Document ID: SEC-2005-0089-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2005-10-11T04:00Z

[Federal Register: October 11, 2005 (Volume 70, Number 195)]
[Notices]               
[Page 59100-59106]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11oc05-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52553; File No. SR-Amex-2004-62]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change and Amendment Nos. 1, 2, and 
3 and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 4 Relating to Listing and Trading of Shares of the 
xtraShares Trust

October 3, 2005.

I. Introduction

    On August 2, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Amex Rule 411 (``Duty to 
Know and Approve Customers'') and Rule 1000A (``Index Fund Shares'') 
and related Commentary .02 to accommodate the listing of Index Fund 
Shares that seek to provide investment results that exceed the 
performance of a securities index by a specified percentage or that 
seek to provide investment results that correspond to the inverse or 
opposite of the index's performance. The proposed rule change will 
accommodate listing on the Exchange of the following eight (8) funds of 
the xtraShares Trust (the ``Trust''): Ultra500 Fund; Ultra100 Fund; 
Ultra30 Fund; UltraMid-Cap 400 Fund; Short500 Fund; Short100 Fund; 
Short30 Fund; and ShortMid-Cap 400 Fund (the ``Funds''). On March 4, 
2005, the Exchange filed Amendment No. 1.\3\ On May 9, 2005, the 
Exchange filed Amendment No. 2.\4\ The Exchange filed Amendment No. 3 
on August 1, 2005.\5\ The proposed rule change, as amended, was 
published for comment in the Federal Register on August 9, 2005.\6\ The 
Commission received no comments on the proposal. On September 15, 2005, 
the Exchange filed Amendment No. 4.\7\ This order approves the proposed 
rule change as amended. Simultaneously, the Commission provides notice 
of, and grants accelerated approval to, Amendment No. 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange modified the proposed rule 
text and accompanying description. Amendment No. 1 replaced Amex's 
original submission in its entirety.
    \4\ In Amendment No. 2, the Exchange clarified the portfolio 
investment methodology and made certain other clarifications to the 
description of the proposal.
    \5\ In Amendment No. 3, the Exchange provided additional details 
regarding the disclosure of the portfolio holdings of the Fund 
Shares and made certain other minor corrections to the rule text and 
proposal. Amendment No. 3 replaced Amex's earlier submissions in 
their entirety.
    \6\ See Securities Exchange Act Release No. 52197 (August 2, 
2005), 70 FR 46228 (``Notice'').
    \7\ In Amendment No. 4, the Amex clarified that Authorized 
Participants (``APs''), as defined in the proposal, who create and 
redeem Index Fund Shares, will deposit and receive only stock and/or 
cash, not other financial instruments.
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II. Description of Proposed Rule Change

    As set forth in the Notice, the Exchange proposes to amend Rule 
1000A and related Commentary .02 to accommodate the listing of Index 
Fund Shares that seek to provide investment results that exceed the 
daily performance of a specified stock index by a specified percentage 
(e.g., equal to 200 percent of the index value) or that seek to provide 
investment results that correspond to the inverse or opposite of the 
index's daily performance.\8\
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    \8\ Amex Rules 1000A et seq. provide standards for the listing 
of Index Fund Shares, which are securities issued by an open-end 
management investment company for exchange trading. These securities 
are registered under the Investment Company Act of 1940 (``1940 
Act''), as well as the Exchange Act. Index Fund Shares are defined 
in Rule 1000A as securities based on a portfolio of stocks or fixed 
income securities that seek to provide investment results that 
correspond generally to the price and yield of a specified foreign 
or domestic stock index or fixed income securities index.
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    The Exchange proposes to list, under amended Rule 1000A, the shares 
of the Funds (``Shares''). Four of the Funds--the Ultra500, Ultra100, 
Ultra30, and UltraMid-Cap400 Funds (the ``Bullish Funds'')--seek daily 
investment results, before fees and expenses, that correspond to twice 
(200%) the daily performance of the Standard and Poor's 500[supreg] 
Index (``S&P 500''), the Nasdaq-100[supreg] Index (``Nasdaq 100''), the 
Dow Jones Industrial AverageSM (``DJIA''), and the S&P 
MidCap400TM Index (``S&P MidCap''), respectively. (These 
indexes are referred to herein as ``Underlying Indexes''.) \9\ Each of 
these Funds, if successful in meeting its objective, should gain, on a 
percentage basis, 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. In addition, four other Funds--the Short500, 
Short100, Short30, and ShortMid-Cap400 Funds (the ``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.\10\ 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 loses when the prices of the securities in the Index 
decline on a given day, or should decrease approximately as much as the 
respective Index gains when the prices of the securities in the index 
rise on a given day.
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    \9\ Exchange-traded funds (``ETFs'') based on each of the 
Underlying Indexes are listed and/or traded on the Exchange. See 
Securities Exchange Act Release Nos. 31591 (December 11, 1992), 57 
FR 60253 (December 18, 1992) (S&P 500 SPDR); 39143 (September 29, 
1997), 62 FR 51917 (October 3, 1997) (DIAMONDS); 41119 (February 26, 
1999), 64 FR 11510 (March 9, 1999) (QQQ); and 35689 (May 8, 1995), 
60 FR 26057 (May 16, 1995) (S&P MidCap 400). The Statement of 
Additional Information (``SAI'') for the Funds discloses that each 
Fund reserves the right to substitute a different Index. 
Substitution could occur if the Index becomes unavailable, no longer 
serves the investment needs of shareholders, the Fund experiences 
difficulty in achieving investment results that correspond to the 
Index, or for any other reason determined in good faith by the 
Board. In such instance, the substitute index will attempt to 
measure the same general market as the current index. Shareholders 
will be notified (either directly or through their intermediary) in 
the event a Fund's current index is replaced. In the event a Fund 
substitutes a different index, the Exchange will file a new Rule 
19b-4 filing with the Commission.
    \10\ Id.
    \11\ The NAV of each Fund is calculated and determined each 
business day at the close of regular trading, typically 4:00 p.m. 
e.s.t.
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    ProFunds Advisors LLC is the investment adviser (the ``Advisor'') 
to each Fund. The Advisor is registered under the Investment Advisers 
Act of

[[Page 59101]]

1940.\12\ While the Advisor will manage each Fund, the Trust's Board of 
Trustees (the ``Board'') will have overall responsibility for the 
Funds'' operations. The composition of the Board is, and will be, in 
compliance with the requirements of Section 10 of the 1940 Act, and the 
Funds will comply with Rule 10A-3 of the Exchange Act.
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    \12\ The Trust, Advisor, and Distributor (``Applicants'') have 
filed with the Commission an Application for an Order under Sections 
6(c) and 17(b) of the 1940 Act (the ``Application'') for the purpose 
of exempting the Funds of the Trust from various provisions of the 
1940 Act. (File No. 812-12354). The Exchange states that the 
information provided in this Rule 19b-4 filing relating to the Funds 
is based on information included in the Application, which contains 
additional information regarding the Trust and Funds.
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    SEI Investments Distribution Company (the ``Distributor'' or 
``SEI''), a broker-dealer registered under the Exchange Act, will act 
as the distributor and principal underwriter of the Shares.
    JPMorgan Chase Bank will act as the Index Receipt Agent for the 
Trust, for which it will receive fees. The Index Receipt Agent will be 
responsible for transmitting the Deposit List (as defined below) to 
National Securities Clearing Corporation (``NSCC'') and for the 
processing, clearance and settlement of purchase and redemption orders 
through the facilities of Depository Trust Company (``DTC'') and NSCC 
on behalf of the Trust. The Index Receipt Agent will also be 
responsible for the coordination and transmission of files and purchase 
and redemption orders between the Distributor and NSCC.\13\
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    \13\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on August 2, 2005 (as to Index Receipt Agent).
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    Shares of the Funds issued by the Trust \14\ will be a class of 
exchange-traded securities that represent an interest in the portfolio 
of a particular Fund. Additional details about the Trust, the operation 
of the Funds, and trading of the Shares are set out in the Notice.
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    \14\ The Fund is also registered as a business trust under the 
Delaware Corporate Code. Telephone Conversation between Jeffrey P. 
Burns, Associate General Counsel, Amex, and Florence Harmon, Senior 
Special Counsel, Division, Commission, on July 12, 2005.
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Investment Objective of the Funds

    Each Bullish Fund will invest its assets, according to the 
Exchange, based upon the same strategies as conventional index funds. 
These 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. Each Bearish Fund will rely on 
establishing positions in financial instruments (as defined below) that 
provide, on a daily basis, the inverse or opposite of the investment 
results of the relevant Underlying Index. Normally 100% of the value of 
the portfolios of each Bearish Fund will be devoted to such financial 
instruments 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,\15\ 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. The Advisor 
may invest in such Money Market Instruments and Financial Instruments, 
rather than in Equity Securities, when it would be more efficient or 
less expensive for the Funds.
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    \15\ Each Fund may engage in transactions in futures contracts 
on designated contract markets where such contracts trade and will 
only purchase and sell futures contracts traded on a U.S. futures 
exchange or board of trade.
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    The Exchange states that the counterparties to the swap agreements 
and/or forward contracts will be major broker-dealers and banks. The 
creditworthiness of each potential counterparty is assessed by the 
Advisor's credit committee pursuant to guidelines approved by the 
Board. Existing counterparties are reviewed periodically by the Board. 
Each Fund may also enter into repurchase and reverse repurchase 
agreements with terms of less than one year and will only enter into 
such agreements with (i) Members of the Federal Reserve System, (ii) 
primary dealers in U.S. government securities, or (iii) major broker-
dealers.\16\ Each Fund may also invest in Money Market Instruments, in 
pursuit of its investment objectives, as ``cover'' for Financial 
Investments, as required by the 1940 Act, or to earn interest.
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    \16\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on September 22, 2005 (as to insertion of term 
``major'' in describing broker-dealer counterparties).
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    Additional details about the Funds' investment techniques, 
including additional regulatory requirements, are described in the 
Notice.
    While the Advisor will attempt to minimize any ``tracking error'' 
between the investment results of a particular Fund and the performance 
or inverse performance (and specified multiple thereof) of its 
Underlying Index, certain factors may tend to cause the investment 
results of a Fund to vary from such relevant Underlying Index or 
specified multiple thereof.\17\ The Funds are expected to have a daily 
tracking error of less than 5% \18\ (500 basis points) relative to the 
specified (inverse) multiple of the performance of the relevant 
Underlying Index.
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    \17\ Factors that may cause a Fund to vary from the relevant 
Underlying Index and investment objective are described in more 
detail in the Notice.
    \18\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on August 1, 2005 (as to removal of 
terminology ``in absolute return'').
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The Portfolio Investment Methodology

    The Advisor seeks to establish investment exposure for each Bullish 
and Bearish Fund corresponding to each Fund's investment objective 
based upon its portfolio investment methodology (the ``Methodology'').
    The Methodology takes into account a variety of specified criteria 
and data (the ``Inputs''), the most important of which are: (i) Net 
assets (taking into account creations and redemptions) in each Fund's 
portfolio at the end of each trading day; (ii) the amount of exposure 
required to the Underlying Index; and (iii) the positions in Equity 
Securities, Financial Instruments and/or Money Market Instruments at 
the beginning of each trading day. The Advisor, pursuant to the 
Methodology, will then mathematically determine the end-of-day 
positions to establish the solution (the ``Solution''), which may 
consists of Equity Securities, Financial Instruments, and Money Market 
Instruments. The difference between the start-of-day positions and the 
required end-of-day positions is the actual amount of Equity 
Securities, Financial Instruments, and/or Money Market Instruments that 
must be bought or sold for the day. The Solution accordingly represents 
the required exposure and is converted into an order or orders, as 
applicable, to be filled that same day.
    Generally, portfolio trades effected pursuant to the Solution are 
reflected in the NAV on the first business day (T+1) after the date the 
relevant trades are

[[Page 59102]]

made. Thus, the NAV calculated for a Fund on any given day reflects the 
trades executed pursuant to the prior day's Solution. For example, 
trades pursuant to the Solution calculated on a Monday afternoon are 
executed on behalf of the Fund in question on that day. These trades 
will then be reflected in the NAV for that Fund that is calculated as 
of 4 p.m. on Tuesday.
    The timeline for the Methodology is as follows. APs have a 3 p.m. 
cut-off for orders submitted by telephone, facsimile, and other 
electronic means of communication and a 4 p.m. cut-off for orders 
received via mail. AP orders by mail are exceedingly rare. Orders are 
received by the Distributor and relayed to the Advisor within ten (10) 
minutes. The Advisor will know by 3:10 p.m. the number of creation/
redemption orders by APs for that day. The Advisor, taking into account 
creation and redemption orders for that day, then places orders, 
consistent with the Solution, at approximately 3:40 p.m. as market-on-
close (MOC) orders. At 4 p.m., the Advisor will again look at the 
exposure to make sure that these orders placed are consistent with the 
Solution, and as described above, the Advisor will execute any other 
transactions in Financial Instruments to assure that the Fund's 
exposure is consistent with the Solution.

Availability of Information About the Shares and Underlying Indexes

    The Trust's or Advisor's Web site and/or that of the Exchange, 
which is and will be publicly accessible at no charge, 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;\19\ 
(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. The Product 
Description for each Fund will inform investors that the Advisor's Web 
site has information about the premiums and discounts at which the 
Fund's Shares have traded.\20\
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    \19\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on August 1, 2005 (as to removal of language 
regarding Web site disclosure of the ``mid-point of the bid-asked 
spread at the time that the Fund's NAV is calculated'' and 
substitution of Web site disclosure of the ``reported closing 
price'').
    \20\ See ``Prospectus Delivery'' below regarding the Product 
Description. The Application requests 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. 
Additionally, Commentary .03 of Amex Rule 1000A requires that Amex 
members and member organizations provide to all purchasers of a 
series of Index Fund Shares a written description of the terms and 
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later 
than the time of confirmation of the first transaction in such 
series is delivered to such purchaser. Also, any sales material must 
reference the availability of such circular and the prospectus. 
Telephone Conversation between Jeffrey P. Burns, Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on July 12, 2005.
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    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 an Indicative Intra-Day Value (the ``IIV'') 
(defined and discussed below under ``Dissemination of Indicative Intra-
Day Value (IIV)''), recent NAV, shares outstanding, estimated cash 
amount, and total cash amount per Creation Unit (defined below). The 
Exchange will make available on its Web site 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 (defined 
below) 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) and/or the Exchange (http://www.amex.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'' (described below) and the ``PCF File'' 
(described below). 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 APs. 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, while the 
IIV and PCF Files will similarly provide the portfolio holdings but in 
a format appropriate for APs, i.e., the exact components of a Creation 
Unit (defined below). Accordingly, all investors will have access to 
the current portfolio composition of each Fund through the Trust Web 
site at http://www.profunds.com and/or the Exchange's Web site at 

http://www.amex.com.\21\

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    \21\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on July 12, 2005 (as to daily disclosure to 
the public of the portfolio composition that will be used to 
calculate the Fund's NAV later that day).
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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. 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.

Creation and Redemption of Shares

    Each Fund will issue and redeem Shares only in initial aggregations 
of at least 50,000 (``Creation Units''). Purchasers of Creation Units 
will be able to separate the Units into individual Shares. Once the 
number of Shares in a Creation Unit is determined, it will not change 
thereafter (except in the event of a stock split or similar

[[Page 59103]]

revaluation). The initial value of a Share for each of the Bullish 
Funds and Bearish Funds is expected to be in the range of $50-$250.
    At the end of each business day, the Trust will prepare the list of 
names and the required number of shares of each Deposit Security (as 
defined below) to be included in the next trading day's Creation Unit 
for each Bullish Fund. The Trust will then add to the Deposit List (as 
defined below), the cash information effective as of the close of 
business on that business day and create a portfolio composition file 
(``PCF'') for each Fund, which it will transmit (via the Index Receipt 
Agent) to NSCC before the open of business the next business day. The 
information in the PCF will be available to all participants in the 
NSCC system.
    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 Funds' 
holdings of Financial Instruments.\22\ 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.\23\
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    \22\ The Trust or the Advisor will post the IIV File to a 
password-protected Web site before the opening of business on each 
business day, and all NSCC participants and the Exchange will have 
access to the password and the Web site containing the IIV File. 
However, the Fund will disclose to the public identical information, 
but in a format appropriate to public investors, at the same time 
the Fund discloses the IIV and PCF files to industry participants. 
Telephone conversation between Jeffrey P. Burns, Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on August 2, 2005.
    \23\ An example of the information that will be provided in the 
IIV File for a Bullish Fund holding Equity Securities and Bearish 
Fund holding swaps and futures contracts (and Bullish Fund to the 
extent it holds such financial instruments) is set forth in the 
Notice.
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    The information in the IIV File will be sufficient for participants 
in the NSCC system to calculate the IIV for Bearish Funds (e.g., the 
amount of the cash deposited for Creation Unit Aggregations or paid 
upon redemption of the Shares) and, together with the information on 
Equity Securities contained in the PCF, will be sufficient for 
calculation of IIV for Bullish Funds, during such next business 
day.\24\ The IIV File, together with the applicable information in the 
PCF in the case of Bullish Funds, will also be the basis for the next 
business day's NAV calculation.
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    \24\ As noted below in ``Dissemination of Indicative Intra-Day 
Value (IIV),'' the Exchange will disseminate through the facilities 
of the CTA, at regular intervals (currently anticipated to be 15 
second intervals) during the Exchange's regular trading hours, the 
IIV on a per Fund Share basis.
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    For the Bullish Funds, the PCF File will be prepared by the Trust 
after 4 p.m. and transmitted by the Index Receipt Agent to NSCC by 6:30 
p.m. By 6:30 p.m., all NSCC participants (such as APs) and the Exchange 
will also have access to the Web site containing the IIV File. The IIV 
File will reflect the trades made on behalf of a Fund that business day 
and the creation/redemption orders for that business day. Accordingly, 
by 6:30 p.m., APs will know the composition of the Fund's portfolio for 
the next trading day.
    The Cash Balancing Amount (defined below) will also be determined 
shortly after 4 p.m. each business day. Although the Cash Balancing 
Amount for most exchange-traded funds is a small amount reflecting 
accrued dividends and other distributions, for both the Bullish and 
Bearish Funds it is expected to be larger due to changes in the value 
of the Financial Instruments, i.e., daily mark-to-market.\25\
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    \25\ See Notice for an example of the calculation of the Cash 
Balancing Amount.
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Creation and Redemption of the Bullish Funds

    The process for APs \26\ purchasing Creation Units from Funds or 
redeeming Shares in Creation Unit-Size Aggregations from the Funds is 
set forth in the Notice. In summary, 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 AP deposits Bullish Fund Shares in Creation Unit-Size 
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 Units on the same 
day. The redeeming AP 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.
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    \26\ APs are the only persons that may place orders to create 
and redeem Creation Units. APs must be registered broker-dealers or 
other securities market participants, such as banks and other 
financial institutions, which are exempt from registration as 
broker-dealers to engage in securities transactions, who are 
participants in DTC.
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Creation and Redemption of the Bearish Funds

    As stated, 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. The arbitrage process, 
which provides the opportunity to profit from differences in prices of 
the same or similar securities, increases the efficiency of the markets 
and serves to prevent potentially manipulative efforts. If the price of 
a Share deviates enough from the Creation Unit, on a per share basis, 
to create a material discount or premium, an arbitrage opportunity is 
created allowing the arbitrageur to either buy Shares at a discount, 
immediately cancel them in exchange for the Creation Unit and sell the 
underlying securities in the cash market at a profit, or sell Shares 
short at a premium and buy the Creation Unit in exchange for the Shares 
to deliver against the short position. In both instances the 
arbitrageur locks in a profit and the markets move back into line.\27\
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    \27\ In their 1940 Act Application, the Applicants stated that 
they do not believe that All-Cash Payments will affect arbitrage 
efficiency. This is because 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 note 
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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Placement of Creation Unit Aggregation Purchase and Redemption Orders

    Payment with respect to Creation Unit Aggregations of the Bullish 
Funds placed through the Distributor generally will be made by In-Kind 
Payments and cash, while All-Cash Payments will be accepted in the case 
of the Bearish Funds and certain other cases. Placement of Creation 
Unit Aggregation Purchase and Redemption Orders is described in more 
detail in the Notice and is generally done on a T+3 basis.

[[Page 59104]]

Dividends

    Dividends, if any, from net investment income will be declared and 
paid at least annually by each Fund in the same manner as by other 
open-end investment companies. Certain Funds may pay dividends on a 
semi-annual or more frequent basis. Distributions of realized 
securities gains, if any, generally will be declared and paid once a 
year.
    Dividends and other distributions on the Shares of each Fund will 
be distributed, on a pro rata basis, to Beneficial Owners of such 
Shares. Dividend payments will be made through the Depository and the 
DTC Participants to Beneficial Owners then of record with proceeds 
received from each Fund.
    The Trust will not make the DTC book-entry Dividend Reinvestment 
Service (the ``Dividend Reinvestment Service'') available for use by 
Beneficial Owners for reinvestment of their cash proceeds but certain 
individual brokers may make a Dividend Reinvestment Service available 
to Beneficial Owners. Additional information about this service is 
provided in the Notice.

Dissemination of Indicative Intra-Day Value (IIV)

    In order to provide updated information relating to each Fund for 
use by investors, professionals, and persons wishing to create or 
redeem Shares, the Exchange will disseminate through the facilities of 
the CTA: (i) Continuously throughout the trading day, the market value 
of a Share; and (ii) every 15 seconds throughout the trading day, a 
calculation of the Indicative Intra-Day Value or ``IIV'' \28\ as 
calculated by a third party calculator (the ``IIV Calculator'') 
currently expected to be the Exchange.\29\ 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.
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    \28\ The IIV is also referred to by other issuers as an 
``Underlying Trading Value,'' ``Indicative Optimized Portfolio Value 
(IOPV),'' and ``Intra-day Value'' in various places such as the 
prospectus and marketing materials for different exchange-traded 
funds.
    \29\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on July 12, 2005.
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    The IIV Calculator will calculate an IIV for each Fund, including 
those Funds that do not hold Equity Securities, in the manner discussed 
below. 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 on a per Share 
basis disseminated during Amex trading hours, should not be viewed as a 
real time update of the NAV of a particular Fund, which is calculated 
only once a day. While the IIV that will be disseminated by the Amex is 
expected to be close to the most recently calculated Fund NAV on a per 
share basis, it is possible that the value of the portfolio of 
securities held by a Fund may diverge from the value of the Deposit 
Securities during any trading day. In such case, the IIV will not 
precisely reflect the value of the Fund portfolio.
    IIV Calculation For the Bullish Funds holding Equity Securities and 
Financial Instruments. The IIV Calculator will disseminate the IIV 
throughout the trading day for Funds holding Equity Securities and 
Financial Instruments. The IIV Calculator will determine such IIV by: 
(i) Calculating the estimated current value of Equity Securities held 
by such Fund by (a) calculating the percentage change in the value of 
the Deposit List (as provided by the Trust) and applying that 
percentage value to the total value of the Equity Securities in the 
Fund as of the close of trading on the prior trading day (as provided 
by the Trust) or (b) calculating the current value of all of the Equity 
Securities held by the Fund (as provided by the Trust); (ii) 
calculating the mark-to-market gains or losses from the Fund's total 
return equity swap exposure based on the percentage change to the 
Underlying Index and the previous day's notional values of the swap 
contracts, if any, held by such Fund (which previous day's notional 
value will be provided by the Trust); (iii) calculating the mark-to-
market gains or losses from futures, options, and other Financial 
Instrument positions by taking the difference between the current value 
of those positions held by the Fund, if any (as provided by the Trust), 
and the previous day's value of such positions; (iv) adding the values 
from (i), (ii), and (iii) above to an estimated cash amount provided by 
the Trust (which cash amount will include the swap costs) to arrive at 
a value; and (v) dividing that value by the total shares outstanding 
(as provided by the Trust) to obtain the current IIV.
    IIV Calculation for the Bearish Funds. The IIV Calculator will 
disseminate the IIV throughout the trading day for the Bearish Funds. 
The IIV Calculator will determine such IIV by: (i) Calculating the 
mark-to-market gains or losses from the Fund's total return equity swap 
exposure based on the percentage change to the Underlying Index and the 
previous day's notional values of the swap contracts, if any, held by 
such Fund (which previous day's notional value will be provided by the 
Trust); (ii) calculating the mark-to-market gains or losses from 
futures, options, and other Financial Instrument positions by taking 
the difference between the current value of those positions held by the 
Fund, if any (as provided by the Trust), and the previous day's value 
of such positions; (iii) adding the values from (i) and (ii) above to 
an estimated cash amount provided by the Trust (which cash amount will 
include the swap costs), to arrive at a value; and (iv) dividing that 
value by the total shares outstanding (as provided by the Trust) to 
obtain current IIV.

Criteria for Initial and Continued Listing

    The Shares are subject to the criteria for initial and continued 
listing of Index Fund Shares in Rule 1002A. It is anticipated that a 
minimum of two Creation Units (100,000 Shares) will be required to be 
outstanding at the start of trading. This minimum number of Shares 
required to be outstanding at the start of trading will be comparable 
to requirements that have been applied to previously listed series of 
Portfolio Depositary Receipts and Index Fund Shares. As stated, the 
initial price of a Share is expected to be in the range of $50-$250.
    The Exchange believes that the proposed minimum number of Shares 
outstanding at the start of trading is sufficient to provide market 
liquidity.

Original and Annual Listing Fees

    The Amex original listing fee applicable to the listing of the 
Funds is $5,000 for each Fund. In addition, the annual listing fee 
applicable to the Funds under Section 141 of the Amex Company Guide 
will be based upon the year-end aggregate number of outstanding shares 
in all Funds of the Trust listed on the Exchange.

Stop and Stop Limit Orders

    Amex Rule 154, Commentary .04(c) provides that stop and stop limit 
orders to buy or sell a security (other than an option, which is 
covered by Rule 950(f) and Commentary thereto) the price of which is 
derivatively priced based upon another security or index of securities, 
may with the prior approval of a Floor Official, be elected by a 
quotation, as set forth in Commentary .04(c) (i-v). The Exchange has 
designated Index Fund

[[Page 59105]]

Shares, including the Shares, as eligible for this treatment.\30\
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    \30\ See Securities Exchange Act Release No. 29063 (April 10, 
1991), 56 FR 15652 (April 17, 1991) at note 9, regarding the 
Exchange's designation of equity derivative securities as eligible 
for such treatment under Rule 154, Commentary .04(c).
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Rule 190

    Rule 190, Commentary .04 applies to Index Fund Shares listed on the 
Exchange, including the Shares. Commentary .04 states that nothing in 
Rule 190(a) should be construed to restrict a specialist registered in 
a security issued by an investment company from purchasing and 
redeeming the listed security, or securities that can be subdivided or 
converted into the listed security, from the issuer as appropriate to 
facilitate the maintenance of a fair and orderly market.

Prospectus Delivery

    The Exchange, in an Information Circular to Exchange members and 
member organizations, prior to the commencement of trading, will inform 
members and member organizations, regarding the application of 
Commentary .03 to Rule 1000A the Funds. The Information Circular will 
further inform members and member organizations of the prospectus and/
or Product Description delivery requirements that apply to the Funds. 
The Application included a request that the exemptive order also grant 
relief from Section 24(d) of the 1940 Act. Any Product Description used 
in reliance on Section 24(d) exemptive relief will comply with all 
representations and conditions set forth in the Application.

Trading Halts

    In addition to other factors that may be relevant, the Exchange may 
consider factors such as those set forth in Rule 918C(b) in exercising 
its discretion to halt or suspend trading in Index Fund Shares. These 
factors would include, but are not limited to, (i) the extent to which 
trading is not occurring in securities comprising an Underlying Index 
and/or the Financial Instruments of a Fund, or (ii) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. (See Amex Rule 918C). In the case 
of any Financial Instruments held by a Fund, the Exchange represents 
that a notification procedure will be implemented so that timely notice 
from the Advisor is received by the Exchange when a particular 
Financial Instrument is in default or shortly to be in default. This 
notification from the Advisor will be through phone, e-mail and/or fax. 
The Exchange would then determine on a case-by-case basis whether a 
default of a particular Financial Instrument justifies a trading halt 
of the Shares. Trading in shares of the Funds 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 
Shares and highlighting the special risks and characteristics of the 
Funds and 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 (i) 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 (ii) that 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: (i) The 
customer's financial status; (ii) the customer's tax status; (iii) the 
customer's investment objectives; and (iv) such other information used 
or considered to be reasonable by such member or registered 
representative in making recommendations to the customer.

Purchases and Redemptions in Creation Unit Size

    In the Information Circular referenced above, members and member 
organizations will be informed that procedures for purchases and 
redemptions of Shares in Creation Unit Size are described in each 
Fund's prospectus and Statement of Additional Information, and that 
Shares are not individually redeemable but are redeemable only in 
Creation Unit Size aggregations or multiples thereof.

Surveillance

    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Shares. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
Index Fund Shares, which have been deemed adequate under the Exchange 
Act. In addition, the Exchange also has a general policy prohibiting 
the distribution of material, non-public information by its employees.

Hours of Trading/Minimum Price Variation

    The Funds will trade on the Amex until 4:15 p.m. (New York time) 
each business day. Shares will trade with a minimum price variation of 
$.01.

III. Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 6 of the Act,\31\ 
and the rules and regulations thereunder, applicable to a national 
securities exchange.\32\ The Commission believes that the Exchange's 
proposed listing standards, trading rules, suitability and disclosure 
rules for the Funds are consistent with the Act.
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    \31\ 15 U.S.C. 78f(b).
    \32\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
---------------------------------------------------------------------------

A. Surveillance

    The Commission believes that because the Underlying Indexes are 
broad-based and are composed of securities having significant trading 
volumes and market capitalization, improper trading practices in the 
Shares and the ability to use the Shares to manipulate the underlying 
securities will be limited. Moreover, the issuers of the securities 
comprising the Underlying Indexes are subject to reporting requirements 
under the Act, and all of the component stocks are either listed or 
traded on, or traded through the facilities of, U.S. securities 
markets, and thus subject to real-time transaction reporting, which 
should further deter manipulation.

B. Dissemination of Information About the Shares

    In approving the Funds for trading on the Amex, the Commission 
notes that the Underlying Indexes are broad-based, widely-disseminated 
indexes, which underlie numerous listed products. These index values 
are widely-disseminated on a real-time basis at least every 15 seconds 
throughout the trading day during the period in which

[[Page 59106]]

the Shares will trade on Amex. Additionally, the Commission notes that 
the Exchange will disseminate through the facilities of CTA at least 
every 15 seconds a calculation of the IIV, along with an updated market 
value of the Shares. Comparing these two figures will help investors to 
determine whether, and to what extent, the Shares may be selling at a 
premium or discount to NAV and thus will facilitate arbitrage of the 
Shares in relation to the Index component securities.
    The Commission also notes that the Trust's or Advisor's Web site 
and/or that of the Exchange, which is and will be publicly accessible 
at no charge, will contain the Shares' prior business day NAV, the 
reported closing price, and a calculation of the premium or discount of 
such price in relation to the closing NAV.
    The Funds' total portfolio composition will be disclosed to all 
market participants at the same time on the Web site of the Trust 
(http://www.profunds.com) and/or the Exchange (http://www.amex.com). 
The Commission believes that such disclosure is reasonably designed to 
facilitate a functional arbitrage mechanism and mitigate the risks of 
improper market activity that could arise from inconsistent disclosure 
of information.

C. Listing and Trading

    The Commission finds that the Exchange's proposed rules and 
procedures for the listing and trading of the Shares are consistent 
with the Act. Shares will trade as equity securities subject to Amex 
rules including, among others, rules governing trading halts, 
specialist activities, stop and stop limit orders, prospectus delivery, 
and customer suitability requirements. In addition, the Shares will be 
subject to Amex listing and delisting/suspension rules and procedures 
governing the trading of Index Fund Shares on the Exchange. The 
Commission believes that listing and delisting criteria for the Shares 
should help to maintain a minimum level of liquidity and therefore 
minimize the potential for manipulation of the Shares. Finally, the 
Commission believes that the information circular the Exchange will 
distribute will inform members and member organizations about the 
terms, characteristics, and risks in trading the Shares.

IV. Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving the proposed 
Amendment No. 4 before the thirtieth day of publication of notice of 
filing thereof in the Federal Register. The Amex filed Amendment No. 4 
to clarify the proposed rule text. Specifically, Amendment No. 4 makes 
clear that, as part of the creation and redemption process, APs will 
deposit or receive only stocks and/or cash. The Commission believes 
that Amex's proposed changes in Amendment No. 4 clarify the proposed 
rule change, raise no new regulatory issues and are consistent with the 
Act. Based on the above, the Commission finds good cause for 
accelerating approval of Amendment No. 4.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether the amendment 
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-Amex-2004-62 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Amex-2004-62. 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 office of the Amex. 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-Amex-2004-62 and should be submitted on or before 
November 1, 2005.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change, as amended, (SR-Amex-2004-62) 
is approved, and that Amendment No. 4 to the proposed rule change be, 
and hereby is, approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).
    \34\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-5563 Filed 10-7-05; 8:45 am]

BILLING CODE 8010-01-P