Document ID: SEC-2007-0759-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-06-01T04:00Z

[Federal Register: June 1, 2007 (Volume 72, Number 105)]
[Notices]               
[Page 30652-30657]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jn07-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55815; File No. SR-NASDAQ-2007-027]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Amend the Generic Listing Standards for Portfolio Depositary Receipts 
and Index Fund Shares

May 25, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 23, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by Nasdaq. 
On May 8, 2007, Nasdaq filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons and is 
simultaneously approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend its existing rules to eliminate the 
requirement that the calculation methodology for the index underlying 
an exchange traded fund (``ETF'') be a methodology specified by rule 
and to adopt generic listing standards for a series of ETFs based 
solely or in part on fixed income indexes or securities. The text of 
the proposed rule change is available at Nasdaq, the Commission's 
Public Reference Room, and http://nasdaq.complinet.com.

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

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

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

1. Purpose
    Rule 19b-4(e) under the Act \4\ provides that the listing and 
trading of a new derivative securities product by a self-regulatory 
organization shall not be deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4,\5\ if the Commission has approved, 
pursuant to Section 19(b) of the Act,\6\ the self-regulatory 
organization's trading rules, procedures and listing standards for the 
product class that would include the new derivatives securities 
product, and the self-regulatory organization has a surveillance 
program for the product class.\7\ Nasdaq has adopted generic listing 
standards to satisfy this rule for the listing and trading of portfolio 
depositary receipts (``PDRs'') \8\ and index fund shares (``IFSs'') \9\ 
(collectively, exchange traded funds or ``ETFs''), among others. The 
proposed rule change will eliminate from these generic listing 
standards the requirement that the calculation methodology for the 
index underlying an ETF be a methodology specified by rule. In 
addition, the proposed rule change will establish generic listing 
standards, trading rules, and procedures, including surveillance, to 
permit the listing and trading pursuant to Rule 19b-4(e) under the Act 
of ETFs based solely on fixed income indexes (``Fixed Income Indexes'') 
or on a combination of equity and fixed income indexes (``Combination 
Indexes'').
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \8\ Nasdaq Rule 4420(i).
    \9\ Nasdaq Rule 4420(j).
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Index Methodology Change
    Nasdaq rules currently permit Nasdaq to list an ETF without filing 
a proposed rule change if the ETF meets certain requirements.\10\ Among 
those requirements is the requirement in Rules 4420(i)(3)(B) and 
4420(j)(3)(B) that the index be calculated based on the market 
capitalization, modified market capitalization, price, equal-dollar or 
modified equal-dollar weighting or a methodology weighting components 
of the index based on any, some or all of the following: Sales, cash 
flow, book value and dividends. Nasdaq recently made a filing with the 
Commission to expand this list to accommodate new products and now 
proposes to remove this requirement to provide greater flexibility to 
index providers and ETF issuers to develop indexes that meet the 
investment objectives of investors. Further, removing these 
requirements will reduce the time required for products based on 
innovative index calculation methodologies to be brought to market. The 
indexes underlying ETFs would continue to be required to meet the other 
requirements of the generic listing standards. For example, domestic 
indexes require, without limitation, that the most heavily weighted 
component stock of an index not exceed 30% of the weight of the index, 
and the five most heavily weighted component stocks of an index not 
exceed 65% of the weight of the index,\11\ and that an index include a 
minimum of 13 component stocks.\12\ Similarly, the generic listing 
standards for international or global indexes require, without 
limitation, that the most heavily weighted component stock of an index 
not exceed 25% of the weight of the index, and the five most heavily 
weighted component stocks of

[[Page 30653]]

an index not exceed 60% of the weight of the index,\13\ and that an 
index include a minimum of 20 component stocks.\14\ Nasdaq believes 
that such requirements will ensure that underlying indexes are 
sufficiently diversified, and that their components are sufficiently 
liquid to serve as the basis for an ETF.\15\
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    \10\ Nasdaq Rules 4420(i) and 4420(j).
    \11\ Nasdaq Rules 4420(i)(3)(A)(i)c. and 4420(j)(3)(A)(i)c.
    \12\ Nasdaq Rules 4420(i)(3)(A)(i)d. and 4420(j)(3)(A)(i)d.
    \13\ Nasdaq Rules 4420(i)(3)(A)(ii)c. and 4420(j)(3)(A)(ii)c.
    \14\ Nasdaq Rules 4420(i)(3)(A)(ii)d. and 4420(j)(3)(A)(ii)d.
    \15\ The Commission recently approved similar changes to the 
rules of other exchanges. See Securities Exchange Act Release Nos. 
55544 (March 27, 2007), 72 FR 15923 (April 3, 2007) (approving an 
American Stock Exchange LLC (``Amex'') proposal (the ``Amex 
Methodology Change'')); 55545 (March 27, 2007), 72 FR 15928 (April 
3, 2007) and 55546 (March 27, 2007), 72 FR 15929 (April 3, 2007) 
(approving, on an accelerated basis, similar changes to the rules of 
the New York Stock Exchange (``NYSE'') and NYSE Arca, respectively).
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Use of Fixed Income and Combination Indexes
    The Commission has previously approved the trading on Nasdaq of a 
number of ETFs that are based on Fixed Income Indexes.\16\ Nasdaq now 
proposes to establish generic listing standards, trading rules, and 
procedures, including surveillance, to permit the listing and trading 
pursuant to Rule 19b-4(e) of ETFs based solely on Fixed Income Indexes 
and Combination Indexes. The Commission recently approved similar 
standards for Amex.\17\ The proposed rule is substantially similar to 
the Amex Rule.\18\ Adopting generic listing standards for these 
securities and applying Rule 19b-4(e) should fulfill the intended 
objective of that Rule by allowing ETFs that satisfy the proposed 
generic listing standards to commence trading, without the need for a 
public comment period and Commission approval. This has the potential 
to reduce the time frame for bringing securities to market and thereby 
reduce the burdens on issuers and other market participants. If a 
particular index does not comply with the proposed generic listing 
standards under Rule 19b-4(e), Nasdaq may submit a separate filing 
pursuant to Section 19(b)(2) requesting Commission approval to list and 
trade the particular index-linked product.
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    \16\ Securities Exchange Act Release No. 55300 (February 15, 
2007), 72 FR 8227 (February 23, 2007) (SR-Nasdaq-2007-002, relating 
to the trading, pursuant to unlisted trading privileges, of 14 
ETFs).
    \17\ Securities Exchange Act Release No. 55437 (March 9, 2007), 
72 FR 12233 (March 15, 2007) (the ``Amex Rule'').
    \18\ The Amex Rule includes certain provisions that already 
appear elsewhere in Nasdaq's rules and are therefore not repeated. 
See, e.g., Rules 4420(i)(4) and 4420(j)(4) (proposed to be 
renumbered as Rules 4420(i)(7) and 4420(j)(7)) relating to the 
trading hours for PDRs and IFSs, respectively. See also Rule 
4613(a)(1)(B) relating to the minimum trading increment on Nasdaq.
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    Proposed Rules 4420(i) and (j) define the term ``Fixed Income 
Securities'' to include notes, bonds (including convertible bonds), 
debentures, or evidence of indebtedness that include, but are not 
limited to, U.S. Treasury securities (``Treasury Securities''), 
securities of government-sponsored entities (``GSE Securities''), 
municipal securities, trust-preferred securities,\19\ supranational 
debt,\20\ and debt of a foreign country or subdivision thereof. For 
purposes of the proposed definition, a convertible bond is deemed to be 
a Fixed Income Security until it is converted into its underlying 
common or preferred stock.\21\ Once converted, the equity security may 
no longer continue as a component of a fixed income index under the 
proposed rules and, accordingly, would have to be removed from the 
index for the ETF to remain listed pursuant to the proposed rule.
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    \19\ Trust-preferred securities are undated cumulative 
securities issued from a special purpose trust in which a bank or 
bank holding company owns all of the common securities. The trust's 
sole asset is a subordinated note issued by the bank or bank holding 
company. Trust preferred securities are treated as debt for tax 
purposes so that the distributions or dividends paid are a tax-
deductible interest expense.
    \20\ Supranational debt represents the debt of international 
organizations such as the World Bank, the International Monetary 
Fund, regional multilateral development banks, and multilateral 
financial institutions. Examples of regional multilateral 
development banks include the African Development Bank, Asian 
Development Bank, European Bank for Reconstruction and Development, 
and the Inter-American Development Bank. In addition, examples of 
multilateral financial institutions include the European Investment 
Bank and the International Fund for Agricultural Development.
    \21\ Under the Section 3(a)(11) of the Act, 15 U.S.C. 
78c(a)(11), a convertible security is an equity security. However, 
for the purposes of the proposed generic listing criteria, Nasdaq 
believes that defining a convertible security (prior to its 
conversion) as a Fixed Income Security is consistent with the 
objectives and intention of the generic listing standards for fixed-
income-based ETFs as well as the Act.
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Fixed Income Index Criteria
    To list an ETF pursuant to the proposed generic listing standards 
for Fixed Income Indexes, the index underlying the ETF must satisfy all 
the conditions contained in proposed Rule 4420(i)(4) (for PDRs) or 
proposed Rule 4420(j)(4) (for IFSs). As with existing generic listing 
standards for ETFs based on domestic and international or global 
indexes, these listing criteria are designed to ensure that securities 
with substantial market distribution and liquidity account for a 
substantial portion of the weight of a Fixed Income Index.\22\
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    \22\ The index criteria are loosely based on the standards 
contained in Commission and Commodity Futures Trading Commission 
(``CFTC'') rules regarding the application of the definition of 
narrow-based security index to debt security indexes. See Securities 
Exchange Act Release No. 54106 (July 6, 2006), 71 FR 39534 (July 13, 
2006) (File No. S7-07-06) (the ``Joint Rules'').
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    To list an ETF based on a Fixed Income Index pursuant to the 
proposed generic listing standards, the index must meet the following 
criteria:
     The index or portfolio must consist of Fixed Income 
Securities;
     Components that in aggregate account for at least 75% of 
the weight of the index or portfolio must have a minimum original 
principal amount outstanding of $100 million or more;
     No component Fixed Income Security (excluding a Treasury 
Security) represents more than 30% of the weight of the index, and the 
five highest weighted component fixed income securities in the index do 
not in the aggregate account for more than 65% of the weight of the 
index; \23\
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    \23\ This is consistent with the standard for U.S. equity ETFs 
set forth in Rules 4420(i)(3)(A)c. and 4420(j)(3)(A)c. and the 
standard set forth by the Commission and the CFTC in the Joint 
Rules.
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     An underlying index or portfolio (excluding one consisting 
entirely of exempted securities) must include a minimum of 13 non-
affiliated issuers; \24\ and
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    \24\ The required number of unaffiliated issuers parallels the 
diversification requirement applicable to U.S. equity ETFs as set 
forth in Rules 4420(i)(3)(A)d. and 4420(j)(3)(A)d.
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     Component securities that in aggregate account for at 
least 90% of the weight of the index or portfolio must be either: \25\
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    \25\ Nasdaq notes that this proposed standard is consistent with 
a similar standard in the Joint Rules and is designed to ensure that 
the component fixed income securities have sufficient publicly 
available information.
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    [squf] From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; \26\
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    \26\ 15 U.S.C. 78m and 78o(d).
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    [squf] From issuers that have a worldwide market value of 
outstanding common equity held by non-affiliates of $700 million or 
more;
    [squf] From issuers that have outstanding securities that are 
notes, bonds, debentures, or evidences of indebtedness having a total 
remaining principal amount of at least $1 billion;
    [squf] Exempted securities, as defined in Section 3(a)(12) of the 
Act; \27\ or
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    \27\ 15 U.S.C. 78c(a)(12).
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    [squf] From issuers that are governments of foreign countries or 
political subdivisions of foreign countries.
    The proposed generic listing requirements for ETFs based on Fixed

[[Page 30654]]

Income Indexes would not require that component securities in an 
underlying index have an investment-grade rating.\28\ In addition, the 
proposed requirements do not include a minimum trading volume, due to 
the lower trading volume that generally occurs in the fixed income 
markets as compared to the equity markets.\29\
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    \28\ See Joint Rules, 71 FR at 30537.
    \29\ Nasdaq believes that the requirement to have a minimum 
principal amount outstanding of $100 million, coupled with the 
proposed concentration requirements, would reduce the likelihood 
that an ETF listed under the proposal would be readily susceptible 
to manipulation.
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Listing and Trading of ETFs Based on Combination Indexes
    To list an ETF pursuant to the proposed generic listing standards 
for Combination Indexes, an index underlying the ETF must satisfy all 
the conditions contained in proposed Rule 4420(i)(5) (for PDRs) or Rule 
4420(j)(5) (for IFSs). As with ETFs based solely on Fixed Income 
Indexes, the generic listing standards are intended to ensure that 
securities with substantial market distribution and liquidity account 
for a substantial portion of the weight of both the equity and fixed 
income portions of a Combination Index.
    The proposed rules provide that Nasdaq may list and trade ETFs 
based on a combination of indexes or a series of component securities 
representing the U.S. or domestic equity market, the international 
equity market, and the fixed income market, pursuant to Rule 19b-4(e) 
under the Act, provided that: (i) Such portfolio or combination of 
indexes has been described in an exchange rule approved by the 
Commission for the trading of options, PDRs, IFSs, Index-Linked 
Exchangeable Notes, or Index-Linked Securities, and all of the 
standards set forth in the approval order are satisfied by the exchange 
employing generic listing standards; or (ii) the equity portion and 
fixed income portion of the component securities separately meet the 
criteria set forth in Rule 4420(i)(3) (equities) and proposed Rule 
4420(i)(4) (fixed income) for PDRs and Rule 4420(j)(3) (equities) and 
proposed Rule 4420(j)(4) (fixed income) for IFSs.
Index Maintenance and Information
    Nasdaq proposes to establish requirements regarding the maintenance 
and dissemination of index information in connection with ETFs based on 
Fixed Income Indexes and Combination Indexes. These rules would require 
that the underlying value of a Fixed Income Index be widely 
disseminated by one or more major market data vendors at least once a 
day during the time when the corresponding ETF trades on Nasdaq.\30\ 
The rules also would require that the underlying value of a Combination 
Index be widely disseminated by one or more major market data vendors 
at least once every 15 seconds during the time when the corresponding 
ETF trades on Nasdaq, provided that, with respect to the fixed income 
components of the Combination Index, their impact on the index is 
required to be updated only once each day.\31\ Nasdaq believes that 
these provisions reflect the nature of the fixed income markets as well 
as the frequency of intra-day trading information with respect to Fixed 
Income Securities. If the index value does not change during some or 
all of the period when trading is occurring on Nasdaq, the last 
official calculated index value must remain available throughout Nasdaq 
trading hours.
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    \30\ Nasdaq Rules 4420(i)(4)(B)(ii) and 4420(j)(4)(B)(ii).
    \31\ Nasdaq Rules 4420(i)(5)(A)(ii) and 4420(j)(5)(A)(ii).
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    Moreover, if a Fixed Income Index or Combination Index underlying 
an ETF is maintained by a broker-dealer or fund advisor, the broker-
dealer or fund advisor shall erect a ``firewall'' around the personnel 
who have access to information concerning changes and adjustments to 
the index.\32\ In addition, any advisory committee, supervisory board, 
or similar entity that advises a Reporting Authority or that makes 
decisions on index composition, methodology, and related matters, must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the index.\33\
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    \32\ Rules 4420(i)(4)(B)(i), 4420(i)(5)(A)(i), 4420(j)(4)(B)(i), 
and 4420(j)(5)(A)(i).
    \33\ Rules 4420(i)(4)(B)(iii), 4420(i)(5)(A)(iii), 
4420(j)(4)(B)(iii), and 4420(j)(5)(A)(iii).
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Application of General Rules
    Proposed Rules 4420(i)(6) and 4420(j)(6) set forth requirements 
governing any ETF based on a Fixed Income Index or Combination Index. 
These include initial shares outstanding and the dissemination of the 
Intraday Indicative Value, which is an estimate of the value of a share 
of each ETF, updated at least every 15 seconds.

ETF Listing Criteria, Trading Rules, and Procedures

    Under Nasdaq's proposal, an ETF based on a Fixed Income Index or 
Combination Index would be subject to the listing criteria set out in 
proposed Rules 4420(i)(9) and 4420(j)(9) \34\ Accordingly, an ETF's NAV 
must be calculated at least once each day and disseminated to all 
market participants at the same time.\35\ Also, where the value of the 
underlying index or portfolio of securities on which the ETF is based 
is no longer calculated or available, or if the ETF replaces the 
underlying index or portfolio with a new index or portfolio, Nasdaq 
would commence delisting proceedings unless the new index or portfolio 
meets the requirements of and listing standards set forth in Rules 
4420(i) and 4420(j), as applicable.\36\ Nasdaq proposes to clarify that 
if a sponsor of an ETF chose to replace an index or portfolio that did 
not meet any of Nasdaq's generic listing standards, approval by the 
Commission of a separate filing pursuant to Section 19(b)(2) of the Act 
to list and trade that ETF would be required.\37\ An ETF based on a 
Fixed Income Index or Combination Index would be traded, in all 
respects, under Nasdaq's existing trading rules and procedures that 
apply to ETFs generally, including with respect to delisting and 
trading halts. In particular, Rule 4120(a)(9) provides that, if the 
Intraday Indicative Value or the index value applicable to that series 
of ETFs is not being disseminated as required, Nasdaq 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, 
Nasdaq would halt trading no later than the beginning of the trading 
day following the interruption.\38\
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    \34\ These rules will be renumbered from Rules 4420(i)(6) and 
4420(j)(6).
    \35\ See proposed Rules 4420(i)(9)(A)(ii) and 4420(j)(9)(A)(ii) 
(requiring that, before approving an ETF for listing, Nasdaq will 
obtain a representation from the ETF issuer that the NAV per share 
will be calculated daily and made available to all market 
participants at the same time).
    \36\ See proposed Rules 4420(i)(9)(B)(i)b and 4420(j)(9)(B)(i)b.
    \37\ The Commission previously approved a similar clarification 
to the rules of the American Stock Exchange. See Securities Exchange 
Act Release No. 54739 (November 9, 2006), 71 FR 66993 (November 17, 
2006) (approving SR-Amex-2006-78).
    \38\ If an ETF is traded on Nasdaq pursuant to unlisted trading 
privileges, Nasdaq would halt trading if the primary listing market 
halts trading in such ETF because the Intraday Indicative Value and/
or the index value is not being disseminated. See Rule 4120(b)(9).
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    As noted above, if a broker-dealer is responsible for maintaining 
(or has a role in maintaining) the underlying index, the broker-dealer 
would be required to erect and maintain a ``firewall,'' in a form 
satisfactory to

[[Page 30655]]

Nasdaq, to prevent the flow of non-public information regarding the 
underlying index from the personnel involved in the development and 
maintenance of such index to others such as sales and trading 
personnel.
Surveillance
    Nasdaq represents that an ETF based on a Fixed Income Index or 
Combination Index would be covered under NASD Regulation's surveillance 
program for ETFs, which NASD Regulation administers for Nasdaq under a 
regulatory services agreement. NASD Regulation will implement written 
surveillance procedures for ETFs based on either a Fixed Income Index 
or a Combination Index.\39\ Nasdaq represents that NASD Regulation's 
surveillance procedures are adequate to properly monitor the trading of 
ETFs listed pursuant to the proposed new listing standards. In 
addition, Nasdaq also has a general policy prohibiting the distribution 
of material, non-public information by its employees.
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    \39\ See proposed Rules 4420(i)(6)(C) and 4420(j)(6)(C).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\40\ in general and with Section 
6(b)(5) of the Act,\41\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \40\ 15 U.S.C. 78f.
    \41\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in 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 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 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-NASDAQ-2007-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASDAQ-2007-027. 
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 Nasdaq.
    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 the File Number SR-NASDAQ-
2007-027 and should be submitted on or before June 22, 2007.

IV. Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\42\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Act \43\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \42\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \43\ 15 U.S.C. 78f(b)(5).
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    Currently, the Exchange must file a proposed rule change with the 
Commission pursuant to Section 19(b)(1) of the Act \44\ and Rule 19b-4 
thereunder \45\ to list or trade any ETF based on Fixed Income 
Securities. The Exchange also must file a proposed rule change to list 
or trade an ETF based on a Fixed Income or Combination Index described 
in an exchange rule previously approved by the Commission as an 
underlying benchmark for a derivative security. Rule 19b-4(e) under the 
Act, however, provides that the listing and trading of a new derivative 
securities product by an SRO will not be deemed a proposed rule change 
pursuant to Rule 19b-4(c)(1) if the Commission has approved, pursuant 
to Section 19(b) of the Act, the SRO's trading rules, procedures, and 
listing standards for the product class that would include the new 
derivative securities product, and the SRO has a surveillance program 
for the product class. The Exchange's proposed rules for the listing 
and trading of ETFs pursuant to Rule 19b-4(e) based on (1) certain 
indexes with components that include Fixed Income Securities or (2) 
indexes or portfolios described in exchange rules previously approved 
by the Commission as underlying benchmarks for derivative securities 
fulfill these requirements. Use of Rule 19b-4(e) by Nasdaq to list and 
trade such ETFs should promote competition, reduce burdens on issuers 
and other market participants, and make such ETFs available to 
investors more quickly. \46\
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    \44\ 15 U.S.C. 78s(b)(1).
    \45\ 17 CFR 240.19b-4.
    \46\ The Commission notes that failure of a particular ETF to 
satisfy the Exchange's generic listing standards does not preclude 
the Exchange from submitting a separate proposal to list and trade 
such ETF.
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    The Commission has approved for listing and trading ETFs based on 
certain fixed income indexes and structured notes linked to a basket or

[[Page 30656]]

index of Fixed Income Securities.\47\ Further, the Commission approved 
substantially similar generic listing standards for ETFs based on Fixed 
Income Indexes and Combination Indexes to be traded on Amex.\48\ The 
Commission believes that adopting generic listing standards for ETFs 
based on Fixed Income and Combination Indexes should fulfill the 
intended objective of that rule by allowing those ETFs that satisfy the 
proposed generic listing standards to commence trading without a rule 
filing. Taken together, the Commission finds that the Nasdaq proposal 
meets the requirements of Rule 19b-4(e). All products listed under the 
proposed generic listing standards will be subject to existing Nasdaq 
rules governing the trading of ETFs.
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    \47\ See note 16 supra.
    \48\ See note 17 supra.
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    Proposed Rule 4420(i) (for PDRs) and proposed Rule 4420 (j) (for 
IFSs) establish the standards for the composition of a Fixed Income 
Index or Combination Index underlying an ETF. These requirements are 
designed, among other things, to ensure that components of an index or 
portfolio underlying the ETF are adequately capitalized and 
sufficiently liquid, and that no one security dominates the index. The 
Commission believes that these standards are reasonably designed to 
ensure that a substantial portion of any underlying index or portfolio 
consists of securities about which information is publicly available, 
and that when applied in conjunction with the other applicable listing 
requirements, will permit the listing and trading only of ETFs that are 
sufficiently broad-based in scope to minimize potential manipulation. 
The Commission further believes that the proposed listing standards are 
reasonably designed to preclude Nasdaq from listing and trading an ETF 
that might be used as a surrogate for trading in unregistered 
securities.
    The proposed generic listing standards also will permit Nasdaq to 
list and trade an ETF if the Commission previously has approved a rule 
of another exchange that contemplates listing and trading a derivative 
security based on the same underlying index. Nasdaq would be able to 
rely on the Commission's earlier approval order, provided that Nasdaq 
complies with the commitments undertaken by the other exchange set 
forth in the prior order, including any surveillance-sharing 
arrangements.
    The Commission believes that Nasdaq's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\49\ which sets forth Congress' 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for and transactions in 
securities. Under the Exchange's proposed listing standards, the 
underlying value of a Fixed Income Index is required to be widely 
disseminated by one or more major market data vendors at least once a 
day during the time when the corresponding ETF trades on the Exchange. 
Likewise, the underlying value of a Combination Index is required to be 
widely disseminated by one or more major market data vendors at least 
once every 15 seconds during the time when the corresponding ETF trades 
on the Exchange, provided that, with respect to the fixed income 
components of the Combination Index, the impact on the index is 
required to be updated only once each day.
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    \49\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Furthermore, the Commission believes that the proposed rules are 
reasonably designed to promote fair disclosure of information that may 
be necessary to price an ETF appropriately. If a Fixed Income Index or 
Combination Index underlying such an ETF is maintained by a broker-
dealer or fund advisor, that entity must erect a firewall around the 
personnel who have access to information concerning changes and 
adjustments to the index. Any advisory committee, supervisory board, or 
similar entity that advises a Reporting Authority or that makes 
decisions on index composition, methodology, or related matters must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the index. The Commission also notes that proposed Rules 
4420(i)(9)(A)(ii) and 4420(j)(9)(A)(ii), which would apply to an ETF 
listed and traded pursuant to this proposal, require that, before 
approving an ETF for listing, the Exchange will obtain a representation 
from the ETF issuer that the NAV per share will be calculated daily and 
made available to all market participants at the same time.
    The Commission also believes that the Exchange's trading halt rules 
are reasonably designed to prevent trading in an ETF when transparency 
cannot be assured. Rule 4120(a)(9) provides that, if the Intraday 
Indicative Value or the index value applicable to an ETF is not 
disseminated as required, the Exchange may halt trading during the day 
in which the interruption occurs. If the interruption continues, the 
Exchange will halt trading no later than the beginning of the next 
trading day.\50\ Also, the Exchange will commence delisting proceedings 
in the event that the value of the underlying index is no longer 
calculated and widely disseminated on at least a 15-second basis (for 
Combination Indexes) or at least once a day (for Fixed Income Indexes).
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    \50\ Nasdaq may also exercise discretion to halt trading in a 
series of Portfolio Depository Receipts or Index Fund Shares based 
on a consideration of the following factors: (A) trading in 
underlying securities comprising the index applicable to that series 
has been halted in the primary market(s), (B) the extent to which 
trading has ceased in securities underlying the index, or (C) the 
presence of other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market. See Nasdaq Rule 
4120(a)(9).
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    The Commission notes that the Exchange represented that NASD 
Regulation will implement written surveillance procedures for ETFs 
based on either a Fixed Income Index or Combination Index.\51\ In 
approving this proposal, the Commission has relied on the Exchange's 
representation that its surveillance procedures are adequate to 
properly monitor the trading of ETFs listed pursuant to this proposal. 
This approval order is conditioned on the continuing accuracy of that 
representation.
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    \51\ See proposed Nasdaq Rules 4420(i)(6)(C) and 4420(j)(6)(C).
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Acceleration
    The Commission finds good cause to approve the proposal, as 
amended, prior to the thirtieth day after the proposal was published 
for comment in the Federal Register. The Commission believes that 
accelerating approval of the proposed rule change will expedite the 
listing and trading of additional ETFs based on Fixed Income and 
Combination Indexes by the Exchange, subject to consistent and 
reasonable standards. The Commission also notes that Nasdaq's proposed 
generic listing standards are substantially similar to the Amex Rules 
that were approved by the Commission. Thus, the Commission finds good 
cause, consistent with Section 19(b)(2) of the Act,\52\ to grant 
accelerated approval of the proposed rule change.
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    \52\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASDAQ-

[[Page 30657]]

2007-027), as amended, is hereby approved on an accelerated basis.\53\
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    \53\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-10556 Filed 5-31-07; 8:45 am]

BILLING CODE 8010-01-P