

[Federal Register: January 7, 2008 (Volume 73, Number 4)]
[Notices]               
[Page 1241-1246]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja08-61]                         


[[Page 1241]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57066; File No. SR-ISE-2007-65]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 
Thereto Relating to Generic Listing Standards for Exchange-Traded Funds 
Based on Fixed Income Indexes and Order Granting Accelerated Approval 
of the Proposed Rule Change, as Modified by Amendment No. 1

December 28, 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 July 24, 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 prepared substantially by the Exchange. 
On December 28, 2007, the Exchange filed Amendment No. 1.\3\ This order 
provides notice of the proposed rule change, as amended, and approves 
the amended proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend ISE Rules 2123 and 2131 to include 
generic listing and/or trading standards for Investment Company Units 
(``Units'') and Portfolio Depositary Receipts (``PDRs'') that are based 
on indexes or portfolios consisting of fixed income securities (``Fixed 
Income Indexes'') or composite indexes consisting of both equity and 
fixed income securities (collectively, ``Combination Indexes''). The 
text of the proposed rule change is available at the Exchange's 
principal office, on the Exchange's Web site at http://www.ise.com, and 

at the Commission's Public Reference Room.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to revise ISE Rules 2123 and 2131 to include 
generic listing and trading standards for series of Units and PDRs 
(Units and PDRs, collectively referred to as ``ETFs'') that are based 
on Fixed Income Indexes or on Combination Indexes. 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 ISE Rules 2123 
and 2131, as applicable, is satisfied. Rule 19b-4(e) provides that the 
listing and trading of a new derivative securities product by a self-
regulatory organization (``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,\6\ the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivatives securities product, and 
the SRO has a surveillance program for the product class.\7\ Similar 
proposals by the American Stock Exchange LLC (``Amex'') and NYSE Arca, 
Inc. (``NYSE Arca'') have been approved by the Commission.\8\
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange 
begins trading the new derivative securities product. See 17 CFR 
240.19b-4(e)(2)(ii).
    \8\ See Securities Exchange Act Release No. 55437 (March 9, 
2007), 72 FR 12233 (March 15, 2007) (SR-Amex-2006-118); Securities 
Exchange Act Release No. 55783 (May 17, 2007), 72 FR 29294 (May 24, 
2007) (SR-NYSEArca-2007-36).
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a. ETFs
    ISE Rule 2123 provides standards for the initial and continued 
listing of Units, which are securities issued by a unit investment 
trust, an open-end management investment company (open-end mutual 
fund), or a similar entity based on a portfolio of stocks or fixed 
income securities that seeks to provide investment results that 
correspond generally to the price and yield performance of a specified 
foreign or domestic stock index or fixed income securities index. PDRs 
represent securities based on a unit investment trust that holds the 
securities that comprise an index or portfolio underlying a series of 
PDRs. Pursuant to ISE Rules 2123 and 2131, Units and PDRs must be 
issued in a specified aggregate minimum number in return for a deposit 
of specified securities and/or a cash amount, with a value equal to the 
next determined net asset value (``NAV''). When aggregated in the same 
specified minimum number, Units and PDRs must be redeemable by the 
issuer for 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.
    To meet the investment objective of providing investment returns 
that correspond to the price, dividend, and yield performance of the 
underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF portfolio. 
An ETF using a replication strategy would invest in each security found 
in the underlying index in about the same proportion as that security 
is represented in the index itself. An ETF using a representative 
sampling strategy would generally invest in a significant number, but 
perhaps not all, of the component securities of the underlying index, 
and would hold the securities that, in the aggregate, are intended to 
approximate the full index in terms of certain key characteristics. In 
the context of a Fixed Income Index, such characteristics may include 
liquidity, duration, maturity, and yield.
    In addition, an ETF portfolio may be adjusted in accordance with 
changes in the composition of the underlying index or to maintain 
compliance with requirements applicable to a regulated investment 
company under the Internal Revenue Code (``IRC'').\9\
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    \9\ In order for an ETF to qualify for tax treatment as a 
regulated investment company, it must meet several requirements 
under the IRC, including requirements with respect to the nature and 
the value of the ETF's assets.
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b. 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 as well as on indexes consisting of U.S. Components, Non-U.S. 
Components or both U.S. and Non-U.S. Components.\10\

[[Page 1242]]

In addition, the Commission has previously approved the listing and 
trading of ETFs based on fixed income securities indexes.\11\
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    \10\ See ISE Rule 2123 and Securities Exchange Act Release No. 
54528 (September 28, 2006), 71 FR 58650 (October 4, 2006) (SR-ISE-
2006-48) (approving generic listing standards for ICUs); Securities 
Exchange Act Release No. 56633 (October 9, 2007), 72 FR 58696 
(October 16, 2007) (SR-ISE-2007-60) (approving generic listing 
standards for ETFs based on international or global indexes or 
indexes described in rules previously approved by the Commission as 
underlying benchmarks for derivative securities).
    \11\ See Securities Exchange Act Release No. 46299 (August 1, 
2002), 67 FR 51907 (August 9, 2002) (SR-NYSE-2002-26); Securities 
Exchange Act Release No. 55780 (May 17, 2007), 72 FR 29022 (May 23, 
2007) (SR-NYSE-2007-37).
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    The Commission has also approved listing standards for other index-
based derivatives that permit the listing--pursuant to Rule 19b-4(e)--
of such securities where the Commission had previously approved the 
trading of specified index-based derivatives on the same index, on the 
condition that all of the standards set forth in the original order are 
satisfied by the exchange employing generic listing standards.\12\
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    \12\ See NYSE Arca Equities Rule 5.2(j)(6); Securities Exchange 
Act Release No. 52204 (August 3, 2005), 70 FR 46559 (August 10, 
2005) (SR-PCX-2005-63) (order approving generic listing standards 
for index-linked securities); Securities Exchange Act Release No. 
56117 (July 23, 2007), 72 FR 41369 (July 27, 2007) (SR-ISE-2007-47) 
(order approving generic listing standards for index-linked 
securities).
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    The Exchange believes that adopting additional generic listing 
standards for ETFs based on Fixed Income Indexes and Combination 
Indexes and applying Rule 19b-4(e) thereto should fulfill the intended 
objective of that rule by allowing those ETFs that satisfy the proposed 
generic listing standards to commence trading, without the need for 
individualized Commission approval. The proposed rules have the 
potential to reduce the timeframe for bringing ETFs to market, thereby 
reducing the burdens on issuers and other market participants. The 
failure of a particular index or portfolio 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.
c. Fixed Income and Combination Index ETFs
    ETFs listed pursuant to the proposed generic standards would be 
traded in all other respects under the Exchange's existing trading 
rules and procedures that apply to all securities traded on ISE, 
including ETFs, and would be covered under the Exchange's surveillance 
procedures for equities.\13\
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    \13\ The Exchange notes that its current trading surveillance 
focuses on detecting securities trading outside their normal 
patterns. When such situations are detected, surveillance analysis 
follows and investigations are opened, where appropriate, to review 
the behavior of all relevant parties for all relevant trading 
violations.
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    To list an ETF pursuant to the proposed generic listing standards 
for ETFs based on Fixed Income Indexes or Combination Indexes, the 
index underlying the ETF must satisfy all the conditions contained in 
proposed ISE Rules 2123 (for Units) or ISE Rule 2131 (for PDRs), as 
applicable. As with the existing generic listing standards for ETFs 
based on domestic and international or global indexes, the proposed 
generic listing standards are intended to ensure that fixed income 
securities with substantial market distribution and liquidity account 
for a substantial portion of the weight of an index or portfolio. While 
the standards in this proposal are based on the standards contained in 
Commission and Commodity Futures Trading Commission (``CFTC'') rules 
regarding the application of the definition of narrow-based security 
index to debt security indexes \14\ as well as existing fixed income 
ETFs, they have been adapted as appropriate to apply generally to Fixed 
Income Indexes for ETFs.
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    \14\ See Securities Exchange Act Release No. 54106 (July 6, 
2006), 71 FR 39534 (July 13, 2006) (File No. S7-07-06) (``Joint 
Rules'').
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d. Fixed Income Securities
    As proposed, ISE Rule 2123(b)(3) and .02 of the Supplementary 
Material to ISE Rule 2131 define the term ``Fixed Income Securities'' 
to include, notes, bonds (including convertible bonds), debentures, or 
evidences of indebtedness that include, but are not limited to, U.S. 
Treasury securities (``Treasury Securities''), government sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities,\15\ supernational debt,\16\ and debt of a foreign 
country or subdivision thereof. This new definition is designed to 
create a category of ETFs based on Fixed Income Indexes that may be 
listed and traded pursuant to Rule 19b-4(e) under the Act.
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    \15\ Trust preferred securities are undated cumulative 
securities issued from a special purpose trust in which a bank or 
bank holding company owns all of the common securities. The trust's 
sole asset is a subordinated note issued by the bank or bank holding 
company. Trust preferred securities are treated as debt for tax 
purposes so that the distributions or dividends paid are a tax 
deductible interest expense.
    \16\ Supranational debt represents the debt of international 
organizations such as the World Bank, the International Monetary 
Fund, regional multilateral development banks, and multilateral 
financial institutions. Examples of regional multilateral 
development banks include the African Development Bank, Asian 
Development Bank, European Bank for Reconstruction and Development, 
and the Inter-American Development Bank. Examples of multilateral 
financial institutions include the European Investment Bank and the 
International Fund for Agricultural Development.
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    For purposes of the proposed definition, a convertible bond is 
deemed to be a Fixed Income Security up until the time that it is 
converted into its underlying common or preferred stock.\17\ Once 
converted, the equity security may no longer continue as a component of 
a Fixed Income Index under the proposed rules and accordingly would be 
removed from such index.
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    \17\ The Exchange notes that under Section 3(a)(11) of the Act, 
15 U.S.C. 78c(a)(11), a convertible security is defined as an equity 
security. However, for the purpose of the proposed generic listing 
criteria, ISE believes that defining a convertible security (prior 
to its conversion) as a Fixed Income Security is consistent with the 
objectives and intention of the generic listing standards for fixed-
income-based ETFs as well as the Act.
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    The Exchange proposes that, to list a series of Units or PDRs based 
on a Fixed Income Index pursuant to the generic standards, the index 
must meet the following criteria:
     The index or portfolio must consist of Fixed Income 
Securities;
     Components that in aggregate account for at least 75% of 
the weight of the index or portfolio each must have a minimum original 
principal amount outstanding of $100 million or more;
     No component Fixed Income Security (excluding Treasury 
Securities or GSE Securities) represents more than 30% of the weight of 
the index, and the five most heavily weighted component fixed income 
securities in the index do not in the aggregate account for more than 
65% of the weight of the index;
     An underlying index or portfolio (excluding one consisting 
entirely of exempted securities) must include a minimum of 13 non-
affiliated issuers; and
     Component securities that in aggregate account for at 
least 90% of the weight of the index or portfolio must be either:
     From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; \18\
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    \18\ 15 U.S.C. 78m and 78o(d).
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    [cir] From issuers that have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
    [cir] From issuers that have outstanding securities that are notes, 
bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion;
    [cir] Exempted securities as defined in Section 3(a)(12) of the 
Act; \19\ or

[[Page 1243]]

    [cir] From issuers that are governments of foreign countries or 
political subdivisions of foreign countries.
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    \19\ 15 U.S.C. 78c(a)(12).
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    The Exchange believes that these proposed component criteria 
standards are reasonable for Fixed Income Indexes and, when applied in 
conjunction with the other listing requirements, would result in ETFs 
that are sufficiently broad-based in scope.
    The Exchange notes that the proposed standards are similar to the 
standards set forth by the Commission and the CFTC in the Joint Rules 
as well as existing fixed-income-based ETFs. First, in the proposed 
standards, component Fixed Income Securities that in the aggregate 
account for at least 75% of the weight of the index or portfolio would 
have to have a minimum original principal amount outstanding of at 
least $100 million; this is consistent with ISE Rule 2123(d)(1)(ii) and 
.02(a)(2) of the Supplementary Material to ISE Rule 2131. Second, the 
proposed standards provide that the most heavily weighted component 
security cannot exceed 30% of the weight of the index or portfolio, 
consistent with the standard for U.S. equity ETFs set forth in ISE Rule 
2123(c)(2)(i)(C). In addition, this standard is identical to the 
standard set forth by the Commission and the CFTC in the Joint 
Rules.\20\ Third, in the proposed standards, the five most heavily 
weighted component securities shall not exceed 65% of the weight of the 
index or portfolio, which is consistent with the Joint Rules and the 
standard for U.S. equity ETFs set forth in ISE Rule 2123(c)(2)(i)(C) 
and .01(a)(1)(iii) of the Supplementary Material to ISE Rule 2131. 
Fourth, the minimum number of Fixed Income Securities (except for 
portfolios consisting entirely of exempted securities, such as Treasury 
Securities or GSE Securities) from unaffiliated \21\ issuers in the 
proposed standards would be 13, consistent with the standard for U.S. 
equity ETFs set forth in ISE Rule 2123(c)(2)(i)(D), .01(a)(1)(v) of the 
Supplementary Material to ISE Rule 2131, and the Joint Rules. This 
requirement, together with the diversification standards set forth 
above, would provide assurance that the Fixed Income Securities 
comprising an index on which an overlying ETF may be listed pursuant to 
this proposal, would not be overly dependent on the price behavior of a 
single component or small group of components.
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    \20\ See supra at note 10.
    \21\ Rule 405 under the Securities Act of 1933, 17 CFR 230.405, 
defines an affiliate as a person that directly, or indirectly 
through one or more intermediaries, controls or is controlled by, or 
is under common control with, such person. Control, for this 
purpose, is the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
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    Finally, the proposed standards would require that at least 90% of 
the weight of the index or portfolio must be either: (i) From issuers 
that are required to file reports pursuant to Sections 13 and 15(d) of 
the Act; \22\ (ii) from issuers that each have a worldwide market value 
of its outstanding common equity held by non-affiliates of $700 million 
or more; (iii) from issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion; (iv) exempted 
securities as defined in Section 3(a)(12) of the Act; \23\ or (v) from 
issuers that are governments of foreign countries or a political 
subdivision of foreign countries. This proposed standard is consistent 
with a similar standard in the Joint Rules and is designed to ensure 
that the component Fixed Income Securities have sufficient publicly 
available information.
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    \22\ 15 U.S.C. 78m and 15 U.S.C. 78o(d).
    \23\ 15 U.S.C. 78c(a)(12).
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    The proposed generic listing standards for fixed income ETFs would 
not require that component securities in an underlying index have an 
investment-grade rating.\24\ In addition, the proposed requirements 
would not require a minimum trading volume, due to the lower trading 
volume that generally occurs in the fixed income markets as compared to 
the equity markets.
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    \24\ Cf. Joint Rules, 71 FR at 30538.
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    The proposed rules would also provide that the Exchange could not 
approve for listing or trading a series of ETFs based on a Combination 
Index under the proposed generic listing standards if such series seeks 
to provide investment results that either exceed the performance of a 
specified index by a specified multiple (``Multiple ETF'') or that 
correspond to the inverse (opposite) of the performance of a specified 
index by a specified multiple (``Inverse ETF'').
e. Requirements for Listing and Trading ETFs Based on Combination 
Indexes
    The Exchange also seeks to list and trade ETFs based on Combination 
Indexes. An ETF listed or traded pursuant to the generic listing 
standards for Combination Indexes would be traded, in all other 
respects, under the Exchange's existing trading rules and procedures 
that apply to all Exchange-traded securities, including ETFs, and would 
be covered under the Exchange's surveillance program for equities.
    To list an ETF pursuant to the proposed generic listing standards 
for Combination Indexes, an index underlying a Unit or PDR must satisfy 
all the conditions contained in proposed ISE Rule 2123(e) (for Units) 
and .03 of Supplementary Material to ISE Rule 2131 (for PDRs). However, 
for Units traded on the Exchange pursuant to UTP, only the provisions 
ISE Rule 2110 and paragraphs (c)(3), (c)(5), (f), (h), (i), and (l) of 
Rule 2123--regarding minimum price variation, disseminated information, 
written surveillance procedures, trading halts, hours of trading, and 
disclosures--would apply. For PDRs traded on the Exchange pursuant to 
UTP, only the provisions set forth in ISE Rules 2131(c) and 
2131(e)(2)(ii), as well as paragraphs (c), (e), (f), and (g) of 
Commentary .02 and Commentary .03 of the Supplementary Material to ISE 
Rule 2131--regarding disclosures, trading halts, disseminated 
information, minimum price variation, hours of trading, and written 
surveillance procedures would apply. Further, Commentary .02(b)(ii) and 
Commentary .03(a)(ii), which pertain to dissemination of the current 
index value, would also apply to PDRs traded pursuant to UTP on the 
Exchange that are based on Fixed Income Indexes and Combination 
Indexes, respectively. These generic listing standards are intended to 
ensure that securities with substantial market distribution and 
liquidity account for a substantial portion of the weight of both the 
equity and fixed income portions of an index or portfolio.
    Proposed ISE Rule 2123(e) and proposed .03 of the Supplementary 
Material to ISE Rule 2131 provide that the Exchange may approve a 
series of Units and PDRs--based on a combination of indexes or a series 
of component securities representing the U.S. or domestic equity 
market, the international equity market, and the fixed income market--
for listing and trading pursuant to Rule 19b-4(e) under the Act. The 
standards that an ETF would have to comply with are as follows: (i) 
Such portfolio or combination of indexes has been described in an 
exchange rule for the trading of options, Units, PDRs, Index-Linked 
Exchangeable Notes, or Index-Linked Securities that has been approved 
by the Commission under Section 19(b)(2) of the Act, and all of the 
standards set forth in the Commission's approval order are satisfied; 
or (ii) the equity portion and fixed income portion of the component 
securities separately meet the criteria set forth in 2123(c)(2) 
(equities) and proposed ISE Rule

[[Page 1244]]

2123(d) (fixed income) for Units and .01 (equities) and .02 (fixed 
income) of the Supplementary Material to ISE Rule 2131 for PDRs. In all 
cases, however, Multiple or Inverse ETFs may not be listed pursuant to 
ISE Rules 2123 or 2131.
f. Index Methodology and Dissemination
    The Exchange proposes to adopt (d)(2) and (e)(1) of ISE Rule 2123 
and .02(b) and .03(a) of Supplementary Material to ISE Rule 2131 to 
establish requirements for index methodology and dissemination in 
connection with Fixed Income and Combination Indexes.
    If a broker-dealer or fund advisor is responsible for maintaining 
(or has a role in maintaining) the underlying index, such broker-dealer 
or fund advisor would be required to erect and maintain a ``firewall,'' 
in a form satisfactory to the Exchange, to prevent the flow of non-
public information regarding the underlying index from the personnel 
involved in the development and maintenance of such index to others 
such as sales and trading personnel.
    With respect to dissemination of the index values, the Exchange 
proposes to adopt ISE Rules 2123(d)(2)(ii), 2123(e)(1)(ii), as well as 
.02(b)(ii) and .03a(ii) of Supplementary Material to ISE Rule 2131. For 
an ETF based on a Fixed Income Index, the underlying index value must 
be widely disseminated by one or more major market data vendors at 
least once a day during the time when the ETF shares trade on the 
Exchange; if the index value does not change during some or all of the 
period when trading is occurring on the Exchange, the last official 
calculated index value must remain available throughout Exchange 
trading hours. This reflects the nature of the fixed income markets as 
well as the frequency of intra-day trading information with respect to 
Fixed Income Indexes. For an ETF based on a Combination Index, the 
underlying index value would have to be widely disseminated by one or 
more major market data vendors at least every 15 seconds during the 
time the ETF shares trade on the Exchange to reflect updates for the 
prices of the equity securities included in the Combination Index; the 
Non-U.S. Component Stock portion of the Combination Index will be 
updated at least every 60 seconds,\25\ and the fixed income portion of 
the Combination Index will be updated at least daily.
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    \25\ See proposed ISE Rule 2123(e)(1)(ii) and proposed section 
.03(a)(ii) of the Supplementary Material to ISE Rule 2131.
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g. Application of General Rules
    Proposed ISE Rule 2123(f) as well as .02(c)-(g) and .03(b) of the 
proposed Supplementary Material to ISE Rule 2131 would be added to 
identify those requirements of ETFs that would apply to all such series 
of Units or PDRs based on Fixed Income or Combination Indexes. This 
would include the dissemination of the Intraday Indicative Value, an 
estimate of the value of a share of each ETF, updated at least every 15 
seconds. In addition, ISE Rule 2123(c)(5), which requires the Exchange 
to implement written surveillance procedures applicable to a series of 
Units, would apply to series of Units based on Fixed Income and 
Combination Indexes. Proposed .02(d)-(g) to the Supplementary Material 
of ISE Rule 2131, sets forth the requirements for PDRs relating to 
initial shares outstanding, minimum price variation, trading hours, and 
surveillance procedures.
    Proposed Sections .02(g) and .03(b) of the Supplementary Material 
to ISE Rule 2131 provide that the written surveillance procedures 
applicable to a series of PDRs listed and traded under Section .01 
would apply to Fixed Income and Combination Indexes. The Exchange 
represents that its surveillance procedures are adequate to properly 
monitor the trading of the ETFs traded and/or listed pursuant to the 
proposed generic standards. The Exchange stated that it may obtain 
information via the Intermarket Surveillance Group (``ISG'') from 
exchanges that are members or affiliates of the ISG. In addition, the 
Exchange also has a general policy prohibiting the distribution of 
material, non-public information by its employees.
    The Exchange states that the Commission has approved generic 
listing standards providing for the listing pursuant to Rule 19b-4(e) 
of other derivative products based on indexes or portfolios described 
in rules previously approved by the Commission under Section 19(b)(2) 
of the Act. The Exchange proposes to include in the generic listing 
standards for the listing of Fixed Income and Combination Indexes based 
Units and PDRs, in ISE Rule 2123(e) and .03 of the Supplementary 
Material to ISE Rule 2131, indexes or portfolios described in rules 
that have been approved by the Commission in connection with the 
listing of options, Investment Company Units, Portfolio Depository 
Receipts, Index-Linked Exchangeable Notes, or Index-Linked Securities. 
The Exchange believes that the application of that standard to ETFs is 
appropriate because the underlying index would have been subject to 
Commission review in the context of the approval of listing of other 
derivatives.\26\
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    \26\ See supra notes 10 and 11.
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    The Exchange notes that existing ISE Rules 2123 and 2131 provide 
continued listing standards for all Units and PDRs. For example, where 
the value of the underlying index or portfolio of securities on which 
the ETF is based is no longer calculated or available, the Exchange 
would commence delisting proceedings. The Exchange notes that ISE Rules 
2123(a)(6) and 2131(e)(1)(ii) provide that, prior to approving an ETF 
for listing, the Exchange will obtain a representation from the ETF 
issuer that the NAV per share will be calculated daily and made 
available to all market participants at the same time.
    The trading halt requirements for existing ETFs will similarly 
apply to fixed income and combination index ETFs. In particular, ISE 
Rules 2123(e) and 2131(e)(2)(ii) provide that, if the Intraday 
Indicative Value or the index value applicable to that series of ETFs 
is not being disseminated as required when the Exchange is the listing 
market, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the Intraday Indicative Value or 
the index value occurs. If the interruption to the dissemination of the 
Intraday Indicative Value or the index value persists past the trading 
day in which it occurred, the Exchange would halt trading no later than 
the beginning of the trading day following the interruption.\27\
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    \27\ If an ETF is traded on the Exchange pursuant to unlisted 
trading privileges (``UTP''), the Exchange would halt trading if the 
primary listing market halts trading in such ETF because the 
Intraday Indicative Value and/or the index value is not being 
disseminated. See ISE Rules 2123(c)(3) and 2131(e)(2)(ii).
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    Additionally, the Exchange proposes to amend ISE Rule 2101 to 
include securities contemplated by ISE Rule 2131 in the list of Equity 
Securities that the Exchange will trade via UTP, unless and until the 
Exchange files with the Commission a rule change under Section 19(b)(2) 
of the Act and receives Commission approval to amend its rules to 
become a listing market. Further, the Exchange proposes to expand the 
definition of ``Equity Securities,'' as set forth in ISE Rule 
2100(c)(7), to include PDRs.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section

[[Page 1245]]

6(b)(5) of the Act,\28\ which requires that the rules of a national 
securities exchange be 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. 
In particular, ISE believes that this filing will provide investors 
with access to a wider range of derivative securities products.
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    \28\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change would not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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-2007-65 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2007-65. 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 ISE. 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-2007-65 and should be 
submitted on or before January 28, 2008.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\29\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \30\ in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange would have to file a proposed rule change 
with the Commission pursuant to Section 19(b)(1) of the Act \31\ and 
Rule 19b-4 thereunder \32\ to list or trade any ETF based on a Fixed 
Income Index or on a Combination Index. The Exchange also would have to 
file a proposed rule change to list or trade an ETF based on a Fixed 
Income or Combination Index described in an exchange rule previously 
approved by the Commission as an underlying benchmark for a derivative 
security. Rule 19b-4(e), however, provides that the listing and trading 
of a new derivative securities product by an SRO will not be deemed a 
proposed rule change pursuant to Rule 19b-4(c)(1) if the Commission has 
approved, pursuant to Section 19(b) of the Act, the SRO's trading 
rules, procedures, and listing standards for the product class that 
would include the new derivative securities product, and the SRO has a 
surveillance program for the product class. The Exchange's proposed 
rules for the listing and trading of ETFs pursuant to Rule 19b-4(e) 
based on (1) certain indexes with components that include Fixed Income 
Securities or (2) indexes or portfolios described in exchange rules 
previously approved by the Commission as underlying benchmarks for 
derivative securities fulfill these requirements. Use of Rule 19b-4(e) 
by ISE 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.\33\
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    \31\ 15 U.S.C. 78s(b)(1).
    \32\ 17 CFR 240.19b-4.
    \33\ The Commission notes that failure of a particular ETF to 
satisfy the Exchange's generic listing standards does not preclude 
the Exchange from submitting a separate proposal under Rule 19b-4 to 
list and trade such ETF.
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    The Commission previously has approved generic listing standards of 
other exchanges that are substantially similar to those proposed here 
by ISE.\34\ This proposal does not appear to raise any novel regulatory 
issues. Therefore, the Commission finds that ISE's proposal is 
consistent with the Act on the same basis that it approved those 
earlier proposals.
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    \34\ See supra at note 8.
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    The Commission believes that ISE's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\35\ which sets forth Congress' 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for and transactions in 
securities. The value of a Fixed Income Index underlying an ETF listed 
pursuant to this proposal is required to be widely disseminated by one 
or more major market data vendors at least once a day. Likewise, the 
value of an underlying Combination Index is required to be widely 
disseminated by one or more major market data vendors at least once 
every 15 seconds during

[[Page 1246]]

the time when the corresponding ETF trades on the Exchange, provided 
that, with respect to the fixed income components of the Combination 
Index, the impact on the index is required to be updated only once each 
day.
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    \35\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Furthermore, the Commission believes that the proposed rules are 
reasonably designed to promote fair disclosure of information that may 
be necessary to price an ETF appropriately. If a broker-dealer or fund 
advisor is responsible for maintaining (or has a role in maintaining) 
the underlying index, such broker-dealer or fund advisor would be 
required to erect and maintain a ``firewall,'' in a form satisfactory 
to the Exchange, to prevent the flow of non-public information 
regarding the underlying index from the personnel involved in the 
development and maintenance of such index to others such as sales and 
trading personnel. The Commission also notes that current ISE Rules 
2123(a)(6) and 2131(e)(1)(ii) provide that, in connection with 
approving an ETF issuer for listing on the Exchange, the Exchange would 
obtain a representation from the ETF issuer that the NAV per share will 
be calculated each business day and made available to all market 
participants at the same time.
    The Commission also believes that the Exchange's trading halt rules 
are reasonably designed to prevent trading in an ETF when transparency 
is impaired. Proposed ISE Rule 2123(h) and current ISE Rule 
2131(e)(2)(ii) provide that, when the Exchange is the listing market, 
if the IIV or index value applicable to an ETF is not disseminated as 
required, the Exchange may halt trading during the day in which the 
interruption occurs. If the interruption continues, then the Exchange 
will halt trading no later than the beginning of the next trading day. 
Also, the Exchange may commence delisting proceedings in the event that 
the value of the underlying index is no longer calculated or available.
    The Commission further believes that the trading rules and 
procedures to which ETFs will be subject pursuant to this proposal are 
consistent with the Act. The definition of ``Equity Securities'' 
already includes Units and, by this proposed rule change, that 
definition would be expanded to also include PDRs.\36\ As a result, 
ETFs would be subject to ISE's previously approved rules governing the 
trading of Equity Securities.
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    \36\ See proposed ISE Rule 2100(c)(7).
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    The Exchange will implement written surveillance procedures for 
ETFs based on Fixed Income Indexes or Combination Indexes.\37\ In 
approving this proposal, the Commission relied on ISE's representation 
that its surveillance procedures are adequate to properly monitor the 
trading of ICUs listed pursuant to this proposal.
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    \37\ See proposed ISE Rule 2123(m) and proposed sections .02(g) 
and .03(b) to the Supplementary Material to ISE Rule 2131.
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Acceleration
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing thereof in the Federal Register. ISE's proposal 
is substantially similar to other proposals that have been approved by 
the Commission.\38\ The Commission does not believe that ISE's proposal 
raises any novel regulatory issues, and accelerated approval of the 
proposal will expedite the listing and trading of additional ETFs by 
the Exchange, subject to consistent and reasonable standards. 
Therefore, the Commission finds good cause, consistent with Section 
19(b)(2) of the Act,\39\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \38\ See supra at note 8.
    \39\ 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,\40\ that the proposed rule change (SR-ISE-2007-65), as modified by 
Amendment No. 1 thereto, be, and it hereby is, approved on an 
accelerated basis.
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    \40\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E7-25652 Filed 1-4-08; 8:45 am]

BILLING CODE 8011-01-P
