

[Federal Register: July 17, 2007 (Volume 72, Number 136)]
[Notices]               
[Page 39121-39127]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy07-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56049; File No. SR-Phlx-2007-20]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change as Modified by Amendment No. 1 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

July 11, 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 March 9, 2007, the Philadelphia Stock Exchange, Inc. (``Phlx'' 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 Phlx. On June 
18, 2007, Phlx filed Amendment No. 1 to the proposal. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to revise its listing standards, adopted pursuant to 
Rule 19b-4(e),\3\ in Phlx Rule 803 to include generic listing standards 
for Trust Shares and Index Fund Shares (``IFSs'') (which together with 
Trust Shares are referred to as ``exchange-traded funds'' or ``ETFs'') 
that are based on

[[Page 39122]]

international or global indexes, or on indexes described in exchange 
rules that have been previously approved by the Commission for the 
trading of ETFs or other specified index-based securities.
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    \3\ 17 CFR 240.19b-4(e).
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    The text of the proposed rule change is available at Phlx, from the 
Commission's Public Reference Room, and on Phlx's Web site (http://www.Phlx.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, Phlx 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. Phlx 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 purpose of the proposed rule change is to provide for the more 
efficient and timely listing and trading of ETFs. This proposal would 
enable the Exchange to list and trade ETFs pursuant to Rule 19b-4(e) 
under the Act \4\ if each of the conditions set forth in Phlx Rules 
803(i) and (l) 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,\5\ if the Commission has 
approved, pursuant to Section 19(b) of the Act, the 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.\6\
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after it begins 
trading the new derivative securities products. See 17 CFR 240.19b-
4(e)(2)(ii).
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Background
    Currently, Phlx Rule 803(i) provides standards for listing Trust 
Shares on Phlx. A Trust Share is a security based on a unit investment 
trust registered under the Investment Company Act of 1940 (``1940 
Act''),\7\ which holds the securities that comprise an index or 
portfolio underlying a series of Trust Shares. Phlx Rule 803(l) 
provides standards for listing IFSs, which are securities issued by an 
open-end management investment company registered under the 1940 Act 
(i.e., an open-end mutual fund) based on a portfolio of stocks that 
seeks to provide investment results that correspond generally to the 
price and yield performance of a specified foreign or domestic stock 
index.
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    \7\ 15 U.S.C. 80a.
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    Pursuant to Phlx Rule 803(i), Trust Shares that are eligible for 
listing on the Exchange 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, the Trust 
Shares must be redeemable from the Trust for the securities and/or 
cash. Pursuant to Phlx Rule 803(l), IFSs that are eligible for listing 
on the Exchange must be issued in a specified aggregate minimum number 
in return for a deposit of specified securities and/or a cash amount, 
with a value equal to the next determined net asset value (``NAV''). 
When aggregated in the same specified minimum number, IFSs must be 
redeemable by the issuer for the securities and/or cash, with a value 
equal to the next determined NAV. The NAV is calculated once a day 
after the close of the regular trading day.\8\
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    \8\ See e-mail from John Dayton, Director and Counsel, Phlx, to 
Natasha Cowen, Special Counsel, Division of Market Regulation 
(``Division''), Commission, dated July 6, 2007.
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    To meet the investment objective of providing investment returns 
that correspond to the price and the 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.\9\ An ETF using a replication strategy will invest 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 will generally invest in a significant number but not 
all of the component securities of the 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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    \9\ 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 
representing 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'').
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.\10\ 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 for 
the issues and risks associated with non-U.S. securities.
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    \10\ See Securities Exchange Act Release No. 43717 (December 13, 
2000), 65 FR 80976 (December 22, 2000) (SR-Phlx-00-54) (approving 
Phlx Rule 803(i), which sets forth the rules related to the listing 
and trading of Trust Shares); Securities Exchange Act Release No. 
43912 (January 31, 2001), 66 FR 9401 (February 7, 2001) (SR-Phlx-00-
91) (approving Phlx Rule 803(l), which sets forth the rules 
including generic listing standards for the listing and trading of 
Index Fund Shares under Phlx Rule 803(l)).
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    In addition, the Commission has previously approved generic listing 
standards of exchanges governing the listing and trading of ETFs based 
on indexes composed of non-U.S. Component Stocks as well as indexes 
based on both non-U.S. Component Stocks and U.S. Component Stocks.\11\ 
The Commission has also approved generic listing standards for index-
based derivative securities products based on indexes described in 
exchange rules that have been previously approved by the Commission 
under Section 19(b)(2) of the Act for the trading of ETFs or other 
index-based securities, on the condition that all of the standards set 
forth in those orders, including surveillance sharing agreements, 
continue to be satisfied.\12\
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    \11\ See Securities Exchange Act Release No. 55621 (April 12, 
2007), 72 FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86); 
Securities Exchange Act Release No. 55269 (February 9, 2007), 72 FR 
7490 (February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 
2007) (SR-NYSE-2006-101).
    \12\ See, e.g. Securities Exchange Act Release No. 51563 (April 
15, 2005) 70 FR 21257 (April 25, 2005) (SR-Amex-2005-001); 
Securities Exchange Act Release No. 52204 (August 3, 2005), 70 FR 
46559 (August 10, 2005) (SR-PCX-2005-63).
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    The Exchange believes that adopting generic listing standards and 
applying Rule 19b-4(e) should fulfill the intended objective of that 
rule by allowing those ETFs that satisfy the

[[Page 39123]]

proposed generic listing standards to commence trading, without the 
need for a 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.
Proposed Listing and Trading Requirements
    ETFs that are listed pursuant to the proposed generic listing 
standards or that are traded pursuant to UTP 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 Exchange's 
surveillance program for ETFs.\13\
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    \13\ See Phlx Rule 803(i)(11)(i) and (l)(6)(I).
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    To list a Trust Share or IFS pursuant to the proposed generic 
listing standards for international and global indexes, the index 
underlying the Trust Share or IFS must satisfy all the conditions 
contained in proposed Phlx Rules 803(i)(11)(b) or (l)(6)(B). 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, Phlx Rule 803(i)(1)(iii) and (iv) and Phlx Rule 
803(l)(2)(C) and (D) 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 Act,\14\ 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 (REIT) 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, 
are not subject to oversight through Commission registration, and would 
include sponsored GDRs and EDRs. A ``U.S. Component Stock'' would mean 
an equity security that is registered under Section 12(b) or 12(g) of 
the Act or an ADR the underlying equity security of which is registered 
under Section 12(b) or 12(g) of the Act. An ADR with an underlying 
equity security that is registered pursuant to the Act is considered a 
U.S. Component Stock because the issuer of that security is subject to 
Commission jurisdiction and must comply with Commission rules.
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    \14\ 15 U.S.C. 78l(b) or (g).
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    The Exchange proposes that, to list a Trust Share or an IFS 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 must have a 
minimum market value of at least $100 million (Phlx Rules 
803(i)(11)(b)(i) and (l)(6)(B)(I));
     Component stocks representing at least 90% of the weight 
of the index or portfolio each must have a minimum worldwide monthly 
trading volume during each of the last six months of at least 250,000 
shares (Phlx Rules 803(i)(11)(b)(ii) and (l)(6)(B)(II));
     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 (Phlx Rules 803(i)(11)(b)(iii) and (l)(6)(B)(III));
     The index or portfolio shall include a minimum of 20 
component stocks (Phlx Rules 803(i)(11)(b)(iv) and (l)(6)(B)(IV)); and
     Each U.S. Component Stock must be listed on a national 
securities exchange and be an NMS stock as defined in Rule 600 of 
Regulation NMS under the Act, and each Non-U.S. Component Stock must be 
listed on an exchange that has last-sale reporting (Phlx Rules 
803(i)(11)(b)(v) and (l)(6)(B)(V)).
    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 to 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. (Market 
value is calculated by multiplying the total shares outstanding by the 
price per share of the component stock.) Second, in the proposed 
standards, the most heavily weighted component stock cannot 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. 
Third, in the proposed standards, the five most heavily weighted 
component stocks shall 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 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.
    The Exchange also proposes new Phlx Rules 803(i)(11)(e) and 
(l)(6)(E) 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 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. In

[[Page 39124]]

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 modification 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 Exchange trading hours.
    In addition, proposed Phlx Rules 803(i)(11)(e) and (l)(6)(E) would 
define the term ``Intraday Indicative Value'' (``IIV'') as the estimate 
of the value of a share of each ETF that is updated at least every 15 
seconds during the Core Session \15\ and during any Pre Market Session 
\16\ for the ETF. Phlx also proposes to clarify in these rules that the 
IIV would be updated at least every 15 seconds during the Core Session 
on Phlx's XLE equities trading platform and during any Pre Market 
Session on XLE 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. If the IIV does not change during some or all of the 
period when trading is occurring on XLE because the underlying 
components of an index or portfolio are not trading, then the last 
official calculated IIV must remain available throughout XLE's trading 
hours.
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    \15\ The Core Session on XLE shall take place for each security 
from 9:30 a.m. until 4 p.m., except for specified ETFs, for which it 
shall last until 4:15 p.m. See Phlx Rule 101 Supplementary Material 
.02(2).
    \16\ The Pre Market Session on XLE begins at 8 a.m. and 
concludes at the commencement of the Core Session. See Phlx Rule 101 
Supplementary Material .02(1).
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    As set forth in proposed Phlx Rules 803(i)(11)(l) and (l)(6)(H), 
Phlx may designate an ETF for trading during XLE's Pre Market Session 
and/or the Post Market Session \17\ as long as the index value and IIV 
dissemination requirements of proposed Phlx Rules 803(i)(11)(e) and 
(l)(6)(E) are met. If there is no overlap with the trading hours of the 
primary market trading the underlying components of an ETF, Phlx may 
designate the ETF for the Pre Market Session as long as the last 
official calculated IIV remains available.\18\ Although the IIV does 
not need to be calculated during XLE's current Post Market Session, the 
last official calculated IIV must also remain available during such 
post-market trading session.
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    \17\ The Post Market Session on XLE shall begin following the 
conclusion of the Core Session and conclude at 6 p.m. See Phlx Rule 
101 Supplementary Material .02(3).
    \18\ See Phlx Rule 803(i)(11)(l) and (l)(6)(H).
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    The Exchange is also proposing to add provisions, proposed Phlx 
Rules 803(i)(11)(k) and (l)(6)(K), 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 provisions would require that the statutory prospectus or the 
application for exemption from provisions of the 1940 Act for the ETF 
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.\19\
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    \19\ 15 U.S.C. 77a et seq.
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    The Commission has approved generic listing standards providing for 
the listing, pursuant to Rule 19b-4(e), of derivative securities 
products based on indexes described in rules previously approved by the 
Commission under Section 19(b)(2) of the Act.\20\ The Exchange would 
include in its proposed generic listing standards indexes described in 
exchange rules that have been approved by the Commission in connection 
with the listing of options, ETFs, index-linked exchangeable notes, or 
index-linked securities. The Exchange believes that the application of 
this standard to ETFs is appropriate because the underlying index would 
have been subject to detailed and specific Commission review in the 
context of the approval of listing of those other derivatives. This new 
generic standard would be limited to stock indexes and would require 
that each component stock be either: (1) A U.S. Component Stock that is 
listed on a national securities exchange and is an NMS Stock as defined 
in Rule 600 of Regulation NMS; 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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    \20\ See supra note 12.
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    The Exchange also proposes to include additional continued listing 
standards relating to ETFs. The Exchange proposes to adopt Phlx Rules 
803(i)(5)(D) and (l)(5)(D) to formalize in the rules existing best 
practices for providing equal access to material information about the 
value of ETFs. Prior to approving an ETF for listing, the Exchange 
would obtain a representation from the ETF issuer that the NAV per 
share would be calculated daily and made available to all market 
participants at the same time. The Exchange would commence delisting 
proceedings for an ETF if the value of the index or portfolio of 
securities on which the ETF is based is no longer calculated or 
disseminated.
    Phlx's proposed amendments to Phlx Rule 136 would expand the 
application of the trading halt provisions of Rule 136(c) and (d) from 
index-linked securities to a broader range of derivative securities 
products listed or traded on Phlx on a UTP basis. Current Phlx Rule 
136, among other things, sets out the trading halt rules for a 
Derivative Securities Product \21\ in the event that there is a 
temporary interruption in the calculation and dissemination of the 
index value or the IIV. Phlx Rule 136(c) sets forth the trading halt 
requirement when Phlx is the primary listing market while Phlx Rule 
136(d) sets forth the trading halt requirement when Phlx is trading an 
ETF pursuant to UTP. The proposed amendments to Phlx Rule 136(e) would 
expand the definition of a Derivative Securities Product to include 
Trust Shares, IFSs, and other derivative securities, thus applying Phlx 
trading halt rules to such securities if there is a temporary 
interruption in the calculation and dissemination of the index value or 
the IIV. Phlx is also proposing to clarify and expand the definition of 
``Required Value'' to include the Indicative Optimized Portfolio Value, 
which is used in connection with certain derivative securities 
products, and other comparable values.\22\
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    \21\ Current Phlx Rule 136 defines a ``Derivative Securities 
Product'' as ``a series of Index-Linked Securities.''
    \22\ Phone conversation between John Dayton, Director and 
Counsel, Phlx, with Natasha Cowen, Special Counsel, Division, 
Commission, on July 10, 2007 (clarifying the implications of 
proposed changes to Rule 136).
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    The Exchange proposes to amend Phlx Rule 803 to stipulate that, as 
provided by Commission Rule 12f-5,\23\ the Exchange may extend UTP to 
any security, such as an ETF, for which the Exchange has in effect 
rules providing for transactions in such class or type of security. 
Provisions of Phlx Rule 803 that govern trading hours and surveillance 
procedures, and that relate to information circulars and prospectus 
delivery, also would apply to securities traded on a UTP basis (as do 
applicable proposed trading halt provision of Phlx Rule 136). The 
Exchange would not, however, apply quantitative listing standards to 
securities traded on a UTP basis. Accordingly, introductory

[[Page 39125]]

language in Phlx Rules 803(i)(11) and (l)(6) that could be read to 
require unlisted securities to meet Phlx's quantitative listing 
standards for Trust Shares or IFSs in order to trade on a UTP basis is 
being deleted.
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    \23\ 17 CFR 240.12f-5.
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    The Exchange is proposing other minor and clarifying changes to 
Phlx Rules 803(i) and (l). Phlx proposed to amend Rules 
803(i)(11)(d)(ii)-(iii) and (l)(6)(D)(II)-(III) to make sure that an 
entity that advises an index provider or calculator and related 
entities has in place procedures designed to prevent the use and 
dissemination of material non-public information regarding the index 
underlying the ETF. Phlx Rules 803(i)(11)(g) and (l)(6)(G) would be 
amended to clarify that the trading increments for ETFs are set in Phlx 
Rule 125. Phlx Rule 803(l)(6)(H) would be amended and Phlx Rule 
803(i)(11)(l) would be added to, among other things, clarify that the 
trading hours for ETFs are set in Phlx Rule 101. Phlx Rule 
803(l)(6)(A)(III), which sets forth one of the listing requirements for 
a series of IFSs that are based on U.S. Component Stocks, would be 
amended to change the maximum weighting requirement for the most 
heavily weighted component stock of the underlying index from 25% to 
30%.\24\ Phlx Rule 803(l)(3) would be amended to harmonize its 
provisions with those in Phlx Rule 803(l)(7).
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    \24\ See Securities Exchange Act Release Nos. 44532 (July 10, 
2001), 66 FR 37078 (July 16, 2001) (SR-Amex-2001-25).
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of Trust Shares and IFSs that 
would be listed pursuant to the proposed listing standards or traded on 
a UTP basis. Specifically, Phlx will rely on its existing surveillance 
procedures governing equities, options, and ETFs. The Exchange states 
that it will closely monitor activity in ETFs to identify and deter any 
potential improper trading activity in ETFs. In addition, the Exchange 
has a general policy prohibiting the dissemination of material, non-
public information by its employees.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\25\ in general, and with 
Section 6(b)(5) of the Act,\26\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \25\ 15 U.S.C. 78f.
    \26\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-Phlx-2007-20 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-Phlx-2007-20. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Phlx. 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-Phlx-2007-20 and should be 
submitted on or before August 7, 2007.

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 Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\27\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \28\ 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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    \27\ 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).
    \28\ 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 Act \29\ and Rule 19b-4 
thereunder \30\ 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 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. Phlx's proposed rules

[[Page 39126]]

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 described in exchange rules that have been 
previously approved by the Commission as underlying benchmarks for 
derivative securities, fulfill these requirements. Use of Rule 19b-4(e) 
by the Exchange 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.\31\
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    \29\ 15 U.S.C. 78s(b)(1).
    \30\ 17 CFR 240.19b-4.
    \31\ 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 the Exchange.\32\ This proposal does not appear to raise any 
novel regulatory issues. Therefore, the Commission finds that Phlx's 
proposal is consistent with the Act on the same basis that it approved 
the other exchange's 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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    \32\ See, e.g., Securities Exchange Act Release No. 55269 
(February 9, 2007), 72 FR 19571 (February 15, 2007) (SR-NASDAQ-2006-
50); Securities Exchange Act Release No. 55621 (April 12, 2007), 72 
FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86); Securities Exchange 
Act Release No. 55113 (January 17, 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, 2007) (SR-Amex-2006-
78).
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    Proposed Phlx Rules 803(i)(11)(b) and (l)(6)(B) establish standards 
for the composition of indexes and portfolios underlying ETFs. These 
requirements are designed, among other things, to require that 
components of an index or portfolio underlying an 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 of only 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 Phlx 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 the Exchange 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. Phlx 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; and (2) Phlx 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 Phlx's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\33\ 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. Phlx'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 the time when the 
ETF shares trade on the Exchange.\34\ Phlx has represented that, if an 
underlying index or portfolio value is no longer calculated or 
available, it would commence delisting proceedings for the associated 
ETF.
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    \33\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \34\ See Phlx Rules 803(i)(11)(e) and (l)(6)(E). In the 
underlying components of an index or portfolio are not trading and 
the index or portfolio value is therefore static, the last official 
calculated index or portfolio value must continue to be disseminated 
during the time that the ETF trades on the Exchange.
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    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 Phlx XLE's Core Session. If the underlying components 
are trading during the same hours as the XLE's Pre Market Session, Phlx 
may not trade the ETF unless an updated IIV is being calculated and 
disseminated. The IIV must reflect changes in the exchange rate between 
the U.S. dollar and the currency in which any index or portfolio 
component stock is denominated. When there is no overlap with the 
trading hours of the primary market or markets trading the underlying 
components of an ETF, Phlx may trade such ETF during the Pre Market 
Session, as long as the last official calculated IIV remains 
available.\35\ In those instances, the IIV will not reflect changes 
associated with the exchange rate. Although the IIV is not calculated 
during XLE's current Post Market Session, the last official calculated 
IIV must also remain available during such post-market trading session.
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    \35\ See Phlx Rule 803(i)(11)(l) and (l)(6)(H).
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    The Commission believes the proposal is reasonably designed to 
preclude trading of ETFs when transparency is impaired. Existing Phlx 
Rule 136 sets out the trading halt rules for Derivative Securities 
Products in the event that there is a temporary interruption in the 
calculation and dissemination of the index value or the IIV. In the 
proposed rule change, Phlx would amend its definition of a ``Derivative 
Securities Product'' and thereby extend Rule 136 to a broader range of 
derivative securities products that currently trade on the Exchange, 
including Trust Shares and IFSs. This proposed rule change is designed 
to ensure that similar derivative securities products are treated 
consistently and that the same trading halt rules apply when there is a 
temporary disruption in the dissemination of the IIV and index value.
    In addition, in the proposed rule change, Phlx would clarify that 
the trading halt rules apply when values that are comparable to the 
IIV, such as the Indicative Optimized Portfolio Value, are not 
disseminated as required. The Commission believes that it is reasonable 
and consistent with the Act for Phlx to apply consistent trading halt 
rules to similar derivative securities products.
    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. 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.\36\ Phlx proposed to amend Rules 
803(i)(11)(d)(ii)-(iii) and

[[Page 39127]]

(l)(6)(D)(II)-(III) to make sure that an entity that advises an index 
provider or calculator and related entities has in place procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the index underlying the ETF.
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    \36\ See proposed Phlx Rules 803(i)(5)(D) and (l)(5)(D).
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    In approving this proposal, the Commission relied on Phlx's 
representation that its surveillance procedures are adequate to 
properly monitor the trading of the Trust Shares and IFSs 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 filing thereof in the Federal Register. The Commission 
notes that Phlx's proposal is substantially similar to other proposals 
that have been approved by the Commission.\37\ The Commission does not 
believe that Phlx'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 
Phlx, subject to consistent and reasonable standards. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\38\ to approve the proposed rule change, as amended, on an 
accelerated basis.
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    \37\ See supra note 32.
    \38\ 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 
Act,\39\ that the proposed rule change (SR-Phlx-2007-20), as amended, 
be, and it hereby is, approved on an accelerated basis.
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    \39\ Id.
    \40\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\40\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E7-13807 Filed 7-16-07; 8:45 am]

BILLING CODE 8010-01-P
