Document ID: SEC-2008-0598-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: American Stock Exchange LLC
Posted Date: 2008-04-21T04:00Z

[Federal Register: April 21, 2008 (Volume 73, Number 77)]
[Notices]               
[Page 21391-21394]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ap08-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57660; File No. SR-Amex-2007-131]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Generic Listing Standards for Index Multiple Fund Shares 
and Index Inverse Fund Shares

April 14, 2008.

I. Introduction

    On December 20, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to revise Amex rules to include generic listing 
standards for series of Index Multiple Exchange Traded Fund Shares 
(``Multiple Fund Shares'') and Index Inverse Exchange Traded Fund 
Shares (``Inverse Fund Shares'') (collectively, the ``Fund Shares''). 
On February 29, 2008, Amex filed Amendment No. 1 to the proposed rule 
change. The proposed rule change, as amended, was published for comment 
in the Federal Register on

[[Page 21392]]

March 13, 2008.\3\ The Commission received no comment letters regarding 
the proposal. This order approves the proposed rule change, as modified 
by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57451 (March 7, 
2008), 73 FR 13591.
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II. Description

    Amex Rules 1000A-AEMI and Rules 1001A through 1005A provide 
standards for listing Index Fund Shares (``IFSs'') on the Exchange. The 
Exchange proposes to amend the definition of ``Index Fund Share'' set 
forth in Amex Rule 1000A-AEMI(b)(2) to reflect that domestic equity, 
international or global equity, or fixed income securities indexes, or 
a combination thereof, may be used as the underlying performance 
benchmark for Fund Shares.\4\
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    \4\ Multiple Fund Shares seek to provide investment results, 
before fees and expenses, that correspond to a specified multiple of 
the percentage performance on a given day of a particular foreign, 
domestic or fixed income securities index. Inverse Fund Shares seek 
to provide investment results, before fees and expenses, that 
correspond to the inverse (opposite) of the percentage performance 
on a given day of a particular foreign, domestic or fixed income 
securities index by a specified multiple. Fund Shares differ from 
traditional exchange-traded fund (``ETF'') shares in that they do 
not merely correspond to the performance of a given securities 
index, but rather attempt to match a multiple or inverse of such 
underlying index performance.
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    The Exchange also proposes to revise Commentaries .02, .03 and .04 
to Amex Rule 1000A-AEMI and add new Commentary .01 to Amex Rule 1002A 
to permit the listing and trading of Multiple Fund Shares and certain 
Inverse Fund Shares pursuant to the Exchange's generic listing 
standards for IFSs. Specifically, the investment objective associated 
with the Fund Shares must be expected to achieve investment results, 
before fees and expenses, by a specified multiple (Multiple Fund 
Shares) or inversely up to -200% (Inverse Fund Shares) of the 
underlying performance benchmark domestic equity, international or 
global equity and/or fixed income indexes, as applicable.
    Accordingly, this proposal would enable the Exchange to list and 
trade Multiple Fund Shares and certain Inverse Fund Shares pursuant to 
Rule 19b-4(e) of the Act \5\ if each of the conditions set forth in 
Commentaries .02, .03, .04 and .05 to Amex Rule 1000A-AEMI, as 
applicable, are satisfied.\6\
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    \5\ 17 CFR 240.19b-4(e).
    \6\ See Commentaries .02(a)(A) to Amex Rule 1000A-AEMI (Domestic 
Equity); .02(a)(B) to Amex Rule 1000A-AEMI (International Equity); 
.02(a)(C) to Amex Rule 1000A-AEMI (Prior Approved Indexes); .03 to 
Amex Rule 1000A-AEMI (Fixed Income); and .04 to Amex Rule 1000A-AEMI 
(Combination Indexes of Domestic Equity, International Equity and/or 
Fixed Income).
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Limitation on Leverage

    In connection with Inverse Funds that seek to provide investment 
results, before fees and expenses, in an amount that exceeds -200% of 
the underlying benchmark index, the Exchange's proposal would continue 
to require specific Commission approval pursuant to Section 19(b)(2) of 
the Act.\7\ In particular, Amex Rule 1000A-AEMI(b)(2)(iii) would 
expressly prohibit Inverse Funds that seek to provide investment 
results, before fees and expenses, in an amount that exceeds -200% of 
the underlying benchmark index, from being approved by the Exchange for 
listing and trading pursuant to Rule 19b-4(e) under the Act.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 17 CFR 240.19b-4(e).
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    In connection with Multiple Fund Shares, proposed Amex Rule 1000A-
AEMI(b)(2) does not provide a similar limitation on leverage. Instead, 
the proposal would permit the underlying registered management 
investment company or fund to seek to provide investment results, 
before fees and expenses, that correspond to any multiple, without 
limitation, of the percentage performance on given day of a particular 
domestic equity, international or global equity, or fixed income 
securities indexes or a combination thereof.

Availability of Information About Fund Shares and Underlying Indexes

    Proposed new Commentary .01 to Amex Rule 1002A provides that the 
portfolio composition of a Fund will be disclosed on a public Web site. 
Web site disclosure of portfolio holdings that will form the basis for 
the calculation of the net asset value by the issuer of a series of 
Multiple Fund Shares or Inverse Fund Shares will be made daily and will 
include, as applicable, the identity and number of shares held of each 
specific equity security, the identity and amount held of each fixed 
income security, the specific types of Financial Instruments and 
characteristics of such instruments, cash equivalents and amount of 
cash held in the portfolio of a Fund. This public Web site disclosure 
of the portfolio composition of a Fund, that will form the basis for 
the calculation of the net asset value, will coincide with the 
disclosure of the same information to ``Authorized Participants.'' \9\ 
Investors will have access to the current portfolio composition of a 
Fund through the Fund's Web site and/or at the Exchange's Web site at 
http://www.amex.com.
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    \9\ Authorized Participants are the only persons that may place 
orders to create and redeem Creation Units. Authorized Participants 
must be registered broker-dealers or other securities market 
participants, such as banks and other financial institutions that 
are exempt from registration as broker-dealers to engage in 
securities transactions, who are participants in DTC. The Commission 
notes that, although substantively identical, the format of the 
disclosure of portfolio holdings to Authorized Participants may 
differ from the format of the public Web site disclosure.
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Trading Halts

    Existing trading halt requirements for IFSs will apply to Multiple 
Fund Shares and Inverse Fund Shares. In particular, Amex Rule 
1002A(b)(ii) provides if the Intraday Indicative Value or the index 
value applicable to that series of IFSs is not being disseminated as 
required, 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 will halt trading no later than 
the beginning of the trading day following the interruption.\10\
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    \10\ If an IFS is traded on the Exchange pursuant to unlisted 
trading privileges, the Exchange will halt trading if the primary 
listing market halts trading in such IFS because the Intraday 
Indicative Value and/or the index value is not being disseminated. 
See Securities Exchange Act Release No. 55018 (December 28, 2006), 
72 FR 1040 (January 9, 2007) (SR-Amex-2006-109).
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    In addition, proposed new Commentary .01 to Amex Rule 1002A will 
require Amex to halt trading of subject Fund Shares if the Exchange 
becomes aware that the open-end investment company fails to properly 
disseminate the appropriate net asset value (``NAV'') to market 
participants at the same time and/or fails to provide daily public Web 
site disclosure of its portfolio holdings. Commentary .01 to Amex Rule 
1002A further provides that the Exchange may resume trading in such 
Fund Shares only when the NAV is disseminated to all market 
participants at the same time or the daily public Web site disclosure 
of portfolio holdings occurs, as appropriate.
    In addition to other factors that may be relevant, the Exchange may 
consider factors such as those set forth in Amex Rule 918C(b) in 
exercising its discretion to halt or suspend trading in Multiple and/or 
Inverse Fund Shares. These factors would include, but are not limited 
to, (1) the extent to which trading is not occurring in securities 
comprising an Underlying Index and/or the Financial Instruments of a 
Multiple or Inverse Fund, or (2) whether other

[[Page 21393]]

unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. In the case of the Financial 
Instruments held by a Multiple or Inverse Fund, the Exchange 
represented that a notification procedure will be implemented so that 
timely notice from the investment adviser of such Multiple or Inverse 
Fund is received by the Exchange when a particular Financial Instrument 
is in default or shortly to be in default. Notification from the 
investment adviser will be made by phone, facsimile or e-mail. The 
Exchange will then determine on a case-by-case basis whether a default 
of a particular Financial Instrument justifies a trading halt of the 
Multiple and/or Inverse Fund Shares. Trading in Multiple and/or Inverse 
Fund Shares will also be halted if the circuit breaker parameters under 
Amex Rule 117 have been reached.

Suitability

    Prior to commencement of trading, the Exchange will issue an 
Information Circular to its members and member organizations providing 
guidance with regard to member firm compliance responsibilities 
(including suitability obligations) when effecting transactions in the 
Fund Shares and highlighting the special risks and characteristics of 
Multiple and Inverse Funds Shares as well as applicable Exchange rules.
    This Information Circular will set forth the requirements relating 
to Commentary .05 to Amex Rule 411 (Duty to Know and Approve 
Customers). Specifically, the Information Circular will remind members 
of their obligations in recommending transactions in the Shares so that 
members have a reasonable basis to believe that (1) the recommendation 
is suitable for a customer given reasonable inquiry concerning the 
customer's investment objectives, financial situation, needs, and any 
other information known by such member, and (2) the customer can 
evaluate the special characteristics, and is able to bear the financial 
risks, of such investment. In connection with the suitability 
obligation, the Information Circular will also provide that members 
make reasonable efforts to obtain the following information: (1) The 
customer's financial status; (2) the customer's tax status; (3) the 
customer's investment objectives; and (4) such other information used 
or considered to be reasonable by such member or registered 
representative in making recommendations to the customer.

III. Discussion

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \11\ and the rules and regulations thereunder applicable to a 
national securities exchange.\12\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\13\ 
which requires, among other things, that the Exchange's rules be 
designed 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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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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Generic Listing Standards

    Pursuant to Section 19(b) of the Act \14\ and Rule 19b-4 
thereunder,\15\ the listing and trading of a new derivative securities 
product is a proposed rule change that must be filed with and approved 
by the Commission. Rule 19b-4(e) under the Act,\16\ however, provides 
that the listing and trading of a new derivative securities product by 
an exchange will not be deemed a proposed rule change pursuant to Rule 
19b-4(c)(1) under the Act \17\ if the Commission has approved, pursuant 
to Section 19(b) of the Act, the self regulatory organization's trading 
rules, procedures, and listing standards for the product class that 
would include the new derivative securities product, and the exchange 
has a surveillance program for the product class. Thus, at present, 
Amex must submit for Commission approval a proposal for each new series 
of Fund Shares that it seeks to list and trade.
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    \14\ 15 U.S.C. 78s(b)(1).
    \15\ 17 CFR 240.19b-4.
    \16\ 17 CFR 240.19b-4(e).
    \17\ 17 CFR 240.19b-4(c)(1).
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    The Commission believes that the Exchange's adoption of listing and 
trading standards for Fund Shares that meet the requirements of 
Commentaries .02, .03 and .04 to Amex Rule 1000A-AEMI should fulfill 
the intended objective of Rule 19b-4(e) by allowing such Fund Shares to 
commence trading, without the need for individualized Commission 
approval. The Commission notes that it has previously approved the 
listing and trading of various Multiple Fund Shares and Inverse Fund 
Shares.\18\ The proposed rules should reduce the time frame for 
bringing these securities to market, thereby reducing the burdens on 
issuers and other market participants and promoting competition.
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    \18\ See Securities Exchange Act Release Nos. 56713 (October 29, 
2007), 72 FR 61915 (November 1, 2007) (SR-Amex-2007-74) (approving 
the listing and trading of Rydex Leveraged Funds, Inverse Funds and 
Leveraged Inverse Funds); 52553 (October 3, 2005), 70 FR 59100 
(October 11, 2005) (SR-Amex-2004-62) (approving the listing and 
trading of the ProShares Ultra Funds and Short Funds); 54040 (June 
23, 2006), 71 FR 37629 (June 30, 2006) (SR-Amex-2006-41) (approving 
the listing and trading of the ProShares UltraShort Funds); 55117 
(January 17, 2007), 72 FR 3442 (January 25, 2007) (SR-Amex-2006-101) 
(approving the listing and trading of Ultra, Short and UltraShort 
Funds based on various indexes); 56592 (October 1, 2007), 72 FR 
57364 (October 9, 2007) (SR-Amex-2007-60) (approving the listing and 
trading of ProShares Ultra, Short and UltraShort Funds based on 
various international indexes); and 56998 (December 19, 2007), 72 FR 
73404 (December 27, 2007) (SR-Amex-2007-104) (approving the listing 
and trading of ProShares Ultra, Short and UltraShort Funds based on 
several fixed income indexes, among others).
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Listing and Trading Rules

    Taken together, the Commission finds that the Exchange's proposal 
contains adequate rules and procedures to govern the listing and 
trading of Inverse Fund Shares and Multiple Fund Shares listed pursuant 
to Rule 19b-4(e) on the Exchange. All Fund Shares listed under the 
proposed generic standards will be subject to the full panoply of Amex 
rules and procedures that currently govern the trading of IFSs on the 
Exchange. For example, where the value of the underlying index or 
portfolio of securities on which the series of Fund Shares is based is 
no longer calculated or available, the Exchange would commence 
delisting proceedings. Likewise, in the event that the issuer of a 
series of Fund Shares substitutes a new index or portfolio for the 
existing index or portfolio, the Exchange would commence delisting 
proceedings if the new index or portfolio does not meet the 
requirements of and listing standards set forth in Rule 1000A-AEMI.
    Fund Shares listed and/or traded under the proposed ``generic'' 
standards would be subject to existing Amex rules that govern the 
continued listing and trading of IFSs. In addition, the Commission 
notes that proposed new Commentary .01 to Amex Rule 1002A will require 
that the portfolio composition of a Fund be disclosed on a public Web 
site.

Information Circular

    The Exchange has represented that it will distribute, as 
appropriate, an Information Circular to its members and member 
organizations describing,

[[Page 21394]]

among other things, their compliance responsibilities and highlighting 
the special risks and characteristics of Multiple Fund Shares and 
Inverse Fund Shares, as well as applicable Exchange rules.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(5) of the Act.\19\
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    \19\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Amex-2007-131), as modified 
by Amendment No. 1, is approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-8518 Filed 4-18-08; 8:45 am]

BILLING CODE 8010-01-P