

[Federal Register: July 27, 2007 (Volume 72, Number 144)]
[Notices]               
[Page 41369-41375]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy07-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56117; File No. SR-ISE-2007-47

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt 
Generic Listing Standards for Index-Linked Securities

July 23, 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 June 26, 2007, the International Securities Exchange, LLC (``ISE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
On July 17, 2007, the Exchange filed Amendment No. 1 to the proposed 
rule change. This order provides notice of the proposed rule change, as 
amended, and approves the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to (1) Adopt generic listing standards for 
equity index-linked securities (``Equity Index-Linked Securities''), 
commodity-linked securities (``Commodity-Linked Securities''), and 
currency-linked securities (``Currency-Linked Securities,'' and 
together with Equity Index-Linked Securities and Commodity-Linked 
Securities, collectively, ``Index-Linked Securities'') under new ISE 
Rule 2130, and (2) make conforming changes to ISE Rules 2100 and 2101 
in regard to the adoption of the generic listing standards for Index-
Linked Securities. The text of the proposed rule change is available at 
the Exchange, the Commission's Public Reference Room, and http://www.ise.com
.


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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

 1. Purpose
    The Exchange proposes to adopt new ISE Rule 2130 (Equity Index-
Linked Securities, Commodity-Linked Securities and Currency-Linked 
Securities), which would provide generic listing standards to permit 
the trading of Index-Linked Securities on the Exchange pursuant to Rule 
19b-4(e) under the Act.\3\ The Exchange seeks to be able to list and/or 
trade Index-Linked Securities without individual Commission approval of 
each such product pursuant to section 19(b)(2) of the Act.\4\ In 
addition, the Exchange proposes to amend ISE Rule 2101(a) to add Index-
Linked Securities to the list of securities that will only trade on the 
Exchange pursuant to unlisted trading privileges (``UTP''). Thus, while 
the proposal would allow the Exchange to trade Index-Linked Securities 
by either listing or trading pursuant to UTP, the Exchange would only 
trade Index-Linked Securities pursuant to UTP. In order to trade by 
listing such Index-Linked Securities on the Exchange, the Exchange 
would first need to seek Commission approval and amend its rules. 
Finally, the Exchange proposes to amend ISE Rule 2100(c)(7) to add 
Index-Linked Securities to the definition of Equity Securities.
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    \3\ 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 if the 
Commission has approved the SRO's trading rules, procedures, and 
listing standards for the product class that would include the new 
derivatives securities product, and the SRO has a surveillance 
program for the product class. See 17 CFR 240.19b-4(e)(1).
    \4\ 15 U.S.C. 78s(b)(2).
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    The Exchange represents that any securities it lists and/or trades 
pursuant to proposed ISE Rule 2130 will satisfy the standards set forth 
therein. The Exchange states that within five business days after 
commencement of trading of an Index-Linked Security in reliance on 
proposed ISE Rule 2130, the Exchange will file a Form 19b-4(e) with the 
Commission.\5\
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    \5\ See 17 CFR 240.19b-4(e)(2)(ii) and 17 CFR 249.820.
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Index-Linked Securities
    Index-Linked Securities are designed for investors who desire to 
participate in a specific market segment by providing exposure to one 
or more identifiable underlying securities, commodities, currencies, 
derivative instruments, or market indexes of the foregoing (the 
``Underlying Index'' or ``Underlying Indexes'').\6\ Index-Linked 
Securities are the non-convertible debt of an issuer that have a term 
of at least one year, but not greater than thirty years, and are tied 
to the performance of the Underlying Index.\7\ Index-Linked Securities 
may or may not make interest payments based on dividends or other cash 
distributions paid on the components comprising the Underlying

[[Page 41370]]

Index or Indexes to the holder during their term. Despite the fact that 
Index-Linked Securities are linked to an Underlying Index, each will 
trade as a single, exchange-listed security.
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    \6\ The Exchange states that the holder of an Index-Linked 
Security may or may not be fully exposed to the appreciation and/or 
depreciation of the underlying component assets. For example, an 
Index-Linked Security may be subject to a ``cap'' on the maximum 
principal amount to be repaid to holders or a ``floor'' on the 
minimum principal amount to be repaid to holders at maturity.
    \7\ E-mail from Laura Clare, Assistant General Counsel, ISE, to 
Edward Cho, Special Counsel, Division of Market Regulation, 
Commission, dated July 18, 2007 (confirming the description of 
Index-Linked Securities).
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    The Exchange represents that the proposed generic listing standards 
will not be applicable to Index-Linked Securities with respect to which 
the payment at maturity is based on a multiple of negative performance 
of an Underlying Index or Indexes. An Index-Linked Security may or may 
not provide ``principal protection,'' i.e., a minimum guaranteed amount 
to be repaid.\8\ The Exchange believes that the flexibility to list a 
variety of Index-Linked Securities will offer investors the opportunity 
to more precisely focus their specific investment strategies.
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    \8\ Some Index-Linked Securities may provide for ``contingent'' 
protection of the principal amount, whereby the principal protection 
may disappear if the Underlying Index at any point in time during 
the life of such security reaches a certain predetermined level.
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    Index-Linked Securities do not give the holder any right to receive 
a portfolio component, dividend payments, or any other ownership right 
or interest in the portfolio or underlying components comprising the 
Underlying Index. Pursuant to proposed ISE Rule 2130, the current or 
composite value of the Underlying Index will be widely disseminated at 
least every 15 seconds during the trading day.

Proposed Listing Criteria for Index-Linked Securities

    The Exchange will apply the following requirements to all issuers 
of Index-Linked Securities:
    (A) If the issuer is a company listed on the New York Stock 
Exchange, NYSE Arca, Inc., American Stock Exchange LLC, or The NASDAQ 
Stock Market LLC, the entity must be a company in good standing (i.e., 
meets the continued listing criteria of such exchange). If not listed, 
the issuer must meet the following criteria:
    (i) The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million. In the case of an issuer 
which is unable to satisfy the earnings criteria set forth in (ii) 
below, the Exchange generally will require the issuer to have the 
following: (x) assets in excess of $200 million and stockholders' 
equity of at least $10 million; or (y) assets in excess of $100 million 
and stockholders' equity of at least $20 million.
    (ii) The issuer's pre-tax income from continuing operations shall 
substantially exceed $750,000 in its last fiscal year, or in two of its 
last three fiscal years (sovereign issuers will be evaluated on a case-
by-case basis).
    (B) The issuer will be expected to have a minimum tangible net 
worth \9\ of $250,000,000. In the alternative, the issuer will be 
expected: (i) To have a minimum tangible net worth of $150,000,000; and 
(ii) not to have issued Index-Linked Securities, the original issue 
price of which, combined with all the issuer's other Index-Linked 
Securities listed on a national securities exchange, exceeds 25% of the 
issuer's tangible net worth at the time of issuance. If the Index-
Linked Securities are fully and unconditionally guaranteed by an 
affiliate of the issuer, the Exchange will rely on such affiliate's 
tangible net worth for purposes of these requirements and will include 
in its calculation all Index-Linked Securities that are fully and 
unconditionally guaranteed by such affiliate.
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    \9\ ``Tangible net worth'' is defined as total assets, less 
intangible assets and total liabilities. Intangibles include non-
material benefits such as goodwill, patents, copyrights, and 
trademarks.
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    (C) The issuer must be in compliance with Rule 10A-3 under the 
Act.\10\
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    \10\ See 17 CFR 240.10A-3 (setting forth the listing standards 
relating to audit committees).
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    The Exchange will apply the following requirements to each issue of 
Index-Linked Securities:
    (1) The issue must have (a) A minimum public distribution of at 
least 1 million units, except if the Index-Linked Securities are traded 
in thousand dollar denominations, and (b) at least 400 holders, except 
if the Index-Linked Securities are redeemable at the option of the 
holders thereof on at least a weekly basis \11\ or the Index-Linked 
Securities are traded in thousand dollar denominations;
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    \11\ E-mail from Laura Clare, Assistant General Counsel, ISE, to 
Edward Cho, Special Counsel, Division of Market Regulation, 
Commission, dated July 18, 2007 (clarifying the exceptions to the 
holder distribution requirement).
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    (2) The issue must have a principal amount/aggregate market value 
of not less than $4 million;
    (3) The issue must have a term of at least one year, but not 
greater than thirty years;
    (4) The issue must be the non-convertible debt of the issuer; and
    (5) The issue must not base its payment at maturity on a multiple 
of the negative performance of an Underlying Index or Indexes, although 
the payment at maturity may or may not provide for a multiple of the 
positive performance of an Underlying Index or Indexes.
    Index-Linked Securities must have at least 400 holders at the time 
of listing, except if the Index-Linked Securities are traded in 
thousand dollar denominations or the Index-Linked Securities are 
redeemable at the option of the holders thereof on at least a weekly 
basis. The Exchange believes that a weekly redemption right will ensure 
a strong correlation between the market price of the Index-Linked 
Securities and the performance of the Underlying Index, as holders will 
be unlikely to sell their Index-Linked Securities for less than their 
redemption value if they have a weekly right to be redeemed for their 
full value. In addition, in the case of Index-Linked Securities with a 
weekly redemption feature, the issuer has the ability to issue new 
Index-Linked Securities from time to time at the indicative value at 
the time of such sale. This provides a ready supply of new Index-Linked 
Securities, thereby lessening the possibility that the market price of 
such securities will be affected by a scarcity of available Index-
Linked Securities for sale. It also assists in maintaining a strong 
correlation between the market price and the indicative value, as 
investors will be unlikely to pay more than the indicative value in the 
open market if they can acquire Index-Linked Securities from the issuer 
at that price.
    The ability to list Index-Linked Securities with these 
characteristics without any specific requirements as to the number of 
holders is important to the successful listing of such securities. 
Issuers issuing these types of Index-Linked Securities generally do not 
intend to do so by way of an underwritten offering. Rather, the 
distribution arrangement is analogous to that of an exchange traded 
fund issuance, in that the issue is launched without any significant 
distribution event, and the float increases over time as investors 
purchase additional securities from the issuer at the then indicative 
value. Investors will generally seek to purchase the securities at a 
point when the Underlying Index is at a level that they perceive as 
providing an attractive growth opportunity. In the context of such a 
distribution arrangement, it is difficult for an issuer to guarantee 
its ability to sell to sufficient investors on the listing date to meet 
a specific number-of-holders requirement. However, the Exchange 
believes that this difficulty in ensuring 400 holders on the listing 
date is not indicative of a likely long-term lack of liquidity in 
Index-Linked Securities or, for the reasons set forth in the prior 
paragraph, of a difficulty in establishing a pricing equilibrium in the 
Index-Linked Securities or a successful two-sided market.

[[Page 41371]]

Equity Index-Linked Securities Listing Standards
    Equity Index-Linked Securities will be subject to the criteria in 
proposed ISE Rule 2130(c) for initial and continued listing. For an 
Underlying Index to be appropriate for the initial listing of an Equity 
Index-Linked Security, such Underlying Index must be comprised of at 
least ten component securities of different issuers. The Underlying 
Index must also either (i) be approved for the trading of options or 
other derivative securities by the Commission under section 19(b)(2) of 
the Act \12\ and rules thereunder, and the conditions set forth in the 
Commission's approval order, including comprehensive surveillance 
sharing agreements for non-U.S. stocks, continue to be satisfied, or 
(ii) meet the following requirements:
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    \12\ 15 U.S.C. 78s(b)(2).
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     Each component security must have a minimum market value 
of at least $75 million, except that, for each of the lowest dollar-
weighted component securities in the Underlying Index that in the 
aggregate account for no more than 10% of the dollar weight of such 
Underlying Index, the market value can be at least $50 million;
     Each component security must have a trading volume in each 
of the last six months of not less than 1,000,000 shares, except that 
for each of the lowest dollar-weighted component securities in the 
Underlying Index that, in the aggregate, account for no more than 10% 
of the dollar weight of such Underlying Index, the trading volume shall 
be at least 500,000 shares in each of the last six months;
     Underlying Indexes based upon the equal-dollar or modified 
equal-dollar weighting methodology must be rebalanced at least 
quarterly;
     In the case of a capitalization-weighted or modified 
capitalization-weighted Underlying Index, the lesser of the five 
highest dollar-weighted component securities in the Underlying Index or 
the highest dollar-weighted component securities in the Underlying 
Index that, in the aggregate, represent at least 30% of the total 
number of component securities in the Underlying Index, each have an 
average monthly trading volume of at least 2,000,000 shares over the 
previous six months;
     No component security can represent more than 25% of the 
dollar weight of the Underlying Index, and the five highest dollar-
weighted component securities in the Underlying Index cannot, in the 
aggregate, account for more than 50% of the dollar weight of the 
Underlying Index (60% for an Underlying Index consisting of fewer than 
25 component securities);
     90% of the Underlying Index's dollar weight and at least 
80% of the total number of component securities must meet the then 
current criteria for standardized options trading on a national 
securities exchange; and
     All component securities must either (A) be securities 
(other than foreign country securities and American Depository Receipts 
(``ADRs'')) that are issued by a reporting company under the Act that 
is listed on a national securities exchange and be an ``NMS stock,'' as 
defined in Rule 600 of Regulation NMS,\13\ or (B) be foreign country 
securities or ADRs, provided that foreign country securities or foreign 
country securities underlying ADRs having their primary trading market 
outside the United States on foreign trading markets that are not 
members of the Intermarket Surveillance Group (``ISG'') or parties to 
comprehensive surveillance sharing agreements with the Exchange cannot, 
in the aggregate, represent more than 20% of the dollar weight of the 
Underlying Index.
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    \13\ See 17 CFR 242.600(b)(47).
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    The Exchange would commence delisting or removal proceedings of an 
Equity Index-Linked Security if any of the standards set forth in the 
initial eligibility criteria are not continuously maintained, except 
that:
     The criteria that no single component represent more than 
25% of the dollar weight of the Underlying Index and the five highest 
dollar-weighted components in the Underlying Index cannot represent 
more than 50% (or 60% for Underlying Indexes with less than 25 
components) of the dollar weight of the Underlying Index, need only be 
satisfied for capitalization-weighted, modified capitalization-
weighted, and price-weighted Underlying Indexes as of the first day of 
January and July in each year;
     The total number of components in the Underlying Index may 
not increase or decrease by more than 33\1/3\% from the number of 
components in the Underlying Index at the time of its initial listing, 
and in no event may be less than ten components;
     The trading volume of each component security in the 
Underlying Index must be at least 500,000 shares for each of the last 
six months, except that for each of the lowest dollar-weighted 
components in the Underlying Index that, in the aggregate, account for 
no more than 10% of the dollar weight of the Underlying Index, trading 
volume must be at least 400,000 shares for each of the last six months; 
and
     For a capitalization-weighted or modified capitalization-
weighted Underlying Index, the lesser of the five highest dollar-
weighted component securities in the Underlying Index or the highest 
dollar-weighted component securities in the Underlying Index that, in 
the aggregate, represent at least 30% of the total number of stocks in 
the Underlying Index must have an average monthly trading volume of at 
least 1,000,000 shares over the previous six months.
    In connection with an Equity Index-Linked Security, the Exchange 
will commence delisting or removal proceedings if an Underlying Index 
or Indexes fails to satisfy the maintenance standards or conditions for 
such Underlying Index or Indexes, as set forth by the Commission in its 
order under section 19(b)(2) of the Act \14\ approving the Underlying 
Index or Indexes for the trading of options or other derivatives. The 
Exchange will also commence delisting or removal proceedings of an 
Equity Index-Linked Security under any of the following circumstances:
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    \14\ 15 U.S.C. 78s(b)(2).
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     If the aggregate market value or the principal amount of 
the Equity Index-Linked Securities publicly held is less than $400,000;
     If the value of the Underlying Index or composite value of 
the Underlying Indexes is no longer calculated and widely disseminated 
on at least a 15-second basis during the time the Equity Index-Linked 
Securities trade on the Exchange; or
     If such other event occurs or condition exists which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
Commodity-Linked Securities Listing Standards
    Commodity-Linked Securities will be subject to the criteria in 
proposed ISE Rule 2130(d) for initial and continued listing. An issue 
of Commodity-Linked Securities must meet initial listing standards set 
forth in either the first or second bullet point below:
     One or more physical commodities or commodity futures, 
options or other commodity derivatives, Commodity-Based Trust Shares 
(as defined in ISE Rule 2125), or a basket or index of any of the 
foregoing (the ``Commodity Reference Asset'') to which the Commodity-
Linked Security is linked shall have been reviewed and approved for the 
trading of Commodity-Based Trust Shares, options, or other derivatives 
by the Commission under

[[Page 41372]]

section 19(b)(2) of the Act \15\ and rules thereunder, and the 
conditions set forth in the Commission's approval order, including with 
respect to comprehensive surveillance sharing agreements, continue to 
be satisfied; or
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    \15\ Id.
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     The pricing information for each component of a Commodity 
Reference Asset must be derived from a market which is an ISG member or 
affiliate member or with which the Exchange has a comprehensive 
surveillance sharing agreement. Notwithstanding the previous sentence, 
pricing information for gold and silver may be derived from the London 
Bullion Market Association.
    In addition, the issue must meet both of the following initial 
listing criteria:
     The value of the Commodity Reference Asset must be 
calculated and widely disseminated on at least a 15-second basis during 
the time the Commodity-Linked Securities trade on the Exchange; and
     In the case of Commodity-Linked Securities that are 
periodically redeemable, the indicative value of the subject Commodity-
Linked Securities must be calculated and widely disseminated by one or 
more major market data vendors on at least a 15-second basis during the 
time the Commodity-Linked Securities trade on the Exchange.
    The Exchange will commence delisting or removal proceedings if any 
of the initial listing criteria described above is not continuously 
maintained. Notwithstanding the foregoing, an issue of Commodity-Linked 
Securities will not be delisted for a failure to have in place 
comprehensive surveillance sharing agreements if the Commodity 
Reference Asset has at least ten components, and the Exchange has 
comprehensive surveillance sharing agreements with respect to at least 
90% of the dollar weight of the Commodity Reference Asset. The Exchange 
will also commence delisting or removal proceedings:
     If the aggregate market value or the principal amount of 
the Commodity-Linked Securities publicly held is less than $400,000;
     The value of the Commodity Reference Asset is no longer 
calculated or available and a new Commodity Reference Asset is 
substituted, unless the new Commodity Reference Asset meets the 
requirements of proposed ISE Rule 2130; or
     If such other event occurs or condition exists which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
Currency-Linked Securities Listing Standards
    Currency-Linked Securities will be subject to the criteria in 
proposed ISE Rule 2130(e) for initial and continued listing. An issue 
of Currency-Linked Securities must meet the initial listing standards 
set forth in either bullet point below:
     One or more currencies, options or currency futures or 
other currency derivatives, Currency Trust Shares (as defined in ISE 
Rule 2126), or a basket or index of any of the foregoing (the 
``Currency Reference Asset'') to which the Currency-Linked Security is 
linked shall have been reviewed and approved for the trading of 
Currency Trust Shares, options, or other derivatives by the Commission 
under section 19(b)(2) of the Act \16\ and rules thereunder, and the 
conditions set forth in the Commission's approval order, including with 
respect to comprehensive surveillance sharing agreements, continue to 
be satisfied; or
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    \16\ Id.
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     The pricing information for each component of a Currency 
Reference Asset must be (a) the generally accepted spot price for the 
currency exchange rate in question or (y) derived from a market which 
is an ISG member or affiliate member or with which the Exchange has in 
place a comprehensive surveillance sharing agreement and is the pricing 
source for components of a Currency Reference Asset that has previously 
been approved by the Commission.
    In addition, the issue must meet both of the following initial 
listing criteria:
     The value of the Currency Reference Asset must be 
calculated and widely disseminated on at least a 15-second basis during 
the time the Currency-Linked Securities trade on the Exchange; and
     In the case of Currency-Linked Securities that are 
periodically redeemable, the indicative value of the subject Currency-
Linked Securities must be calculated and widely disseminated by one or 
more major market data vendors on at least a 15-second basis during the 
time the Currency-Linked Securities trade on the Exchange.
    The Exchange will commence delisting or removal proceedings if any 
of the initial listing criteria described above is not continuously 
maintained. Notwithstanding the forgoing, an issue of Currency-Linked 
Securities will not be delisted for a failure to have in place 
comprehensive surveillance sharing agreements if the Currency Reference 
Asset has at least ten components, and the Exchange has comprehensive 
surveillance sharing agreements with respect to at least 90% of the 
dollar weight of the Currency Reference Asset. The Exchange will also 
commence delisting or removal proceedings under any of the following 
circumstances:
     If the aggregate market value or the principal amount of 
the Currency-Linked Securities publicly held is less than $400,000;
     If the value of the Currency Reference Asset is no longer 
calculated or available and a new Currency Reference Asset is 
substituted, unless the new Currency Reference Asset meets the 
requirements of proposed ISE Rule 2130; or
     If such other event occurs or condition exists which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
Exchange Rules Applicable to Index-Linked Securities
    Index-Linked Securities traded on the Exchange will be subject to 
all Exchange rules governing the trading of equity securities. 
Accordingly, the Exchange proposes to amend the definition of ``Equity 
Security'' to include Index-Linked Securities.\17\ The Exchange's 
equity margin rules and the Exchange's regular trading hours (from 9 
a.m. to 4 p.m. Eastern Time) will apply to transactions in Index-Linked 
Securities.
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    \17\ See ISE Rule 2100(c)(7).
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Regulatory Information Circular
    Upon evaluating the nature and complexity of each Index-Linked 
Security, the Exchange represents that it will prepare and distribute, 
if appropriate, a Regulatory Information Circular to Electronic Access 
Members (``EAMs'') describing the product. Accordingly, the particular 
structure of, and the corresponding risks transacting in, an Index-
Linked Security will be highlighted and disclosed. In particular, the 
Regulatory Information Circular will set forth the Exchange's 
suitability rule that requires EAMs recommending a transaction in 
Index-Linked Securities (1) To determine that such transaction is 
suitable for the customer (ISE Rule 610), and (2) to have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics, and is able to bear the financial risks, of such 
transaction. In addition, the Regulatory Information Circular will 
reference the requirement that EAMs must deliver a prospectus to 
investors purchasing newly issued Index-Linked Securities prior to or 
concurrently with the confirmation of a transaction.

[[Page 41373]]

Surveillance
    The Exchange will closely monitor activity in Index-Linked 
Securities to identify and deter any potential improper trading 
activity in such securities. Additionally, the Exchange represents that 
its surveillance procedures are adequate to properly monitor the 
trading of Index-Linked Securities. Specifically, the Exchange will 
rely on its existing surveillance procedures governing equities, 
options, and exchange-traded funds. The Exchange has developed 
procedures to closely monitor activity in Index-Linked Securities and 
the Underlying Indexes and their components to identify and deter 
potential improper trading activity. To the extent applicable, the 
Exchange will be able to obtain trading and beneficial holder 
information from the primary trading markets for the components of the 
Underlying Indexes in relation to Index-Linked Securities, either 
pursuant to bilateral information sharing agreements with those markets 
or because those markets are full or affiliate members of ISG.
Firewall Procedures
    If the Underlying Index is maintained by a broker-dealer, the 
broker-dealer shall erect a ``firewall'' around the personnel 
responsible for the maintenance of the Underlying Index or who have 
access to information concerning changes and adjustments to the 
Underlying Index, and the Underlying Index shall be calculated by a 
third party who is not a broker-dealer. Any advisory committee, 
supervisory board, or similar entity that advises an Underlying Index 
licensor or administrator or that makes decisions regarding the 
Underlying Index or portfolio composition, methodology, and related 
matters must implement and maintain, or be subject to, procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the applicable Underlying Index or portfolio.
Trading Halts
    In the case of Commodity- or Currency-Linked Securities, if the 
indicative value or the Commodity Reference Asset value or Currency 
Reference Asset value, as the case may be, applicable to a series of 
securities is not being disseminated as required, or, in the case of 
Equity Index-Linked Securities, if the value of the Underlying Index is 
not being disseminated as required, the Exchange may halt trading 
during the day on which such interruption first occurs. If such 
interruption persists past the trading day in which it occurred, the 
Exchange will halt trading no later than the beginning of the trading 
day following the interruption. With respect to Index-Linked Securities 
admitted to dealings by the Exchange pursuant to UTP, the Exchange will 
halt trading in accordance with proposed ISE Rule 2101(a), if such 
Index-Linked Security is no longer listed or trading on the primary 
listing market.
2. Statutory Basis
    The proposal is consistent with section 6(b) of the Act,\18\ in 
general, and section 6(b)(5) of the Act,\19\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
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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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purpose of the Act.

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

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

III. 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-ISE-2007-47 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-ISE-2007-47. 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 offices of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2007-47 and should be 
submitted on or before August 17, 2007.

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

    After careful consideration, 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.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of section 
6(b)(5) of the Act,\21\ which requires, among other things, that the 
Exchange's rules be designed to promote just and equitable principles 
of trade, to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in

[[Page 41374]]

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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    \20\ In approving this proposed 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).
    \21\ 15 U.S.C. 78f(b)(5).
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Generic Listing Standards for Index-Linked Securities
    To list and/or trade any issue of Index-Linked Securities, the 
Exchange currently must file a proposed rule change with the Commission 
pursuant to section 19(b)(1) of the Act \22\ and Rule 19b-4 
thereunder.\23\ However, Rule 19b-4(e) under the Act \24\ 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) under the Act \25\ 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/or trading of Index-Linked Securities pursuant to Rule 19b-4(e) 
fulfill these requirements. The Exchange's ability to rely on Rule 19b-
4(e) to list and/or trade Index-Linked Securities that meet the 
requirements of proposed ISE Rule 2130 should reduce the timeframe for 
bringing these securities to the market and thereby reduce the burdens 
on issuers and other market participants, while also promoting 
competition and making such securities available to investors more 
quickly.
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    \22\ 15 U.S.C. 78s(b)(1).
    \23\ 17 CFR 240.19b-4.
    \24\ 17 CFR 240.19b-4(e).
    \25\ 17 CFR 240.19b-4(c)(1).
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    The Commission has previously approved generic listing standards 
that are substantially similar to ISE's proposal.\26\ The Commission 
believes that the proposed generic listing standards for Index-Linked 
Securities should fulfill the intended objective of Rule 19b-4(e) and 
allow securities that satisfy the proposed generic listing standards to 
commence trading without the need for public comment and Commission 
approval.\27\
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    \26\ See Securities Exchange Act Release Nos. 55794 (May 22, 
2007), 72 FR 29558 (May 29, 2007) (SR-Amex-2007-45) (amending the 
generic listing standards for Index-Linked Securities and approving 
generic listing standards for Commodity- and Currency-Linked 
Securities); and 55687 (May 1, 2007), 72 FR 25824 (May 7, 2007) (SR-
NYSE-2007-27) (approving generic listing standards for Equity Index-
Linked Securities, Commodity-Linked Securities, and Currency-Linked 
Securities).
    \27\ The Commission notes that the failure of a particular 
product or index to comply with the proposed generic listing 
standards under Rule 19b-4(e), however, would not preclude the 
Exchange from submitting a separate filing pursuant to Section 
19(b)(2), requesting Commission approval to list and trade a 
particular equity-, commodity-, or currency-linked product. The 
Commission further notes that securities that satisfy ISE's proposed 
generic listing standards for Index-Linked Securities would only be 
traded on the Exchange pursuant to UTP, pursuant to proposed ISE 
Rule 2101(a), and that the Exchange would be required to submit a 
separate filing pursuant to Section 19(b)(2) requesting Commission 
approval if the Exchange seeks to trade such securities by listing 
them. See ISE Rule 2101(a).
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Listing and Trading Index-Linked Securities
    Taken together, the Commission finds that ISE's proposal contains 
adequate rules and procedures to govern the listing and trading of 
Index-Linked Securities pursuant to Rule 19b-4(e) on the Exchange. All 
such securities listed and/or traded under their respective generic 
standards will be subject to the full panoply of ISE rules and 
procedures that currently govern the trading of equity securities on 
the Exchange.
    As set forth more fully above, ISE has proposed size, earnings, and 
minimum tangible net worth requirements for each issuer, as well as 
minimum public distribution and shareholder, principal amount/aggregate 
market value, and minimum term thresholds for each issuance of Index-
Linked Securities.\28\ In addition, the Exchange's proposal requires 
that the assets (or their derivatives) underlying such securities must 
either have (1) Been reviewed and approved for trading by the 
Commission, or (2) in the case of Equity Index-Linked Securities, such 
underlying assets or their derivatives have sufficient market value and 
trading volume and not constitute an unreasonable percentage of the 
overall dollar weight of the Underlying Index, or, in the case of 
Commodity- and Currency-Linked Securities, their pricing information be 
reliable or derived from certain required sources. These requirements 
are designed to ensure that the trading markets for the underlying 
components are adequately capitalized and sufficiently liquid. The 
Commission believes that these requirements should minimize the 
potential for manipulation.
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    \28\ The Commission notes that ISE's proposed initial 
requirements for all issuers and issuances of Index-Linked 
Securities are substantially similar to those adopted by other 
exchanges. See supra note 26.
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    The Commission also finds that (1) In the case of Equity Index-
Linked Securities, the requirement that all component securities must 
either be securities issued by a reporting company under the Act that 
is listed on a national securities exchange and be an NMS stock (as 
defined in Rule 600 of Regulation NMS) \29\ or be foreign country 
securities or ADRs, so long as such foreign country securities or 
foreign country securities underlying the ADRs that are primarily 
traded on foreign markets, which are not ISG members or parties to 
comprehensive surveillance sharing agreements, do not in the aggregate 
represent more than 20% of the dollar weight of the Underlying Index, 
and (2) in the case of Commodity-Linked and Currency-Linked Securities 
with at least ten components, the requirement that at least 90% of the 
dollar weight of the corresponding Commodity Reference Asset or 
Currency Reference Asset, as the case may be, must have comprehensive 
surveillance sharing agreements with the Exchange, in each case, should 
aid the Exchange in identifying potential trading and other violations 
of its rules. The Commission believes that such a requirement will 
contribute to the transparency of the applicable Underlying Index. The 
Commission also notes that, by requiring pricing information for the 
relevant components to be readily available, the proposed listing 
standards of ISE Rule 2130 should help ensure a fair and orderly market 
for Index-Linked Securities listed and/or traded pursuant to Rule 19b-
4(e).
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    \29\ See 17 CFR 242.600(b)(47).
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    The Exchange has also developed delisting criteria that will permit 
it to suspend trading of Index-Linked Securities in circumstances that 
make further dealings in such products inadvisable. The Commission 
believes that the delisting criteria should help ensure that a minimum 
level of liquidity exists for each such security to allow for the 
maintenance of fair and orderly markets. Also, in the event that the 
value of the Underlying Index for Index-Linked Securities (or, for 
Commodity-Linked and Currency-Linked Securities that are periodically 
redeemable, the corresponding indicative value) is no longer calculated 
and widely disseminated on at least a 15-second basis, the Exchange may 
halt trading during the day on which the interruption first occurs; 
however, if the interruption persists past the trading day on which it 
occurred, the Exchange will halt trading no later than the beginning of 
the trading day following the interruption and will commence delisting 
proceedings. The Commission also notes that, because Index-Linked 
Securities would only be traded on the Exchange pursuant to UTP under 
proposed ISE Rule 2101(a), the Exchange would halt the trading of such 
securities if such Index-Linked

[[Page 41375]]

Securities are no longer listed or trading on the original listing 
market.
Surveillance
    The Commission notes that any Index-Linked Securities approved for 
listing and/or trading would be subject to the Exchange's existing 
surveillance procedures governing equities, options, and exchange-
traded funds, as well as procedures the Exchange represents it has 
developed to closely monitor activity in such securities and the 
Underlying Indexes and/or portfolios. The Exchange also has represented 
that its surveillance procedures are adequate to properly monitor the 
trading of Index-Linked Securities listed pursuant to the proposed 
generic listing standards and that it will be able to obtain necessary 
trading and beneficial holder information from the primary trading 
markets for the underlying components, either pursuant to bilateral 
information sharing agreements with those markets or because those 
markets are full or affiliate members of ISG.
Regulatory Information Circular
    The Exchange has represented that it will distribute, as 
appropriate, a Regulatory Information Circular to EAMs describing the 
product, the specific structure of the product, and the corresponding 
risks of transacting in Index-Linked Securities. In addition, the 
Regulatory Information Circular will set forth the Exchange's 
suitability requirements with respect to recommendations in 
transactions in Index-Linked Securities to customers and the prospectus 
delivery requirements.
Firewall Procedures
    The Exchange has further represented that if the Underlying Index 
is maintained by a broker-dealer, such broker-dealer will establish a 
``firewall'' around personnel responsible for the maintenance of such 
Underlying Index or who have access to information concerning changes 
and adjustments to the Underlying Index. As an added measure, a third-
party who is not a broker-dealer will be required to calculate the 
value of the Underlying Index. In addition, the Exchange has stated 
that any advisory committee, supervisory board, or similar entity that 
advises an Underlying Index licensor or administrator or that makes 
decisions regarding the Underlying Index or portfolio composition, 
methodology, and related matters must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the applicable Underlying 
Index or portfolio.
Acceleration
    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1 thereto, before the 30th day 
after the date of publication of notice of filing thereof in the 
Federal Register. The Exchange requested accelerated approval of the 
proposal to facilitate the prompt trading of Index-Linked Securities 
pursuant to UTP based on the specified criteria of proposed ISE Rules 
2100, 2101, and 2130. The Commission notes that the Exchange's proposed 
generic listing standards for Index-Linked Securities are substantially 
based on previously approved listing standards for such securities \30\ 
and presently is not aware of any regulatory issue that should cause it 
to revisit that finding or would preclude the trading of such 
securities on the Exchange. Therefore, accelerating approval of this 
proposal should benefit investors by creating, without undue delay, 
additional competition in the market for Index-Linked Securities, 
subject to the standards and representations discussed herein. 
Therefore, the Commission finds good cause, consistent with section 
19(b)(2) of the Act,\31\ to approve the proposed rule change on an 
accelerated basis.
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    \30\ See supra note 26.
    \31\ 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,\32\ that the proposed rule change (SR-ISE-2007-47), as modified by 
Amendment No. 1 thereto, be, and it hereby is, approved on an 
accelerated basis.
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    \32\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-14502 Filed 7-26-07; 8:45 am]

BILLING CODE 8010-01-P
