Document ID: SEC-2008-1473-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2008-10-27T04:00Z

[Federal Register: October 27, 2008 (Volume 73, Number 208)]
[Notices]               
[Page 63756-63759]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27oc08-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58825; File No. SR-NYSEArca-2008-89]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change Amending NYSE Arca Equities Rule 5.2(j)(3) in 
Connection With Generic Listing Standards for Multiple Fund Shares and 
Inverse Fund Shares

October 21, 2008.

I. Introduction

    On August 25, 2008, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca''), through its wholly owned subsidiary, NYSE Arca Equities, Inc. 
(``NYSE Arca Equities''), filed with the Securities and Exchange 
Commission (``Commission'') pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NYSE Arca Equities Rule 
5.2(j)(3) in connection with generic listing standards for Multiple 
Fund Shares and Inverse Fund Shares. The proposed rule change was 
published for comment in the Federal Register on September 16, 2008.\3\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58484 (September 8, 
2008), 73 FR 53472.
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Commentaries .01, .02, and .03 and 
to adopt new Commentary .04, to NYSE Arca Equities Rule 5.2(j)(3), the 
Exchange's initial listing standards for Investment Company Units 
(``ICUs''), to permit the listing and trading of ICUs issued by an 
open-end management investment company that seek to provide investment 
results, before fees and expenses, that either correspond to a 
specified multiple of the percentage performance on a given day of a 
particular benchmark domestic equity index, international equity index, 
Fixed Income Securities \4\ index, or a combination thereof (``Multiple 
Fund Shares'') or that correspond inversely up to minus or negative 300 
percent (-300%) of the percentage performance on a given day of a 
particular domestic equity index, international equity index, Fixed 
Income Securities index, or a combination thereof (``Inverse Fund 
Shares,'' and together with Multiple Fund Shares, collectively, ``Fund 
Shares''), in each case, pursuant to Rule 19b-4(e) under the Act.\5\
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    \4\ Fixed Income Securities are debt securities that are notes, 
bonds, debentures, or evidence of indebtedness that include, but are 
not limited to, U.S. Department of Treasury securities, government-
sponsored entity securities, municipal securities, trust preferred 
securities, supranational debt, and debt of a foreign country or a 
subdivision thereof. See Commentary .02 to NYSE Arca Equities Rule 
5.2(j)(3).
    \5\ Rule 19b-4(e) under the Act provides that the listing and 
trading of a new derivative securities product by a self-regulatory 
organization (``SRO'') shall not be deemed a proposed rule change, 
pursuant to Rule 19b-4(c)(1) under the Act, 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. See 17 CFR 240.19b-
4(e)(1). A new derivative securities product means any type of 
option, warrant, hybrid securities product, or any other security, 
other than a single equity option or a security futures product, 
whose value is based, in whole or in part, upon the performance of, 
or interest in, an underlying instrument. See 17 CFR 240.19b-4(e).
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    Specifically, the Exchange proposes to remove the current 
limitation to listing Multiple Fund Shares and Inverse Fund Shares \6\ 
and to amend Commentaries .01, .02, and .03 to NYSE Arca Equities Rule 
5.2(j)(3) to permit the Exchange to approve the listing and trading of 
Multiple Fund Shares and Inverse Fund Shares pursuant to Rule 19b-4(e) 
under the Act, provided that each of the applicable conditions and 
requirements set forth in Commentaries .01, .02, or .03 to NYSE Arca 
Equities Rule 5.2(j)(3), as proposed to be amended, and proposed 
Commentary .04 to NYSE Arca Equities Rule 5.2(j)(3) are satisfied.
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    \6\ See Commentaries .02 and .03 to NYSE Arca Equities Rule 
5.2(j)(3) (currently prohibiting the Exchange from approving for 
listing and trading pursuant to Rule 19b-4(e) a series of ICUs that 
are issued by an open-end management investment company that seeks 
to provide investment results that either exceed the performance of 
a specified index by a specified multiple or that correspond to the 
inverse of the performance of a specified index by a specified 
multiple).
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    Lastly, the Exchange proposes to make a minor, non-substantive 
language change to Commentary .02(ii) to NYSE Arca Equities Rule 
5.2(j)(3).

Limitation on Leverage

    In connection with the listing and trading of Multiple Fund Shares, 
Commentaries .01, .02, and .03 to NYSE Arca Equities Rule 5.2(j)(3), as 
amended, would not provide a limitation on leverage. Specifically, the 
proposal would permit the Exchange to approve, pursuant to Rule 19b-
4(e) under the Act, the listing and trading of Multiple Fund Shares 
that seek to provide investment results, before fees and expenses, 
corresponding to any multiple, without limitation, of the percentage 
performance on a given day of a particular domestic or international 
equity index, Fixed Income Securities index, or a combination thereof.
    In connection with Inverse Fund Shares, Commentaries .01, .02, and 
.03 to NYSE Arca Equities Rule 5.2(j)(3), as amended, would expressly 
prohibit the Exchange from approving pursuant to Rule 19b-4(e) under 
the Act the listing and trading of Inverse Fund Shares that seek to 
provide investment results, before fees and expenses, in an amount that 
exceeds -300% of the percentage performance of the underlying benchmark 
index. Specifically, with respect to the listing and trading of Inverse 
Fund Shares that seek to provide investment results, before fees and 
expenses, in an amount that exceeds -300% of the percentage performance 
of the underlying benchmark index, the Exchange's proposal would 
continue to require specific Commission approval pursuant to section 
19(b)(2) of the Act.\7\
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    \7\ 15 U.S.C. 78s(b)(2).
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Availability of Information About Fund Shares and Underlying Indexes

    The Exchange also proposes to adopt new Commentary .04 to NYSE Arca 
Equities Rule 5.2(j)(3), which would only apply to a series of Multiple 
Fund Shares and Inverse Fund Shares issued by an open-end management 
investment company. Proposed Commentary .04 to NYSE Arca Equities Rule 
5.2(j)(3) would require the composition of portfolio holdings of a fund 
be disclosed daily on

[[Page 63757]]

its Internet Web site and to include, as applicable: (1) The identity 
and number of shares held of each specific equity security; (2) the 
identity and amount held of each specific Fixed Income Security; (3) 
the specific types of financial instruments, which include, but are not 
limited to, stock index futures contracts, options on futures 
contracts, options on securities and indices, equity caps, collars, and 
floors, swap agreements, forward contracts, and repurchase agreements 
(collectively, ``Financial Instruments''), as well as the 
characteristics of such Financial Instruments; and (4) the cash 
equivalents and amount of cash held in such portfolio.
    The Exchange states that this public Web site disclosure of the 
portfolio composition of a fund would coincide with the disclosure of 
the ``IIV File'' \8\ and the ``PCF File.'' \9\ Therefore, the same 
portfolio information (including accrued expenses and dividends) would 
be provided on the public Web site, as well as in the IIV File and PCF 
File provided to ``Authorized Participants.'' \10\ The Exchange further 
states that the format of the public Web site disclosure and the IIV 
File and PCF File could differ because the public Web site will list 
all portfolio holdings, while the IIV File and PCF File would similarly 
provide the portfolio holdings, but in a format appropriate for 
Authorized Participants, i.e., the exact components of a Creation Unit. 
Accordingly, investors would have access to the current portfolio 
composition of a fund through the fund's Web site.
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    \8\ Because the National Securities Clearing Corporation's 
(``NSCC'') system for the receipt and dissemination to its 
participants of the portfolio composition file (``PCF File'') is not 
currently capable of processing information with respect to 
Financial Instruments, an ``IIV File'' has been developed, which is 
used to disclose a fund's holdings of Financial Instruments. The IIV 
File is posted to a password-protected Web site before the opening 
of business on each business day, and all NSCC participants and the 
Exchange have access to a password and the Web site containing the 
IIV File.
    \9\ The PCF File for a fund includes the list of names and the 
required number of shares of each deposit security, as well as any 
cash information to be included in the next trading day's ``Creation 
Unit'' (the minimum aggregation size of shares required to effect a 
creation or redemption of shares). The information in the PCF File 
will be available to all participating in the NSCC system.
    \10\ Authorized Participants are the only persons that may place 
orders to create and redeem Creation Units. Authorized Participants 
must be registered broker-dealers or other securities market 
participants, such as banks and other financial institutions, that 
are exempt from registration as broker-dealers to engage in 
securities transactions, who are Depository Trust Company 
participants.
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Trading Halts

    The Exchange states that existing trading halt requirements for 
ICUs would apply to Multiple Fund Shares and Inverse Fund Shares. In 
particular, NYSE Arca Equities Rule 5.5(g)(2)(b) provides that, if the 
intraday indicative value (``IIV'') or the index value applicable to 
that series of ICUs is not being disseminated as required, the Exchange 
may halt trading during the day in which the interruption to the 
dissemination of the IIV or the index value occurs. If the interruption 
to the dissemination of the IIV or the index value persists past the 
trading day in which it occurred, the Exchange would halt trading no 
later than the beginning of the trading day following the 
interruption.\11\
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    \11\ If a series of ICUs are traded on the Exchange pursuant to 
unlisted trading privileges, the Exchange would halt trading if the 
primary listing market halts trading in such series. See NYSE Arca 
Equities Rule 7.34(a).
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    In addition, proposed Commentary .04(b) to NYSE Arca Equities Rule 
5.2(j)(3) requires the Exchange to halt trading of Fund Shares if the 
Exchange becomes aware that the net asset value (``NAV'') is not being 
disseminated to all market participants at the same time or the daily 
public Web site disclosure of its portfolio holdings does not occur. 
Proposed Commentary .04(b) to NYSE Arca Equities Rule 5.2(j)(3) further 
provides that the Exchange may resume trading in such Fund Shares only 
when the NAV is disseminated to all market participants at the same 
time or the daily public Web site disclosure of portfolio holdings 
occurs, as appropriate.
    In addition to other factors that may be relevant, the Exchange 
states that it may consider factors in exercising its discretion to 
halt or suspend trading in Multiple Fund Shares and/or Inverse Fund 
Shares. These factors would include, without limitation, (1) the extent 
to which trading is not occurring in securities comprising an 
underlying index and/or the Financial Instruments relating to the Fund 
Shares, or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.\12\ In the case of Financial Instruments, the Exchange 
represents that a notification procedure would be implemented so that 
timely notice from the investment adviser is received by the Exchange 
when a particular Financial Instrument is in default or shortly to be 
in default. Notification from the investment adviser would be made by 
phone, facsimile, or e-mail. 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 Multiple Fund Shares and/or 
Inverse Fund Shares, as applicable. Trading in Multiple Fund Shares 
and/or Inverse Fund Shares would also be halted if the circuit breaker 
parameters pursuant to NYSE Arca Equities 7.12 are reached.\13\
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    \12\ See NYSE Arca Equities Rule 5.5(g)(2)(b).
    \13\ See id.
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Continued Listing and Trading Criteria

    The Exchange states that the continued listing and trading 
requirements for ICUs set forth in NYSE Arca Equities Rule 5.5(g)(2) 
would apply to Multiple Fund Shares and Inverse Fund Shares.

Suitability

    Currently, NYSE Arca Equities Rule 9.2(a) (Diligence as to 
Accounts) provides that an ETP Holder, before recommending a 
transaction in ICUs, must have reasonable grounds to believe that the 
recommendation is suitable for the customer based on any facts 
disclosed by the customer as to its other security holdings and as to 
its financial situation and needs. Further, the rule provides, with a 
limited exception, that prior to the execution of a transaction 
recommended to a non-institutional customer, the ETP Holder must make 
reasonable efforts to obtain information concerning the customer's 
financial status, tax status, investment objectives, and any other 
information that such ETP Holder believes would be useful to make a 
recommendation.
    Prior to the commencement of trading, the Exchange would inform its 
ETP Holders of the suitability requirements of NYSE Arca Equities Rule 
9.2(a) in an Information Bulletin. Specifically, ETP Holders would be 
reminded in the Information Bulletin that, in recommending transactions 
in these securities, they must have a reasonable basis to believe that 
(1) the recommendation is suitable for a customer given reasonable 
inquiry concerning the customer's investment objectives, financial 
situation, needs, and any other information known by such member, and 
(2) the customer can evaluate the special characteristics, and is able 
to bear the financial risks, of an investment in Multiple Fund Shares 
and Inverse Fund Shares. In connection with the suitability obligation, 
the Information Circular would also provide that members must make 
reasonable efforts to obtain the following information: (1) The 
customer's financial status; (2) the customer's tax

[[Page 63758]]

status; (3) the customer's investment objectives; and (4) such other 
information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of section 6 of the 
Act \14\ and the rules and regulations thereunder applicable to a 
national securities exchange.\15\ In particular, the Commission finds 
that the proposed rule change is consistent with section 6(b)(5) of the 
Act,\16\ which requires, among other things, that the Exchange's rules 
be designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \14\ 15 U.S.C. 78f.
    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal reasonably balances the 
removal of impediments to a free and open market with the protection of 
investors and the public interest, two principles set forth in section 
6(b)(5) of the Act. The Commission notes that it has previously 
approved the listing and trading of various leveraged exchange-traded 
funds, including trading pursuant to unlisted trading privileges on the 
Exchange, that seek daily investment results, before fees and expenses, 
that correspond to twice the inverse or opposite of the daily 
performance (-200%) of the underlying index.\17\ The Commission also 
notes that the proposed rule change is similar to another exchange's 
generic listing requirements for Multiple Fund Shares and Inverse Fund 
Shares.\18\ With respect to the listing and trading of a series of 
Inverse Fund Shares that seek to provide investment results that exceed 
-300% of the percentage performance of an underlying benchmark index, 
the Commission further notes that the Exchange would be required to 
obtain prior Commission approval pursuant to section 19(b)(2) of the 
Act.
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    \17\ See, e.g., Securities Exchange Act Release Nos. 56713 
(October 29, 2007), 72 FR 61915 (November 1, 2007) (SR-Amex-2007-74) 
(approving the listing and trading of Rydex Leveraged Funds, Inverse 
Funds and Leveraged Inverse Funds); 52553 (October 3, 2005), 70 FR 
59100 (October 11, 2005) (SR-Amex-2004-62) (approving the listing 
and trading of the ProShares Ultra Funds and Short Funds); 54040 
(June 23, 2006), 71 FR 37629 (June 30, 2006) (SR-Amex-2006-41) 
(approving the listing and trading of the ProShares UltraShort 
Funds); 55117 (January 17, 2007), 72 FR 3442 (January 25, 2007) (SR-
Amex-2006-101) (approving the listing and trading of Ultra, Short 
and UltraShort Funds based on various indexes); 56592 (October 1, 
2007), 72 FR 57364 (October 9, 2007) (SR-Amex-2007-60) (approving 
the listing and trading of ProShares Ultra, Short and UltraShort 
Funds based on various international indexes); and 56998 (December 
19, 2007), 72 FR 73404 (December 27, 2007) (SR-Amex-2007-104) 
(approving the listing and trading of ProShares Ultra, Short and 
UltraShort Funds based on several fixed income indexes, among 
others). See also, e.g., Securities Exchange Act Release Nos. 56763 
(November 7, 2007), 72 FR 64103 (November 14, 2007) (SR-NYSEArca-
2007-81) (approving UTP trading of shares of funds of Rydex ETF 
Trust); 56601 (October 2, 2007), 72 FR 57625 (October 10, 2007) (SR-
NYSEArca-2007-79) (approving UTP trading of shares of eight funds of 
the ProShares Trust); 55125 (January 18, 2007), 72 FR 3462 (January 
25, 2007) (SR-NYSEArca-2006-87) (approving UTP trading of shares of 
81 funds of the ProShares Trust); and 54026 (June 21, 2006), 71 FR 
36850 (June 28, 2006) (SR-PCX-2005-115) (approving UTP trading of 
shares of funds of the ProShares Trust).
    \18\ See Securities Exchange Act Release No. 57660 (April 14, 
2008), 73 FR 21391 (April 21, 2008) (SR-Amex-2007-131) (approving 
generic listing standards for Multiple Fund Shares and generic 
listing standards for Inverse Fund Shares that correspond inversely 
up to -200% of the percentage performance of a particular underlying 
benchmark index).
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    The Commission also notes that Fund Shares must comply with all of 
the applicable provisions under NYSE Arca Equities Rules 5.2(j)(3), as 
proposed to be amended, and 5.5(g)(2), as well as all other 
requirements applicable to ICUs including, without limitation, 
requirements relating to the dissemination of intraday indicative 
value, index value, disclosure of portfolio holdings, rules and 
policies governing the trading of equity securities, trading hours, 
trading halts, surveillance, firewalls, and Information Bulletins to 
ETP Holders, as set forth in prior Commission orders approving the 
generic listing rules applicable to the listing and trading of ICUs.
    The Commission further notes that the proposed rule change is 
reasonably designed to promote fair disclosure of information that may 
be necessary to price the Shares appropriately and to prevent trading 
when a reasonable degree of transparency cannot be assured. Proposed 
Commentary .04 to NYSE Arca Equities Rule 5.2(j)(3) requires daily 
public Web site disclosure of the composition of a fund's portfolio 
holdings, including the identities and amount of securities comprising 
the underlying benchmark index, the specific types and characteristics 
of Financial Instruments, and any cash and cash equivalents held in 
such portfolio. With respect to such Financial Instruments, the 
Commission notes that a notification procedure will be implemented by 
the Exchange so that timely notice from the investment adviser is 
submitted to the Exchange if a particular Financial Instrument is in 
default or is shortly to be in default. The Exchange states that, after 
receipt of such notice, it would determine on a case-by-case basis 
whether such default justifies a trading halt of Multiple Fund Shares 
or Inverse Fund Shares, as the case may be. The Commission also notes 
that the Exchange would be required to halt trading in Multiple Fund 
Shares and Inverse Fund Shares if certain values are not disseminated 
as required or cease to be disseminated to all market participants at 
the same time.\19\
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    \19\ See proposed Commentary .04(b) to NYSE Arca Equities Rule 
5.2(j)(3); NYSE Arca Equities Rule 5.5(g)(2).
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    In addition, the Commission notes that NYSE Arca Equities Rule 
9.2(a), which sets forth the Exchange's suitability requirements, would 
apply to the trading of Multiple Fund Shares and Inverse Fund Shares. 
Specifically, ETP Holders, before recommending a transaction to a non-
institutional customer in such securities, must have reasonable grounds 
to believe that the recommendation is suitable for the customer, based 
on facts disclosed by the customer after reasonable inquiry concerning 
the customer's investment objectives, financial situation, needs, and 
any other information that such ETP Holder believes would be useful to 
make a recommendation. ETP Holders must also have a reasonable basis to 
believe that the customer can evaluate the special characteristics, and 
is able to bear the financial risks, of investments in Multiple Fund 
Shares and Inverse Fund Shares. An Information Bulletin would inform 
ETP Holders of the suitability requirements of NYSE Arca Equities Rule 
9.2(a) prior to the commencement of trading in such securities.
    In sum, the Commission believes that the Exchange's proposed 
amendments to Commentaries .01, .02, and .03, and adoption of new 
Commentary .04, to NYSE Arca Equities Rule 5.2(j)(3) relating to the 
listing and trading of Multiple Fund Shares and Inverse Fund Shares 
should fulfill the intended objective of Rule 19b-4(e) under the Act by 
allowing such derivative securities products to be listed and traded 
without separate Commission approval. The Commission believes that the 
proposed rule change should facilitate the listing and trading of 
additional types of exchange-traded products and reduce the time frame 
for bringing these

[[Page 63759]]

securities to market, thereby reducing the burdens on issuers and other 
market participants and promoting competition.
    For the foregoing reasons, the Commission believes that the 
proposed rule change is consistent with the Act and finds good cause 
for approving the proposed rule change.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NYSEArca-2008-89) be, and it 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(1).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Florence E. Harmon,
Acting Secretary.
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    \21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-25505 Filed 10-24-08; 8:45 am]

BILLING CODE 8011-01-P