securities are undated cumulative 
securities issued from a special purpose trust in which a bank or 
bank holding company owns all of the common securities. The trust's 
sole asset is a subordinated note issued by the bank or bank holding 
company. Trust-preferred securities are treated as debt for tax 
purposes so that the distributions or dividends paid are a tax-
deductible interest expense.
    \18\ Supranational debt represents the debt of international 
organizations such as the World Bank, the International Monetary 
Fund, regional multilateral development banks, and multilateral 
financial institutions. Examples of regional multilateral 
development banks include the African Development Bank, Asian 
Development Bank, European Bank for Reconstruction and Development, 
and the Inter-American Development Bank. In addition, examples of 
multilateral financial institutions include the European Investment 
Bank and the International Fund for Agricultural Development.
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    For purposes of the proposed definition, a convertible bond is 
deemed to be a Fixed Income Security until the time that it is 
converted into its underlying common or preferred stock.\19\ Once 
converted, the equity security may no longer continue as a component of 
a Fixed Income Index under the proposed rules, and accordingly, would 
be removed from such index.
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    \19\ 19 The Exchange notes that, under the Section 3(a)(11) of 
the Act, 15 U.S.C. 78c(a)(11), a convertible security is defined as 
an equity security. However, for the purpose of the proposed generic 
listing criteria, NYSE Arca believes that defining a convertible 
security (prior to its conversion) as a Fixed Income Security is 
consistent with the objectives and intention of the generic listing 
standards for fixed-income-based ETFs as well as the Act.
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    The Exchange proposes that, to list a Unit or PDR based on a Fixed 
Income Index pursuant to the generic standards, the index must meet the 
following criteria:
     The index or portfolio must consist of Fixed Income 
Securities;
     Components that in aggregate account for at least 75% of 
the weight of the index or portfolio each must have a minimum original 
principal amount outstanding of $100 million or more;
     No component Fixed Income Security (excluding Treasury 
Securities or GSE Securities) represents more than 30% of the weight of 
the index, and the five most heavily weighted component fixed income 
securities in the index do not in the aggregate account for more than 
65% of the weight of the index;
     An underlying index or portfolio (excluding one consisting 
entirely of exempted securities) must include a minimum of 13 non-
affiliated issuers; and
     Component securities that in aggregate account for at 
least 90% of the weight of the index or portfolio must be either:
     From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; \20\
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    \20\ 15 U.S.C. 78m and 78o(d).
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     From issuers that have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
     From issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion;
     Exempted securities, as defined in Section 3(a)(12) of the 
Act; \21\ or
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    \21\ 15 U.S.C. 78c(a)(12).
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     From issuers that are governments of foreign countries or 
political subdivisions of foreign countries.
    The Exchange believes that these proposed component criteria 
standards are reasonable for Fixed Income Indexes, and, when applied in 
conjunction with the other listing requirements, would result in ETFs 
that are sufficiently broad-based in scope.
    The Exchange notes that the proposed standards are similar to the 
standards set forth by the Commission and the CFTC in the Joint Rules 
as well as existing fixed-income-based ETFs. For example, in the 
proposed standards, the most heavily weighted component security cannot 
exceed 30% of the weight of the index or portfolio, which is consistent 
with the standard for U.S. equity ETFs set forth in Commentary 
.01(a)(A) to each of NYSE Arca Equities Rules 5.2(j)(3) and 8.100. In 
addition, this standard is identical to the standard set forth by the 
Commission and the CFTC in the Joint Rules.\22\ In addition, in the 
proposed standards, the five most heavily weighted component securities 
could not exceed 65% of the weight of the index or portfolio, 
consistent with the standard for U.S. equity ETFs set forth in 
Commentary .01(a)(A) to each of Rules 5.2(j)(3) and 8.100 as well as 
the Joint Rules. Also, the minimum number of fixed income securities 
(except for portfolios consisting entirely of exempted securities, such 
as Treasury Securities or GSE Securities) from unaffiliated \23\ 
issuers in the proposed standards is consistent with the standard for 
U.S. equity ETFs set forth in Commentary .01(a)(A) to each of Rule 
5.2(j)(3) and Rule 8.100 and the Joint Rules. This requirement together 
with the diversification standards set forth above would provide 
assurance that the fixed income securities comprising an index on which 
an overlying ETF may be listed pursuant to this proposal would not be 
overly dependent on the price behavior of a single component or small 
group of components.
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    \22\ See note 16 supra.
    \23\ Rule 405 under the Securities Act of 1933, 17 CFR 230.405, 
defines an affiliate as a person that directly, or indirectly 
through one or more intermediaries, controls or is controlled by, or 
is under common control with, such person. Control, for this 
purpose, is the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
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    Finally, the proposed standards would require that at least 90% of 
the weight of the index or portfolio must be either (i) From issuers 
that are required to file reports pursuant to Sections 13 and 15(d) of 
the Act; \24\ (ii) from issuers that each have a worldwide market value 
of its outstanding common equity held by non-affiliates of $700 million 
or more; (iii) from issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion;

[[Page 29197]]

(iv) exempted securities, as defined in Section 3(a)(12) of the Act; 
\25\ or (v) from issuers that are governments of foreign countries or 
political subdivisions of foreign countries. This proposed standard is 
consistent with a similar standard in the Joint Rules and is designed 
to ensure that the component fixed income securities have sufficient 
publicly available information.
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    \24\ 15 U.S.C. 78m and 78o(d).
    \25\ 15 U.S.C. 78c(a)(12).
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    The proposed generic listing requirements for fixed income ETFs 
would not require that component securities in an underlying index have 
an investment-grade rating.\26\ In addition, the proposed requirements 
would not require a minimum trading volume, due to the lower trading 
volume that generally occurs in the fixed income markets as compared to 
the equity markets.
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    \26\ Cf. Joint Rules, 71 FR at 30538.
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    The proposed standards would also provide that the Exchange could 
not approve a series of fixed income ETFs under the proposed generic 
listing requirements if such series seeks to provide investment results 
that either exceed the performance of a specified index by a specified 
multiple (``Multiple ETF'') or that correspond to the inverse 
(opposite) of the performance of a specified index by a specified 
multiple (``Inverse ETF''), pursuant to Rule 5.2(j)(3).

Requirements for Listing and Trading ETFs Based on Combination Indexes

    The Exchange also seeks to list and trade ETFs based on Combination 
Indexes. An ETF listed pursuant to the generic standards for 
Combination Indexes would be traded, in all other respects, under the 
Exchange's existing trading rules and procedures that apply to ETFs, 
and would be covered under the Exchange's surveillance program for 
derivative products.
    To list an ETF pursuant to the proposed generic listing standards 
for Combination Indexes, an index underlying a Unit or PDR must satisfy 
all the conditions contained in proposed Commentary .03 to each of Rule 
5.2(j)(3) (for Units) and Rule 8.100 (for PDRs). However, for Units 
traded on the Exchange pursuant to UTP, only the provisions of 
paragraphs (c), (e), (f), (g), and (h) of Commentary .01 to Rule 
5.2(j)(3)--regarding disseminated information, minimum price variation, 
hours of trading, written surveillance procedures and disclosures--
would apply. For PDRs traded on the Exchange pursuant to UTP, only the 
provisions set forth in Rule 8.100(c) and paragraphs (c), (e), (f), and 
(g) and of Commentary .01 to Rule 8.100--regarding disclosures, 
disseminated information, minimum price variation, hours of trading, 
and written surveillance procedures--would apply.
    These generic listing standards are intended to ensure that 
securities with substantial market distribution and liquidity account 
for a substantial portion of the weight of both the equity and fixed 
income portions of an index or portfolio.
    Proposed Commentary .03 to each of Rule 5.2(j)(3) (for Units) and 
Rule 8.100 (for PDRs) would provide that the Exchange may approve 
series of Units and PDRs--based on a combination of indexes or a series 
of component securities representing the U.S. or domestic equity 
market, the international equity market, and the fixed income market--
for listing and trading pursuant to Rule 19b-4(e) under the Act. The 
standards that an ETF would have to comply with are as follows: (i) 
Such portfolio or combination of indexes has been described in an 
exchange rule for the trading of options, Units, PDRs, Index-Linked 
Exchangeable Notes, or Index-Linked Securities that has been approved 
by the Commission under Section 19(b)(2) of the Act, and all of the 
standards set forth in the original order are satisfied; or (ii) the 
equity portion and fixed income portion of the component securities 
separately meet the criteria set forth in Commentary .01(a) (equities) 
and proposed Commentary .02(a) (fixed income) for Units and PDRs. In 
all cases, Multiple or Inverse ETFs listed pursuant to Rule 5.2(j)(3) 
may not be the subject of these proposed generic listing standards.
    Index Methodology and Dissemination. The Exchange proposes to adopt 
Commentary .02(b) to each of Rule 5.2(j)(3) and Rule 8.100 to establish 
requirements for index methodology and dissemination in connection with 
Fixed Income and Combination Indexes.
    If a broker-dealer or fund advisor is responsible for maintaining 
(or has a role in maintaining) the underlying index, such broker-dealer 
or fund advisor would be required to erect and maintain a ``firewall,'' 
in a form satisfactory to the Exchange, to prevent the flow of non-
public information regarding the underlying index from the personnel 
involved in the development and maintenance of such index to others 
such as sales and trading personnel.
    With respect to dissemination of the index value, the Exchange 
proposes to adopt Commentary .02(b)(ii) to each of Rule 5.2(j)(3) and 
Rule 8.100 to require that the index value for an ETF listed pursuant 
to the proposed standards for fixed income ETFs be widely disseminated 
by one or more major market data vendors at least once a day during the 
time when the ETF shares trade on the Exchange. If the index value does 
not change during some or all of the period when trading is occurring 
on the Exchange, the last official calculated index value must remain 
available throughout Exchange trading hours. This reflects the nature 
of the fixed income markets as well as the frequency of intra-day 
trading information with respect to Fixed Income Indexes. If an ETF is 
based on a Combination Index, the index would have to be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the time when the ETF shares trade on the Exchange to 
reflect updates for the prices of the equity securities included in the 
Combination Index. The non-U.S. component stock portion of the 
combination index will be updated at least every 60 seconds, and the 
fixed income portion of the Combination Index will be updated at least 
daily. If the index value does not change during some or all of the 
period when trading is occurring on the Exchange, the last official 
calculated index value must remain available throughout Exchange 
trading hours.
    The Corporation may designate each series of Units or PDRs for 
trading during the Opening Session (as defined in NYSE Arca Equities 
Rule 7.34) and/or Late Trading Session (as defined in NYSE Arca 
Equities Rule 7.34); provided, however that the Corporation will not 
designate a series of Units or PDRs for trading in the Opening Session 
or Late Trading Session unless the requirements of Commentary .01(b)(2) 
and (c) to NYSE Arca Equities Rule 5.2(j)(3) or Commentary .01(b)(3) 
and (c) to NYSE Arca Equities Rule 8.100 are satisfied for Units or 
PDRs, respectively. If there is no overlap with the trading hours of 
the primary market(s) trading the underlying components of a series of 
Units, the Corporation may designate such series for trading in the 
Opening Session as long as the last official calculated Intraday 
Indicative Value remains available.
    Application of General Rules. Commentaries .02(c)-(h) and .03(b) to 
Rule 5.2(j)(3) and Commentaries .02(c)-(g) and .3(b) to Rule 8.100 
would be added to identify those requirements for ETFs that would apply 
to all series of Units and PDRs based on Fixed Income or Combination 
Indexes. This would include the dissemination of the Intraday 
Indicative Value, an estimate of the value of a share of each ETF, 
updated at least every 15 seconds. In

[[Page 29198]]

addition, proposed Commentaries .02(c)-(h) and .03(b) to Rule 5.2(j)(3) 
and Commentaries .02(c)-(g) and .3(b) to Rule 8.100 set forth the 
requirements for Units or PDRs relating to initial shares outstanding, 
minimum price variation, and written surveillance procedures.
    The Exchange states that 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 rule changes 
previously approved by the Commission under Section 19(b)(2) of the 
Act. The Exchange proposes to include in the generic standards for the 
listing of Units and PDRs based on Fixed Income and Combination 
Indexes, in new Commentary .02 and .03 to each of Rule 5.2(j)(3) and 
Rule 8.100, indexes described in exchange rules approved by the 
Commission in connection with the listing of options, Investment 
Company Units, Portfolio Depositary Receipts, 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 listing of other derivatives.\27\
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    \27\ See supra notes 12 and 13.
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    The Exchange notes that existing Rules 5.5(g)(2) and 8.100 provide 
continued listing standards for all Units and PDRs. For example, where 
the value of the underlying index or portfolio of securities on which 
the ETF is based is no longer calculated or available, the Exchange 
would commence delisting proceedings. The Exchange notes that Rules 
5.2(j)(3)(A)(v) and 8.100(e)(1)(ii) provide that, before approving an 
ETF for listing, the Exchange will obtain a representation from the ETF 
issuer that the net asset value (``NAV'') per share will be calculated 
daily and made available to all market participants at the same time.
    The trading halt requirements for existing ETFs will similarly 
apply to fixed income and combination index ETFs. In particular, Rules 
5.5(g)(2)(b) and 8.100(e)(2)(ii) provide that, if the Intraday 
Indicative Value 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 Intraday Indicative Value or 
the index value occurs. If the interruption to the dissemination of the 
Intraday Indicative Value 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.\28\
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    \28\ If an ETF is traded on the Exchange pursuant to UTP, the 
Exchange will halt trading if the primary listing market halts 
trading in such ETF because the Intraday Indicative Value and/or the 
index value is not being disseminated. See NYSE Arca Equities Rule 
7.34.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \29\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \30\ 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, 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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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change would impose no 
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 comments on this 
proposal.

III. Solicitation of Comments

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

Electronic Comments

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

File Number SR-NYSEArca-2007-36 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2007-36. 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-2007-36 and should be submitted on or before 
June 14, 2007.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\31\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \32\ 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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    \31\ 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).
    \32\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange would have to file a proposed rule change 
with the Commission pursuant to Section 19(b)(1) of the Act \33\ and 
Rule 19b-4

[[Page 29199]]

thereunder \34\ to list or trade any ETF based on a Fixed Income Index 
or on a Combination Index. The Exchange also would have to file a 
proposed rule change to list or trade an ETF based on a Fixed Income or 
Combination Index described in an exchange rule previously approved by 
the Commission as an underlying benchmark for a derivative security. 
Rule 19b-4(e), however, 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 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 Fixed Income 
Securities or (2) indexes or portfolios described in exchange rules 
previously 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.\35\
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    \33\ 15 U.S.C. 78s(b)(1).
    \34\ 17 CFR 240.19b-4.
    \35\ The Commission notes that failure of a particular ETF to 
satisfy the Exchange's generic listing standards does not preclude 
the Exchange from submitting a separate proposal under Rule 19b-4 to 
list and trade such ETF.
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    The Commission previously has approved generic listing standards 
for another exchange, Amex, that are substantially similar to those 
proposed here by NYSE Arca.\36\ This proposal does not appear to raise 
any novel regulatory issues. Therefore, the Commission finds that NYSE 
Arca's proposal is consistent with the Act on the same basis that it 
approved Amex's generic listing standards for ETFs based on Fixed 
Income or Combination Indexes or on indexes or portfolios described in 
exchange rules that have previously been approved by the Commission and 
underlie derivative securities.
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    \36\ See supra note 8.
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    Proposed Commentaries .02 and .03 to each of NYSE Arca Equities 
Rules 5.2(j)(3) and 8.100 establish the standards for the composition 
of a Fixed Income Index or Combination Index underlying an ETF. The 
Commission believes that these standards are reasonably designed to 
ensure that a substantial portion of any underlying index or portfolio 
consists of securities about which information is publicly available, 
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 a surrogate for trading in unregistered 
securities.
    The proposed generic listing standards also will permit NYSE Arca 
to list and trade an ETF if the Commission previously has approved an 
exchange rule that contemplates listing and trading a derivative 
security based on the same underlying index. NYSE Arca would be able to 
rely on that earlier approval order, provided that NYSE Arca complies 
with the commitments undertaken by the other SRO set forth in the prior 
order, including any surveillance-sharing arrangements.
    The Commission believes that NYSE Arca's proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\37\ 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 value of a Fixed Income Index underlying underlying an 
ETF listed pursuant to this proposal is required to be widely 
disseminated by one or more major market data vendors at least once a 
day. Likewise, the value of an underlying Combination Index is required 
to be widely disseminated by one or more major market data vendors at 
least once every 15 seconds during the time when the corresponding ETF 
trades on the Exchange, provided that, with respect to the fixed income 
components of the Combination Index, the impact on the index is 
required to be updated only once each day.
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    \37\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Furthermore, the Commission believes that the proposed rules are 
reasonably designed to promote fair disclosure of information that may 
be necessary to price an ETF appropriately. If a broker-dealer or fund 
advisor is responsible for maintaining (or has a role in maintaining) 
the underlying index, such broker-dealer or fund advisor would be 
required to erect and maintain a ``firewall,'' in a form satisfactory 
to the Exchange, to prevent the flow of non-public information 
regarding the underlying index from the personnel involved in the 
development and maintenance of such index to others such as sales and 
trading personnel. The Commission also notes that current NYSE Arca 
Equities Rules 5.2(j)(3)(A)(v) and 8.100(e)(1)(ii) provide that, in 
connection with approving an ETF issuer for listing on the Exchange, 
the Exchange will obtain a representation from the ETF issuer that the 
NAV per share will be calculated each business day and made available 
to all market participants at the same time.
    The Commission also believes that the Exchange's trading halt rules 
are reasonably designed to prevent trading in an ETF when transparency 
is impaired. NYSE Arca Equities Rules 5.5(g)(2)(b) and 8.100(e)(2)(ii) 
provide 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, then the Exchange will halt 
trading no later than the beginning of the next trading day. Also, the 
Exchange may commence delisting proceedings in the event that the value 
of the underlying index is no longer calculated or available.
    The Commission further believes that the trading rules and 
procedures to which ETFs will be subject pursuant to this proposal are 
consistent with the Act. NYSE Arca has represented that any securities 
listed pursuant to this proposal will be deemed equity securities, and 
subject to existing NYSE Arca rules governing the trading of equity 
securities.
    The Exchange will implement written surveillance procedures for 
ETFs based on Fixed Income Indexes or Combination Indexes.\38\ In 
approving this proposal, the Commission relied on NYSE's representation 
that its surveillance procedures are adequate to properly monitor the 
trading of Units listed pursuant to this proposal. This approval is 
conditioned on the continuing accuracy of that representation.
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    \38\ See proposed Commentary .02 to Rule 5.2(j)(3) (for Units) 
or Rule 8.100 (for PDRs).
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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 filing thereof in the Federal Register. The Commission 
notes that NYSE Arca's proposal is substantially similar to an Amex 
proposal that has been approved

[[Page 29200]]

by the Commission.\39\ The Commission does not believe that NYSE Arca's 
proposal raises any novel regulatory issues and, therefore, believes 
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,\40\ to approve the proposed rule change, as amended, 
on an accelerated basis.
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    \39\ See supra note 8.
    \40\ 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,\41\ that the proposed rule change (SR-NYSEArca-2007-36), 
as amended, be, and it hereby is, approved on an accelerated basis.
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    \41\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10034 Filed 5-23-07; 8:45 am]

BILLING CODE 8010-01-P
