[Federal Register Volume 72, Number 14 (Tuesday, January 23, 2007)]
[Notices]
[Pages 2916-2920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-870]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55102; File No. SR-NYSEArca-2006-63]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change and 
Amendment Nos. 1 and 2 Thereto to Trade iShares[supreg] Lehman Bond 
Funds Pursuant to Unlisted Trading Privileges

January 12, 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 September 20, 2006, the NYSE Arca, Inc. (the ``Exchange''), through 
its wholly owned subsidiary, NYSE Arca Equities, Inc. (``NYSE Arca 
Equities''), 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. 
The Exchange submitted Amendment No. 1 to the proposed rule change on 
January 8, 2007, which replaces the original filing in its entirety. On 
January 12, 2007, the Exchange submitted Amendment No. 2 to the 
proposed rule change.\3\ The

[[Page 2917]]

Commission is publishing this notice to solicit comment on the 
proposal, as amended, from interested persons and to approve the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 clarified that Amendment No. 1 replaced the 
original filing in its entirety and revised the statutory basis 
section of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through NYSE Arca Equities, has proposed to trade 
shares (``Shares'') of the following Index Funds (``Funds'') pursuant 
to unlisted trading privileges (``UTP'') based on NYSE Arca Equities 
Rule 5.2(j)(3): (1) iShares[supreg] Lehman Short Treasury Bond Fund; 
(2) iShares Lehman 3-7 Year Treasury Bond Fund; (3) iShares Lehman 10-
20 Year Treasury Bond Fund; (4) iShares Lehman 1-3 Year Credit Bond 
Fund; (5) iShares Lehman Intermediate Credit Bond Fund; (6) iShares 
Lehman Credit Bond Fund; (7) iShares Lehman Intermediate Government/
Credit Bond Fund; and (8) iShares Lehman Government/Credit Bond Fund. 
The text of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and http://www.nysearca.com.

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

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

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

1. Purpose
    Under NYSE Arca Equities Rule 5.2(j)(3), the Exchange may propose 
to list or trade pursuant to UTP ``Investment Company Units'' 
(``ICUs''). The Exchange proposes to trade pursuant to UTP the Shares 
of the Funds under NYSE Arca Equities Rule 5.2(j)(3).\4\ The Commission 
has approved a proposed rule change by the New York Stock Exchange LLC 
(the ``NYSE'') to list and trade the Shares of the Funds.\5\
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    \4\ NYSE Arca Equities Rule 5.2(j)(3)(A)(i)(a) allows the 
listing and trading of ICUs issued by a registered investment 
company that holds securities comprising, or otherwise based on or 
representing an interest in, an index or portfolio or securities.
    \5\ See Securities Exchange Act Release No. 54916 (December 12, 
2006), 71 FR 76008 (December 19, 2006) (SR-NYSE-2006-70) (the ``NYSE 
Proposal'').
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    The Funds will be based on the following indexes, respectively: (1) 
Lehman Brothers Short U.S. Treasury Index; (2) Lehman Brothers 3-7 Year 
U.S. Treasury Index; (3) Lehman Brothers 10-20 Year U.S. Treasury 
Index; (4) Lehman Brothers 1-3 Year U.S. Credit Index; (5) Lehman 
Brothers Intermediate U.S. Credit Index; (6) Lehman Brothers U.S. 
Credit Index; (7) Lehman Brothers Intermediate U.S. Government/Credit 
Index; and (8) Lehman Brothers U.S. Government/Credit Index.
    The indexes are referred to herein collectively as ``Indexes'' or 
``Underlying Indexes,'' which are described in detail in the NYSE 
Proposal. Each Fund is an ``index fund'' that seeks investment results 
that correspond generally to the price and yield performance, before 
fees and expenses, of its Underlying Index developed by Lehman.

Availability of Information Regarding iShares and the Underlying Index

    Quotations for and last sale information regarding the Shares are 
disseminated through the Consolidated Tape System (``CTS''). The NYSE 
Proposal states that, on each business day the list of names and amount 
of each security constituting the current Deposit Securities \6\ of the 
Fund Deposit \7\ and the Balancing Amount \8\ effective as of the 
previous business day will be made available. An amount per iShare 
representing the sum of the estimated Balancing Amount effective 
through and including the previous business day, plus the current value 
of the Deposit Securities in U.S. dollars, on a per iShare basis (the 
``Intra-day Optimized Portfolio Value'' or ``IOPV'') will be calculated 
by an independent third party (the ``Value Calculator''), such as 
Bloomberg L.P., every 15 seconds during the Exchange's regular trading 
hours and disseminated every 15 seconds on the Consolidated Tape. 
Because NSCC does not disseminate the new basket amount to market 
participants until approximately 6 p.m. to 7 p.m. ET, an updated IOPV 
is not possible to calculate during the Exchange's late trading session 
(4:15 p.m. to 8 p.m. ET).
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    \6\ Deposit Securities are the in-kind deposit of a designated 
portfolio of securities, which constitute a substantial replication, 
or a portfolio sampling representation, of the securities in the 
relevant Fund's Underlying Index.
    \7\ The Fund Deposit represents the minimum initial and 
subsequent investment amount for a Creation Unit.
    \8\ Balancing Amount, together with the Deposit Securities, 
constitute the ``Fund Deposit.''
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    The NYSE Proposal indicates that the NYSE intends to disseminate a 
variety of data with respect to each Fund on a daily basis by means of 
the Consolidated Tape Association and CQ High Speed Lines; information 
with respect to recent NAV, shares outstanding, estimated cash amount 
and total cash amount per Creation Unit \9\ will be made available each 
trading day.
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    \9\ Shares of the Funds will be issued on a continuous offering 
basis in groups of 50,000 to 100,000 iShares (as specified for each 
Fund), or multiples thereof. These ``groups'' of shares are called 
``Creation Units.''
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    The Underlying Indexes are calculated once each trading day, and 
are available from major market data vendors. The NAV for each Fund 
will be calculated and disseminated daily in a number of places, 
including iShares.com and on the Consolidated Tape. In the NYSE 
Proposal, the NYSE stated that it will receive a representation from 
the Advisor to the Funds that the NAV will be calculated and made 
available to all market participants at the same time.
    In addition, the Web site for the iShare[supreg] Trust (``Trust''), 
which will be publicly accessible at no charge, will contain the 
following information, on a per iShare basis, for each Fund: (a) The 
prior business day's NAV and the mid-point of the bid-ask price and a 
calculation of the premium or discount of such price against such NAV; 
and (b) data in chart format displaying the frequency distribution of 
discounts and premiums of the Bid/Ask Price against the NAV, within 
appropriate ranges, for each of the four previous calendar quarters.

UTP Trading Criteria

    The Exchange represents that it will cease trading the Shares of a 
Fund if: (a) The listing market stops trading the Shares because of a 
regulatory halt similar to a halt based on NYSE Arca Equities Rule 
7.12; or (b) the listing market delists the Shares. Additionally, the 
Exchange may cease trading the Shares if such other event shall occur 
or condition exists which in the opinion of the Exchange makes further 
dealings on the Exchange inadvisable. UTP trading in the Shares is also 
governed by the trading halts provisions of NYSE Arca Equities Rule 
7.34 relating to temporary interruptions in the calculation or wide 
dissemination of the Intraday Indicative Value (``IOPV'') or the value 
of the underlying index.

[[Page 2918]]

Trading Rules

    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. until 8 p.m. ET, even if the IOPV 
is not disseminated from 4:15 p.m. to 8 p.m. ET.\10\ The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. The minimum trading increment for Shares on the 
Exchange will be $0.01.
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    \10\ The Exchange relies on the listing market to monitor 
dissemination of the IOPV during the Exchange's core trading session 
(9:30 a.m. to 4:15 p.m. ET). Currently the official index sponsors 
for the Funds' indexes do not calculate updated index values during 
the Exchange's late trading session; however, if the index sponsors 
did so in the future, the Exchange will not trade this product 
unless such official index value is widely disseminated.
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    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. Trading may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent to 
which trading is not occurring in the securities comprising an 
Underlying Index of a Fund, or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. In addition, trading in Shares will be subject to 
trading halts caused by extraordinary market volatility pursuant to the 
Exchange's ``circuit breaker'' rule \11\ or by the halt or suspension 
of trading of the underlying securities. See ``UTP Trading Criteria'' 
above for specific instances when the Exchange will cease trading the 
Shares.
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    \11\ See NYSE Arca Equities Rule 7.12.
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    Shares will be deemed ``Eligible Listed Securities,'' as defined in 
NYSE Arca Equities Rule 7.55, for purposes of the Intermarket Trading 
System (``ITS'') Plan and therefore will be subject to the trade 
through provisions of NYSE Arca Equities Rule 7.56, which require that 
ETP Holders avoid initiating trade-throughs for ITS securities.

Surveillance

    The Exchange will utilize its existing surveillance procedures 
applicable to ICUs to monitor trading of the Funds. Surveillance 
procedures applicable to trading in the proposed Shares are comparable 
to those applicable to other ICUs currently trading on the Exchange. 
The Exchange represents that these surveillance procedures are adequate 
to properly monitor the trading of the Funds. The Exchange's current 
trading surveillances focus 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.

Information Bulletin

    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an Information Bulletin of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Bulletin will discuss the following: (1) The procedures for 
purchases and redemptions of Shares in Creation Unit Aggregations (and 
that Shares are not individually redeemable); (2) NYSE Arca Equities 
Rule 9.2(a),\12\ which imposes a duty of due diligence on its ETP 
Holders to learn the essential facts relating to every customer prior 
to trading the Shares; (3) how information regarding the IOPV is 
disseminated; (4) the requirement that ETP Holders deliver a prospectus 
to investors purchasing newly issued Shares prior to or concurrently 
with the confirmation of a transaction; and (5) trading information.
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    \12\ NYSE Arca Equities Rule 9.2(a) (``Diligence as to 
Accounts'') provides that ETP Holders, before recommending a 
transaction, must have reasonable grounds to believe that the 
recommendation is suitable for the customer based on any facts 
disclosed by the customer as to his other security holdings and as 
to his financial situation and needs. Further, with a limited 
exception, prior to the execution of a transaction recommended to a 
non-institutional customer, ETP Holders shall make reasonable 
efforts to obtain information concerning the customer's financial 
status, tax status, investment objectives, and any other information 
that they believe would be useful to make a recommendation. See 
Securities Exchange Act Release No. 54045 (June 26, 2006), 71 FR 
37971 (July 3, 2006) (SR-PCX-2005-115).
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    In addition, the Information Bulletin will advise ETP Holders, 
prior to the commencement of trading, of the prospectus delivery 
requirements applicable to the Funds.\13\ The Exchange notes that 
investors purchasing Shares directly from the Trust will receive a 
prospectus. ETP Holders purchasing Shares from the Trust for resale to 
investors will deliver a prospectus to such investors. The Information 
Bulletin will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
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    \13\ See In the Matter of iShares, Inc., Investment Company Act 
Release No. 25623 (June 25, 2002), which permits dealers to sell 
Shares in the secondary market unaccompanied by a statutory 
prospectus when prospectus delivery is not required by the 
Securities Act of 1933. Any product description used in reliance on 
the Section 24(d) exemptive order will comply with all 
representations and conditions set forth in the order.
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    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses described in the Registration 
Statement. The Information Bulletin will also disclose that the NAV for 
the Shares will be calculated shortly after 4 p.m. ET each trading day.
    The Commission has granted the Funds an exemption from certain 
prospectus delivery requirements under Section 24(d) of the Investment 
Company Act of 1940 (``1940 Act'').\14\ Any product description used in 
reliance on the Section 24(d) exemptive order will comply with all 
representations made and all conditions contained in the Funds' 
application for orders under the 1940 Act.\15\
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    \14\ 15 U.S.C. 80a-24(d).
    \15\ See In the Matter of iShares, Inc., Investment Company Act 
Release No. 25623 (June 25, 2002).
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    In connection with the trading of the Funds, the Exchange would 
inform ETP Holders in an Information Circular of the special 
characteristics and risks associated with trading the Funds, including 
how the Funds are created and redeemed, the prospectus or product 
description delivery requirements applicable to the Funds, applicable 
Exchange rules, how information about the value of the underlying index 
is disseminated, and trading information.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \16\ in general and Section 6(b)(5) of the 
Act \17\ in particular in that it is designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments and perfect the mechanisms of a free and open market 
and to protect investors and the public interest.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    In addition, the proposed rule change is consistent with Rule 12f-5 
\18\ under the Act because it deems the Shares to be equity securities, 
thus rendering the Shares subject to the Exchange's rules governing the 
trading of equity securities.
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    \18\ 17 CFR 240.12f-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 
impose any burden on competition that is not

[[Page 2919]]

necessary or appropriate in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received 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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#2e5c5b424b034d4143434b405a5d6e5d4b4d00494158"><span class="__cf_email__" data-cfemail="443631282169272b2929212a3037043721276a232b32">[email protected]</span></a>. Please include 
File No. SR-NYSEArca-2006-63 on the subject line.

Paper Comments

    <bullet> 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 No. SR-NYSEArca-2006-63. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal 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 No. SR-NYSEArca-2006-63 and should be submitted on or before 
February 13, 2007.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\19\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\20\ which requires that an 
exchange have rules designed, among other things, to promote just and 
equitable principles of trade, 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. The Commission 
believes that this proposal will benefit investors by increasing 
competition among markets that trade Shares of the Funds.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the proposal is consistent 
with Section 12(f) of the Act,\21\ which permits an exchange to trade, 
pursuant to UTP, a security that is listed and registered on another 
exchange.\22\ The Commission notes that it previously approved the 
listing and trading of the Shares on the NYSE.\23\ The Commission also 
finds that the proposal is consistent with Rule 12f-5 under the 
Act,\24\ which provides that an exchange shall not extend UTP to a 
security unless the exchange has in effect a rule or rules providing 
for transactions in the class or type of security to which the exchange 
extends UTP. The Exchange has represented that it meets this 
requirement because it deems the Shares to be an equity security, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.
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    \21\ 15 U.S.C. 78l(f).
    \22\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally 
prohibits a broker-dealer from trading a security on a national 
securities exchange unless the security is registered on that 
exchange pursuant to Section 12 of the Act. Section 12(f) of the Act 
excludes from this restriction trading in any security to which an 
exchange ``extends UTP.'' When an exchange extends UTP to a 
security, it allows its members to trade the security as if it were 
listed and registered on the exchange even though it is not so 
listed and registered.
    \23\ See NYSE Proposal, supra note 5.
    \24\ 17 CFR 240.12f-5.
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    The Commission further believes that the proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\25\ which sets forth 
Congress's 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. Quotations for and last sale information regarding the 
Shares are disseminated through the Consolidated Quotation System. 
Furthermore, a Value Calculator disseminates the value of IOPV every 15 
seconds. Because of the importance of this information, if a Value 
Calculator ceases to maintain or to calculate the value of the IOPV or 
if the value of the index ceases to be widely available, NYSE Arca 
Equities Rule 7.34 would require the Exchange to cease trading the 
Shares.
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    \25\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Finally, the Commission notes that, if the Shares should be 
delisted by NYSE, the original listing exchange, the Exchange would no 
longer have authority to trade the Shares pursuant to this order.
    In support of this proposal, the Exchange has made the following 
representations:
    1. The Exchange's surveillance procedures are adequate to address 
any concerns associated with the trading of the Shares on a UTP basis.
    2. The Exchange will distribute an information circular to its ETP 
Holders prior to the commencement of trading of the Shares on the 
Exchange that explains the terms, characteristics, and risks of trading 
the Shares.
    3. The Exchange will require ETP Holders to deliver a prospectus to 
investors purchasing newly issued Shares and will note this prospectus 
delivery requirement in the information circular.

This approval order is conditioned on the Exchange's adherence to these 
representations.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. As noted previously, the Commission previously found 
that the listing and trading of the Shares on NYSE is consistent with 
the Act.\26\ The Commission presently is not aware of any regulatory 
issue that should cause it to revisit that earlier finding or preclude 
the trading of the Shares on the Exchange pursuant to UTP. Therefore, 
accelerating approval of this proposal should benefit investors by 
creating, without undue delay, additional

[[Page 2920]]

competition in the market for the Shares.
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    \26\ See NYSE Proposal, supra note 5.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-NYSEArca-2006-63), as 
modified by Amendment Nos. 1 and 2, be and hereby is, approved on an 
accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-870 Filed 1-22-07; 8:45 am]
BILLING CODE 8011-01-P


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