Document ID: SEC-2006-0828-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-06-28T04:00Z

[Federal Register: June 28, 2006 (Volume 71, Number 124)]
[Notices]               
[Page 36850-36856]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn06-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54026; File No. SR-PCX-2005-115]

 
Self-Regulatory Organizations; Pacific Exchange, Inc. (n/k/a NYSE 
Arca, Inc.); Notice of Filing of a Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto Relating and Order Granting Partial Accelerated 
Approval To Trading Shares of the Funds of the ProShares Trust Pursuant 
to Unlisted Trading Privileges

June 21, 2006.
    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 October 11, 2005, the Pacific Exchange, Inc. (n/k/a NYSE Arca, Inc.) 
(the ``Exchange''), through its wholly owned subsidiary PCX Equities, 
Inc. (n/k/a/ NYSE Arca Equities, Inc.) (``NYSE Arca Equities'' or the 
``Corporation''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange.\3\ The 
Exchange filed Amendment No. 1 to the proposed rule change on November 
21, 2005.\4\ The Exchange filed Amendment No. 2 to the proposed rule 
change on May 5, 2006.\5\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons and is partially approving the proposal, as amended, 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 6, 2006, the Pacific Exchange, Inc. (``PXC''), 
filed with the Commission a proposed rule change, which was 
effective upon filing, to change the name of the Exchange, as well 
as several other related entities, to reflect Archipelago's recent 
acquisition of PCX and the merger of the NYSE with Archipelago. See 
File No. SR-PCX-2006-24. All references herein have been changed to 
reflect these transactions. Telephone Conference between Lisa 
Dallmer, Direct, NYSE Arca Equities, Inc., and Florence E. Harmon, 
Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, on June 21, 2006.
    \4\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \5\ Amendment No. 2 replaced and superseded Amendment No. 1 in 
its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly owned subsidiary NYSE Arca 
Equities, proposes to trade shares (``Shares'') of the following twelve 
funds of the ProShares Trust (f/k/a xtraShares Trust) (the ``Trust''): 
Ultra 500 Fund, Ultra 100 Fund, Ultra 30 Fund, Ultra Mid-Cap 400

[[Page 36851]]

Fund, Short 500 Fund, Short 100 Fund, Short 30 Fund, Short Mid-Cap 400 
Fund, Ultra Short 500 Fund, Ultra Short 100 Fund, Ultra Short 30 Fund 
and Ultra Short Mid-Cap 400 Fund (the ``Funds'') pursuant to unlisted 
trading privileges (``UTP'') and to amend NYSE Arca Equities Rule 
9.2(a) (``Diligence as to Accounts'') to accommodate the trading of the 
Shares. While the Commission is publishing the Exchange's entire 
proposal for notice, the Commission is only approving, on an 
accelerated basis, the portion of the proposal pertaining to the 
trading, pursuant to UTP, of the Ultra 500 Fund, Ultra 100 Fund, Ultra 
30 Fund, Ultra Mid-Cap 400 Fund, Short 500 Fund, Short 100 Fund, Short 
30 Fund, Short Mid-Cap 400 Fund and the portion of the proposal 
pertaining to NYSE Arca Equities Rule 9.2(a) because the four remaining 
funds have not been approved for trading on the primary listing 
exchange, the American Stock Exchange LLC (``AMEX'').
    The text of the proposed rule change appears below. Additions are 
in italic.
* * * * *
Rules of NYSE Arca Equities, Inc.
Rule 9
Conducting Business With The Public
    Rule 9.2(a).
Diligence As To Accounts
    (1) Every ETP Holder, through a general partner, a principal 
executive officer or a designated authorized person, shall use due 
diligence to learn the essential facts relative to every customer, 
every order, every account accepted or carried by such ETP Holder and 
every person holding power of attorney over any account accepted or 
carried by such ETP Holder.
    (2) In recommending to a customer the purchase, sale or exchange of 
any security, an ETP Holder shall have reasonable grounds for believing 
that the recommendation is suitable for such customer upon the basis of 
any facts disclosed by the customer as to his other security holdings, 
financial situation and needs. Prior to the execution of a transaction 
recommended to a non-institutional customer (defined below), other than 
transactions with customers where investments are limited to money 
market mutual funds, an ETP Holder shall make reasonable efforts to 
obtain information concerning the customer's financial status, tax 
status, investment objectives, and such other information used or 
considered to be reasonable by such ETP Holder or registered 
representative in making recommendations to the customer.
    (3) For purposes of this Rule, the term ``non-institutional 
customers'' shall mean a customer that does not qualify as an 
``institutional account.'' The term ``institutional account'' means the 
account of a bank, savings and loan association, insurance company, 
registered investment company, investment adviser registered either 
with the Securities and Exchange Commission under Section 203 of the 
Investment Advisers Act of 1940 or with a state securities commission 
(or any agency or office performing like functions), or any other 
natural person or entity with total assets of at least $50 million.
* * * * *

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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

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

I. Purpose
    Under NYSE Area Equities Rule 5.2(j)(3), the Exchange may propose 
to list and/or trade pursuant to UTP ``Investment Company Shares.'' \6\ 
With this filing, the Exchange proposes to trade pursuant to UTP the 
Shares of the Funds under NYSE Arca Equities Rule 5.2(j)(3). The 
Exchange represents that the Shares, which seek to provide investment 
results that exceed the daily performance of a specified stock index by 
a specified percentage or that seek to provide investment results that 
correspond to the inverse or opposite of the index's daily performance 
or twice the inverse or opposite (-200%) of the index's daily 
performance, qualify as Investment Company shares as defined in NYSE 
Arca Equities Rule 5.2(j)(3).\7\ To accommodate the trading of the 
Shares, the Exchange is proposing to amend NYSE Arca Equities Rule 
9.2(a) (``Diligence as to Accounts''), as more fully described below 
under the heading ``Information Bulletin.'' The Commission previously 
approved the original listing and trading of the Shares of eight of the 
Funds on the American Stock Exchange LLC (``Amex'').\8\ A proposal to 
list and trade the Shares of the remaining four Funds has been filed 
with the Commission by Amex, but has not yet been approved by the 
Commission.\9\
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    \6\ In October 1999, the Commission approved NYSE Arca Equities 
Rule 5.2(j)(3), which sets forth the rules related to listing and 
trading criteria for Investment Company Shares. See Securities 
Exchange Act Release No. 41983 (October 6, 1999), 64 FR 56008 
(October 15, 1999) (SR-PCX-1998-29). In July 2001, the Commission 
also approved the Exchange's generic listing standards for listing 
and trading, or the trading pursuant to UTP, of Investment Company 
Shares under NYSE Arca Equities Rule 5.2(j)(3). See Securities 
Exchange Act Release No. 44551 (July 12, 2001), 66 FR 37716 (July 
19, 2001) (SR-PCX-2001-14). The definition of an Investment Company 
Unit is set forth in NYSE Arca Equities Rule 5.1(b)(15), which 
provides that an Investment Company Unit is a security representing 
an interest in a registered investment company that could be 
organized as a unit investment trust, an open-end management 
investment company or a similar entity.
    \7\ NYSE Arca Equities Rule 5.2(j)(3)(A)(i)(a) allows the 
listing and trading of Investment Company Shares 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. The Exchange represents that the Shares 
qualify under NYSE Arca Equities Rule 5.2(j)(3) because the Shares 
are being registered under the Investment Company Act of 1940 (the 
``1940 Act'') and are ``otherwise based on'' an index.
    \8\ See Securities Exchange Act Release No. 34-52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (SR-SMEX-2004-62) (the ``Amex 
Order'') (approving the listing and trading on Amex of the following 
eight Funds: Ultra 500 Fund, Ultra 100 Fund, Ultra 30 Fund, Ultra 
Mid-Cap 400 Fund ; Short 500 Fund, Short 100 Fund, Ultra 100 Fund, 
Ultra 100 Fund, Ultra 30 Fund, Ultra Mid-Cap 400 Fund; Short 500 
Fund, Short 100 Fund, Short 30 Fund and Short Mid-Cap 400 Fund). See 
also Securities Exchange Act Release No. 52197 (August 2, 2005), 70 
FR 46228 August 9, 2005) (SR-AMEX-2004-62) (the ``Amex Notice'').
    \9\ See SR-AMEX-2006-41 (April 28, 2006) (the ``Amex Proposal'') 
(seeking accelerated approval to list and trade on Amex the Ultra 
Short 500 Fund, Ultra Short 100 Fund, Ultra Short 30 Fund and Ultra 
short Mid-Cap 400 Fund).
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    Four of the Funds--the Ultra 500, Ultra 100, Ultra 30, and Ultra 
Mid-Cap 400 Funds (the ``Bullish Funds'')--seek daily investment 
results, before fees and expenses, that correspond to twice (200%) the 
daily performance of the Standard & Poor's 500[supreg] Index (``S&P 
500''), the Nasdaq-100[supreg] Index (``Nasdaq 100''), the Dow Jones 
Industrial Average\SM\ (``DJIA''), and the S&P MidCap400\TM\ Index 
(``S&P Midcap''), respectively. Each such index is referred to herein 
individually as an ``Underlying Index'' or ``Index'' and collectively 
as ``Underlying Indexes,''\10\Each of these Funds if successful in 
meeting its objective, should gain, on a percentage basis,

[[Page 36852]]

approximately twice as much as the Fund's Underlying Index when the 
prices of the securities in such Index increase on a given day, and 
should lose approximately twice as much when such prices decline on a 
given day.
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    \10\ Exchange-traded funds based on the Underlying Indexes are 
traded on the NYSE Arca Marketplace. The Statement of Additional 
Information (``SAI'') for the Funds discloses that each Fund 
reserves the right to substitute a different Underlying Index under 
certain circumstances. In the event a Fund substitutes a different 
index, the Exchange will file a new Rule 19b-4 filing with the 
Commission if the listing market does so.
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    In addition, four Funds-- the Short 500, Short 100, Short 30, and 
Short Mid-Cap 400 Funds (the ``Initial Bearish Funds'')--seek daily 
investment results, before fees and expenses, which correspond to the 
inverse or opposite of the daily performance (-100%) of the S&P 500, 
Nasdaq 100, DJIA and S&P MidCap, respectively. If each of these Funds 
is successful in meeting its objective, the net asset value (the 
``NAV'') \11\ of shares of each Fund should increase approximately as 
much, on a percentage basis, as the respective Underlying Index 
decreases when the prices of the securities in the Index decline on a 
given day; or should decrease approximately as much, on a percentage 
basis, as the respective Index gains when the prices of the securities 
in the index rise on a given day.
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    \11\ The NAV of each Fund is calculated and determined each 
business day at the close of regular trading at the Amex, typically 
4 p.m. eastern time (``ET'').
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    The remaining four Funds--the Ultra Short 500, Ultra Short 100, 
Ultra Short 30, and Ultra Short Mid-Cap 400 Funds (the ``Additional 
Bearish Funds'')--seek daily investment results, before fees and 
expenses, that correspond to twice (or two times) the inverse or 
opposite (-200%) of the daily performance of the S&P 500, Nasdaq 100, 
DJIA and S&P MidCap, respectively. If each of these Funds is successful 
in meeting its objective, the net asset value (the ``NAV'') of the 
Shares of each Fund should increase approximately twice as much, on a 
percentage basis, as the respective Underlying Index loses when the 
prices of the securities in the Index decline on a given day, or should 
decrease approximately twice as much as the respective Underlying Index 
gains when the prices of the securities in the Index rise on a given 
day. The ``Initial Bearish Funds'' and the ``Additional Bearish Funds'' 
are referred to herein collectively as the ``Bearish Funds.''
    The Shares represent beneficial ownership interests in the net 
assets of the Funds, less expenses. The Bullish Funds generally will 
hold at least 85% of their assets in the component equity securities 
(``Equity Securities'') of the relevant Underlying Index. The remainder 
of assets will be devoted to Financial Instruments (as defined below) 
that are intended to create the additional needed exposure to such 
Underlying Index necessary to pursue the Fund's investment objective. 
The Bearish Funds will not invest directly in the component securities 
of the relevant Underlying Index, but instead, will create short 
exposure to such Index. Normally 100% of the value of the portfolios of 
each Bearish Fund will be devoted to Financial Instruments (defined 
below) and money market instruments, including U.S. government 
securities and repurchase agreements (the ``Money Market 
Instruments'').
    The financial instruments to be held by any of the Bullish or 
Bearish Funds may include stock index futures contracts, options on 
futures contracts, options on securities and indices, equity caps, 
collars and floors as well as swap agreements, forward contracts, 
repurchase agreements and reverse repurchase agreements (the 
``Financial Instruments''), and Money Market Instruments. ProShare 
Advisors LLC is the investment adviser (the ``Advisor'') to each Fund.
    (a) The Shares. A description of the Trust, the operation of the 
Funds and the creation and redemption process for the Shares is set 
forth in the Amex Notice, the Amex Order and the Amex Proposal. To 
summarize, issuances of Shares will be made only in aggregations of at 
least 50,000 Shares or multiples thereof (``Creation Shares'' or 
``Creation Unit Aggregations''). The Funds will issue and redeem the 
Shares on a continuous basis, by or through participants that have 
entered into participant agreements (each, an ``Authorized 
Participant'') with the Distributor.
    Persons purchasing Creation Unit Aggregations from the Bullish 
Funds do so through an ``in-kind'' process in which a basket of 
securities (the ``Deposit Securities''), together with an amount of 
cash (the ``Cash Balancing Amount''), plus the applicable transaction 
fee is deposited with the Fund. The redeeming Authorized Participant 
deposits Bullish Fund Shares in Creation Unit Aggregations in exchange 
for a basket of securities (the ``Redemption Securities''), which in 
most cases will be the same as the Deposit Securities required of 
investors purchasing Creation Shares on the same day. The redeeming 
Authorized Participant may receive from or pay to the Fund a Cash 
Balancing Amount and also must pay to the Fund a transaction fee. A 
Fund has the right to require creation payments or a right to make 
redemption payments in cash, in kind, or a combination of each.
    The Bearish Funds will be purchased and redeemed entirely for cash 
(``All-Cash Payments''). The use of an All-Cash Payment for the 
purchase and redemption of Creation Unit Aggregations of the Bearish 
Funds is due to the limited transferability of Financial Instruments. 
The Exchange believes that Bearish Fund Shares will not trade at a 
material discount or premium to the underlying securities held by a 
Fund based on potential arbitrage opportunities.\12\
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    \12\ According to the Amex Order, in their 1940 Act Application, 
the Applicants stated that they do not believe that All-Cash 
Payments will affect arbitrage efficiency. This is because the 
Applicants believe it makes little difference to an arbitrageur 
whether Creation Unit Aggregations are purchased in exchange for a 
basket of securities or cash. The important function of the 
arbitrageur is to bid the share price of any Fund up or down until 
it converges with the NAV. Applicants state that this can occur 
regardless of whether the arbitrageur is allowed to create in cash 
or with a Deposit Basket. In either case, the arbitrageur can 
effectively hedge a position in a Fund in a variety of ways, 
including the use of market-on-close contracts to buy or sell the 
underlying Equity Securities and/or Financial Instruments.
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    NAV per Share of each Fund is computed by dividing the value of the 
net assets of such Fund (i.e., the value of its total assets less total 
liabilities) by its total number of Shares outstanding. Expenses and 
fees are accrued daily and taken into account for purposes of 
determining NAV. The NAV of each Fund is calculated by the accounting 
agent for the Fund and determined each business day at the close of 
regular trading of the NYSE (ordinarily 4:00 p.m. New York time). More 
information regarding the calculation of the NAV is set forth in the 
Amex Order.
    (b) Dissemination of Information About the Shares and the 
Underlying Indexes. The Trust's or Advisor's Web site, which is and 
will be publicly accessible at no charge (and to which the Exchange ill 
provide a hyperlink on its Web site), will contain the following 
information for each Fund's Shares: (i) The prior business day's 
closing NAV, the reported closing price, and a calculation of the 
premium or discount of such price in relation to the closing NAV; (ii) 
data for a period covering at least the four previous calendar quarters 
(or the life of a Fund, if shorter) indicating how frequently each 
Fund's Shares traded at a premium or discount to NAV based on the 
reported closing price and NAV, and the magnitude of such premiums and 
discounts; (iii) its Prospectus and Product Description; and (iv) other 
quantitative information such as daily trading volume.
    According to the Amex Order, the Amex will disseminate for each 
Fund on a daily basis by means of Consolidated Tape Association 
(``CTA'') and CQ High Speed Lines information with respect to in 
Indicative Intra-Day Value (the ``IIV'') (discussed below),

[[Page 36853]]

recent NAV, shares outstanding, estimated cash amount, and total cash 
amount per Creation Unit. The Amex will make available on its Web site 
(http://www.amex.com) daily trading volume, closing price, the NAV, and 

final dividend amounts, if any, to be paid for each Fund. The closing 
prices of the Deposit Securities are readily available from, as 
applicable, exchanges, automated quotation systems, published or other 
public sources, or on-line information services such as Bloomberg or 
Reuters.
    Each Fund's total portfolio composition will be disclosed on the 
Web site of the trust (http://www.profunds.com). The Trust expects that 

Web site disclosure of portfolio holdings will be made daily and will 
include, as applicable, the names and number of shares held of each 
specific Equity Security, the specific types of Financial Instruments 
and characteristics of such instruments, cash equivalents and amount of 
cash held in the portfolio of each Fund. This public Web site 
disclosure of the portfolio composition of each Fund will coincide with 
the disclosure by the Advisor of the ``IIV File'' and the ``PCF 
File''.\13\ Therefore, the same portfolio information (including 
accrued expenses and dividends) will be provided on the public Web site 
as well as in the IIV File and PCF File provided to authorized 
Participants. The format of the public Web site disclosure and the IIV 
and PCF Files will differ because the public Web site will list all 
portfolio holdings, whereas the IIV and PCF Files will similarly 
provide the portfolio holdings but in a format appropriate for 
Authorized Participants, i.e., the exact components of a Creation Unit. 
Accordingly, all investors will have access to the current portfolio 
composition of each Fund through the Trust Web site at http://www.profunds.com
.

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    \13\ According the Amex Order, at the end of each business day, 
the Trust will create a portfolio composition file (``PCF'') for 
each Fund, which it will transmit via JPMorgan Chase Bank (the 
``Index Receipt Agent'') to the National Securities Clearing 
Corporation (``NSCC'') before the open of business the next business 
day. Because the NSCC's system for the receipt and dissemination to 
its participants of the PCF is not currently capable of processing 
information with respect to Financial Instruments, the Advisor has 
developed an ``IIV File,'' which it will use to disclose the Fund's 
holdings of Financial Instruments. The IIV File will contain, for 
each Bullish Fund (to the extent that it holds Financial 
Instruments) and Bearish Fund, information sufficient by itself or 
in connection with the PCF File and other available information for 
market participants to calculate a Fund's IIV and effectively 
arbitrage the Fund. The information in the PCF File and the IIV File 
will be available to all participants in the NSCC system.
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    Beneficial owners of Shares (``Beneficial Owners'') will receive 
all of the statements, notices, and reports required under the 1940 Act 
and other applicable laws. They will receive, for example, annual and 
semi-annual fund reports, written statements accompanying dividend 
payments, proxy statements, annual notifications detailing the tax 
status of fund distributions, and Form 1099-DIVs. Some of these 
documents will be provided to Beneficial Owners by their brokers, while 
others will be provided by the Fund through the brokers.
    The daily closing index value and the percentage change in the 
daily closing index value for each Underlying Index will be publicly 
available on various Web sites, e.g., http://www.bloomberg.com. Data 

regarding each Underlying Index is also available from the respective 
index provider to subscribers. Several independent data vendors also 
package and disseminate index data in various value-added formats 
(including vendors displaying both securities and index levels and 
vendors displaying index levels only). The value of each Underlying 
Index will be updated intra-day on a real time basis as its individual 
component securities change in price. According to the Amex Order, 
these intra-day values of each Underlying Index will be disseminated 
every 15 seconds throughout the trading day by the Amex or another 
organization authorized by the relevant Underlying Index provider.
    In order to provide updated information relating to each Fund for 
use by investors, professionals, and persons wishing to create or 
redeem Shares, the Amex will disseminate through the facilities of the 
CTA from 9:30 a.m. ET to 4:15 p.m. ET: (i) continuously, the market 
value of a share; and (ii) every 15 seconds, a calculation of the IIV 
as calculated by a third-party calculator (the ``IIV Calculator'') 
currently expected to be Amex, according to the Amex Order. Comparing 
these two figures helps an investor to determine whether, and to what 
extent, the Shares may be selling at a premium or a discount to NAV. 
Information regarding the calculation methodology for the IIV for the 
Bullish Funds and the Bearish Funds is set forth in the Amex Order.
    The IIV is designed to provide investors with a reference value 
that can be used in connection with other related market information. 
The IIV may not reflect the value of all securities included in the 
Underlying Index. In addition, the IIV does not necessarily reflect the 
precise composition of the current portfolio of securities held by each 
Fund at a particular point in time. Therefore, the IIV should not be 
viewed as a real time update of the NAV of a particular Fund which is 
calculated only once a day.
    (c) UTP Trading Criteria. The Exchange represents that it will 
cease trading the Shares of a Fund during the listing market's trading 
hours 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 a halt because the IIV or the value of the applicable Underlying 
Index is no longer available; or (b) the listing market delists the 
shares. Additionally, the Exchange may cease trading the Shares of a 
Fund if such other event shall occur or condition exists which in the 
opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    (d) 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 9:30 a.m. ET until 
8 p.m. ET, even if the IIV is not disseminated from 4:14 p.m. ET to 8 
p.m. ET.\14\ 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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    \14\ Because NSCC does not disseminate the new basket amount to 
market participant until approximately 6 p.m. to 7 p.m. ET, an 
updated IIV is not possible to calculate during the Exchange's late 
trading session. The Exchange also states that 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. Telephone Conference between Lisa Dallmer, 
Director, NYSE Arca Equities, Inc., and Florence E. Harmon, Senior 
Special Counsel, Division, Commission, on June 21, 2006.
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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 of a Fund. 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 a 
Underlying Index and/or the Financial Instruments 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

[[Page 36854]]

``circuit breaker'' rule\15\ or by the halt or suspension of trading of 
the underlying securities.\16\
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    \15\ See NYSE Arca Equities Rule 7.12.
    \16\ See ``UTP Trading Criteria'' above for specific instances 
when the Exchange will cease trading the Shares.
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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.
    (e) Surveillance. The Exchange intends to utilize its existing 
surveillance procedures applicable to derivative products to monitor 
trading in the Shares. The Exchange represents that these procedures 
are adequate to monitor Exchange trading of the Shares.
    The Exchange's 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.
    The Exchange is able to obtain information regarding trading in the 
Shares and the securities comprising the Underlying Indexes through ETP 
Holders in connection with such ETP Holders' proprietary or customer 
trades which they effect on any relevant market. In addition, the 
Exchange may obtain trading information via the Intermarket 
Surveillance Group (``ISG'') from other exchanges who 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.
    (f) 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), as amended herein and more fully 
described below, 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 IIV 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. 
Specifically, the proposed amendment to NYSE Arca Equities Rule 9.2(a), 
which will be discussed in the Information Bulletin as noted above, 
provides that ETP Holders, before recommending a transaction in the 
Shares, 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, the proposed rule amendment provides that 
prior to the execution of a transaction recommended to a non-
institutional customer, ETP Holders should 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.
    In addition, the Information Bulletin will advise ETP Holders, 
prior to the commencement of trading, of the prospectus delivery 
requirements applicable to the Funds.\17\ 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 relief, if granted, by the Commission or 
the staff from any rules under the Act.
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    \17\ According to the Amex Order, their 1940 Act Application 
included a request that the exemptive order also grant relief from 
Section 24(d) of the 1940 Act, which would permit 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 
Section 24(d) exemptive relief 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.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(5),\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 facilitating 
transaction in securities, to remove impediments and perfect the 
mechanisms of a free and open market, and, in general, to protect 
investors and the public interest.
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    \18\ 15 U.S.C. 78s(b).
    \19\ 15 U.S.C. 78s(b)(5).
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    In addition, the Exchange believes that the proposal is consistent 
with Rule 12f-5 under the Act \20\ because it deems the Shares to be 
equity securities, thus rendering the Shares subject to the Exchange's 
existing rules governing the trading of equity securities.
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    \20\ 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 necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-PCX-2005-115 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-PCX-2005-115. 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

[[Page 36855]]

with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of 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-PCX-
2005-115 and should be submitted on or before July 19, 2006.

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

    The Commission is approving the portion of the proposed rule 
change, as amended, pertaining to the trading pursuant to UTP of eight 
Funds: Ultra 500 Fund, Ultra 100 Fund Ultra 30 Fund, Ultra Mid-Cap 400 
Fund, Short 500 Fund, Short 100 Fund, Short 30 Fund, and Short Mid-Cap 
400 Fund (``Original Funds''). The Commission is also approving the 
Exchange's Rule 9.2(a) with respect to ``Diligence to Accounts.'' With 
regard to the trading pursuant to UTP of the Original Funds and the 
implementation of Rule 9.2(a) ``Diligence to Accounts,'' the Commission 
finds that the proposed rule change, as amended, is consistent with the 
requirements of the Act and the rules regulations thereunder applicable 
to a national securities exchange.\21\ In particular, the Commission 
finds that the portion of the proposed rule change pertaining to the 
Original Funds and Rule 9.2(a) is consistent with Section 6(b)(5) of 
the Act,\22\ 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.
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    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the portion of the proposal 
pertaining to the trading the Original Funds is consistent with Section 
12(f) of the Act,\23\ which permits an exchange to trade, pursuant to 
UTP, a security that is listed and registered on another exchange.\24\ 
The Commission notes that it previously approved the listing and 
trading of the Shares of the Original Funds on the Amex.\25\ The 
Commission also finds that the proposal is consistent with Rule 12f-5 
under the Act,\26\ 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. NYSEArca rules deem the Shares to be equity 
securities, thus trading in the Shares will be subject to the 
Exchange's existing rules governing the trading of equity securities.
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    \23\ 15 U.S.C. 78l(f).
    \24\ Section 12(a) of the Act, 15 U.S.C. 781(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.
    \25\ See Amex Order and Amex Notice, supra note 8.
    \26\ 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,\27\ 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.
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    \27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    In connection with the Exchange's UTP of the Shares, of the 
Original Funds, the Exchange will cease trading in the Shares if: (1) 
the listing market stops trading the Shares because of a regulatory 
halt similar to NYSE Arca Equities Rule 7.12 or a halt because the 
Indicative Partnership Value or the value of the applicable Underlying 
Index is no longer available, 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.
    In support of the portion of the proposed rule change regarding UTP 
of the Shares, of the Original Funds, the Exchange has made the 
following representations:
    1. The Exchange has appropriate rules to facilitate transactions in 
this type of security in all trading sessions.
    2. The Exchange's surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange.
    3. The Exchange will distribute an Information Bulletin to its 
members prior to the commencement of trading of the Shares on the 
Exchange that explains the special characteristics and risks of trading 
the Shares.
    4. The Exchange will require a member with a customer who purchases 
newly issued Shares on the Exchange to provide that customer with a 
product prospectus and will note this prospectus delivery requirement 
in the Information Bulletin.
    5. The Exchange will cease trading in the Shares if (1) the listing 
market stops trading the Shares because of a regulatory halt similar to 
a halt based on NYSE Arca Equities Rule 7.12 and/or a halt because the 
Indicative Partnership Value or the value of the applicable Underlying 
Index is no longer available, or (2) the listing market delists the 
Shares.
    This approval order is conditioned on the Exchange's adherence to 
these representations.
    The Commission finds good cause for partially approving this 
proposed rule change with regard to the UTP of the Original Funds and 
Rule 9.2(a) ``Diligence to Accounts'' 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 these Shares on the amex is consistent with the Act.\28\ The 
Commission presently is not aware of any issue that would cause it to 
revisit that earlier finding or preclude the trading of these funds on 
the Exchange pursuant to UTP. Rule 9.2(a) ``Diligence as to Accounts'' 
is substantially similar to the suitability standards previously 
approved for other self-regulatory organizations. Therefore, 
accelerating approval of this proposed rule change should benefit 
investors by creating, without undue delay, additional competition in 
the market for these Shares and suitability standards that will enhance 
investor protection.
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    \28\ See Amex Order and Amex Notice, supra note 8.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-PCX-2005-115), as amended, is hereby 
approved on an accelerated basis.\29\

    \29\ 15 U.S.C. 78s(b)(2).

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[[Page 36856]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5729 Filed 6-27-06; 8:45 am]

BILLING CODE 8010-01-M