Document ID: SEC-2011-1244-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-08-19T04:00Z

[Federal Register Volume 76, Number 161 (Friday, August 19, 2011)]
[Notices]
[Pages 52037-52040]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21175]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65136; File No. SR-NYSEArca-2011-24]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To List and Trade Shares of the Following Under 
NYSE Arca Equities Rule 8.200: ProShares Short DJ-UBS Natural Gas, 
ProShares Ultra DJ-UBS Natural Gas and ProShares UltraShort DJ-UBS 
Natural Gas

August 15, 2011.

I. Introduction

    On April 28, 2011, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
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 
list and trade shares of the ProShares Short DJ-UBS Natural Gas, 
ProShares Ultra DJ-UBS Natural Gas, and ProShares UltraShort DJ-UBS 
Natural Gas under NYSE Arca Equities Rule 8.200. The proposed rule 
change was published for comment in the Federal Register on May 17, 
2011.\3\ The Commission received no comments on the proposal. On July 
1, 2011, the Exchange submitted a request to extend the Commission's 
action date for the proposed rule change to August 15, 2011. This order 
grants approval of 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. 64464 (May 11, 
2011), 76 FR 28483 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade shares (``Shares'') of the 
ProShares Short DJ-UBS Natural Gas, ProShares Ultra DJ-UBS Natural Gas, 
and ProShares UltraShort DJ-UBS Natural Gas (each a ``Fund'' and, 
collectively, ``Funds'') \4\ pursuant to NYSE Arca Equities Rule 8.200, 
Commentary .02, which permits the trading of Trust Issued Receipts 
either by listing or pursuant to unlisted trading privileges.\5\

[[Page 52038]]

Each of the Funds is a series of the ProShares Trust II (``Trust''), a 
Delaware statutory trust. ProShare Capital Management LLC (``Sponsor'') 
is the Trust's Sponsor, and Wilmington Trust Company is the Trust's 
trustee. Brown Brothers Harriman & Co. (``Administrator'') serves as 
the administrator, custodian, and transfer agent of the Funds. SEI 
Investments Distribution Co. serves as distributor of the Shares.
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    \4\ See Post-Effective Amendment No. 1 dated May 28, 2010 (File 
No. 333-163511) and Post-Effective Amendment No. 4 dated April 13, 
2011 (File No. 333-163511) to the Funds' Registration Statement on 
Form S-3 (``Registration Statements'').
    \5\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to 
Trust Issued Receipts that invest in ``Financial Instruments.'' The 
term ``Financial Instruments,'' as defined in Commentary .02(b)(4) 
to NYSE Arca Equities Rule 8.200, means any combination of 
investments, including cash; securities; options on securities and 
indices; futures contracts; options on futures contracts; forward 
contracts; equity caps, collars and floors; and swap agreements.
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    The Funds seek daily investment results (before fees and expenses) 
that correspond to the inverse (opposite) of the daily performance, a 
multiple of the daily performance, or an inverse multiple of the daily 
performance of the Dow Jones-UBS Natural Gas Sub-Index, the benchmark 
index for each of the Funds (``Benchmark'' or ``Index''). The Index, 
which is comprised of New York Mercantile Exchange (``NYMEX'') Natural 
Gas futures contracts (``Natural Gas Futures Contracts''), is intended 
to reflect the performance of natural gas as measured by the 
performance of Natural Gas Futures Contracts, including roll costs, 
without regard to income earned on cash positions. The Index rolls (or 
sells its existing position prior to settlement while purchasing a new 
position further from settlement) the component Natural Gas Futures 
Contracts every other month. The roll for each Index component occurs 
over a period of five NYMEX business days.
    Each Fund will seek to achieve its respective investment objective 
by investing under normal market conditions in Natural Gas Futures 
Contracts. In the event position accountability rules are reached with 
respect to Natural Gas Futures Contracts, the Sponsor may, in its 
commercially reasonable judgment, cause the Funds to obtain exposure 
through swaps referencing the Index or particular Natural Gas Futures 
Contracts, or invest in other futures contracts or swaps not based on 
the particular Natural Gas Futures Contracts if such instruments tend 
to exhibit trading prices or returns that correlate with the Index or 
any Natural Gas Futures Contract and will further the investment 
objective of such Fund.\6\ Each Fund may also invest in swaps if the 
market for a specific futures contract experiences emergencies (e.g., 
natural disaster, terrorist attack, or an act of God) or disruptions 
(e.g., a trading halt or a flash crash) that would prevent such Fund 
from obtaining the appropriate amount of investment exposure to the 
affected Natural Gas Futures Contracts directly or to other futures 
contracts.\7\ In addition, each Fund may invest in cash, cash 
equivalents, and/or U.S. Treasury Securities or other high credit 
quality short-term fixed-income or similar securities (such as shares 
of money market funds, bank deposits, bank money market accounts, 
certain variable-rate demand notes, and repurchase agreements 
collateralized by government securities) that will serve as collateral 
for any futures contracts or swap agreements held by the Funds.
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    \6\ To the extent practicable, the Funds will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \7\ The Sponsor will also attempt to mitigate the Funds' credit 
risk by transacting only with large, well-capitalized institutions 
using measures designed to determine the creditworthiness of a 
counterparty. The Sponsor will take various steps to limit 
counterparty credit risk.
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    The Sponsor expects the Funds to have a statistical correlation \8\ 
over time of -0.95 or better (for ProShares Short DJ-UBS Natural Gas 
and ProShares UltraShort DJ-UBS Natural Gas) and +0.95 or better (for 
ProShares Ultra DJ-UBS Natural Gas) when correlating the daily return 
of a Fund's NAV against the daily return of its relevant Benchmark.
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    \8\ Correlation is the strength of the relationship between (1) 
the change in a Fund's net asset value (``NAV'') and (2) the change 
in the underlying Index or Benchmark. The statistical measure of 
correlation is known as the ``correlation coefficient.'' A 
correlation coefficient of +1 indicates a perfect positive 
correlation while a value of -1 indicates a perfect negative 
(inverse) correlation. A value of zero would mean that there is no 
correlation between the two variables.
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    If ProShares Short DJ-UBS Natural Gas is successful in meeting its 
objective, its value on a given day (before fees and expenses) should 
gain approximately as much on a percentage basis as its Benchmark when 
the Benchmark falls on a given day. Conversely, its value on a given 
day (before fees and expenses) should lose approximately as much on a 
percentage basis as the Benchmark when the Benchmark rises on a given 
day. If the ProShares Ultra DJ-UBS Natural Gas Fund is successful in 
meeting its objective, its value (before fees and expenses) should gain 
approximately twice as much on a percentage basis as the Benchmark when 
it rises on a given day. Conversely, its value (before fees and 
expenses) should lose approximately twice as much on a percentage basis 
as the Benchmark when it declines on a given day. If the ProShares 
UltraShort DJ-UBS Natural Gas Fund is successful in meeting its 
objective, its value (before fees and expenses) should gain 
approximately twice as much on a percentage basis as the Benchmark when 
it declines on a given day. Conversely, its value (before fees and 
expenses) should lose approximately twice as much on a percentage basis 
as the Benchmark when it rises on a given day.
    For each dollar invested in the Funds, each Fund will seek the 
requisite exposure in Natural Gas Futures Contracts to pursue its 
respective investment objective. The Funds' investment techniques may 
involve a small investment relative to the amount of investment 
exposure assumed and may result in losses exceeding the amounts 
invested. Such techniques, particularly when used to create leverage, 
may expose the Funds to potentially dramatic changes (losses or gains) 
in the value of their investments and imperfect correlation between the 
value of the investments and the security or index. The Sponsor does 
not intend to invest directly in any commodity.
    The Exchange represents that the Funds will be subject to the 
criteria in NYSE Arca Equities Rule 8.200 and Commentary .02 thereto 
for the initial and continued listing of the Shares. The Exchange 
further represents that, for the initial and continued listing of the 
Shares, the Funds will be in compliance with NYSE Arca Equities Rule 
5.3 and Rule 10A-3 under the Act \9\ and a minimum of 100,000 Shares 
for each Fund will be outstanding as of the start of trading on the 
Exchange.
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    \9\ 17 CFR 240.10A-3.
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    Additional details regarding the Trust, Shares, trading policies of 
the Fund, creations and redemptions of the Shares, Natural Gas Futures 
Contracts, investment risks, Benchmark performance, NAV calculation, 
the dissemination and availability of information about the underlying 
assets, trading halts, applicable trading rules, surveillance, and the 
Information Bulletin, among other things, can be found in the Notice 
and/or the Registration Statements, as applicable.\10\
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    \10\ See Notice and Registration Statements, supra notes 3 and 
4, respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change to list and trade the Shares of the Funds is consistent with the 
requirements of Section 6 of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\11\ In 
particular, the Commission finds that the proposed rule change is 
consistent

[[Page 52039]]

with the requirements of Section 6(b)(5) of the Act,\12\ which 
requires, among other things, that the Exchange's rules be 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. The Commission notes that 
the Funds and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.200 and Commentary .02 thereto to be listed and traded 
on the Exchange. The Commission finds that the proposal to list and 
trade the Shares on the Exchange is consistent with Section 
11A(a)(1)(C)(iii) of the Act,\13\ which sets forth Congress's finding 
that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for, and transactions in, securities. Quotation 
and last-sale information for the Shares will be available via the 
Consolidated Tape Association high-speed line, and the Index level will 
be disseminated by one or more major market data vendors and will be 
updated at least every 15 seconds during the NYSE Arca Core Trading 
Session, except for that period after the end of the NYMEX Natural Gas 
pit trading session at 2:30 p.m. Eastern Time (``E.T.''), at which 
point the Index value will be static.\14\ In addition, the Indicative 
Fund Value (``IFV'') for each Fund will be disseminated on a per-Share 
basis by one or more major market data vendors at least every 15 
seconds during the NYSE Arca Core Trading Session.\15\ The NAV for the 
Funds' Shares will be calculated by the Administrator once a day and 
will be disseminated daily to all market participants at 2:30 p.m. E.T. 
Each Fund's total portfolio composition will be disclosed on the Funds' 
Web site or another relevant Web site as determined by the Trust and/or 
the Exchange. The Trust will provide Web site disclosure of portfolio 
holdings daily and will include, as applicable, the names and notional 
value (in U.S. dollars) of Natural Gas Futures Contracts and swap 
agreements, if any, cash equivalents and amount of cash held in the 
portfolio of each Fund. The intra-day, closing, and settlement prices 
of the futures contracts held by the Funds are available from NYMEX, 
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters. In addition, 
the Web site for the Funds and/or the Exchange will contain the 
prospectus and additional data relating to NAV and other applicable 
quantitative information.
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    \11\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \14\ The daily closing Index level and the percentage change in 
the daily closing Index level will be publicly available on various 
websites, e.g., http://www.bloomberg.com, and data regarding the 
Index will also be available from the Dow Jones & Company, Inc. to 
subscribers. In addition, data will be available for the Natural Gas 
Futures Contracts in the Index and for other futures contracts from 
those futures exchanges that list and trade futures contracts on 
such commodity. Several independent data vendors also package and 
disseminate data in various value-added formats (including vendors 
displaying both Index constituents and Index levels and vendors 
displaying Index levels only).
    \15\ The value of a Share may be influenced by non-concurrent 
trading hours between NYSE Arca and NYMEX when the Shares are traded 
on NYSE Arca after normal trading hours of NYMEX. The IFV will be 
updated during the NYSE Arca Core Trading Session when Natural Gas 
Futures Contracts held by the Funds are traded. However, a static 
IFV will be disseminated between the close of trading of Natural Gas 
Futures Contracts and the close of the NYSE Arca Core Trading 
Session.
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    The Commission further believes that the proposal to list and trade 
the Shares 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. If the Exchange becomes aware that the NAV with respect to the 
Shares is not disseminated to all market participants at the same time, 
it will halt trading in the Shares until such time as the NAV is 
available to all market participants.\16\ Further, the Exchange 
represents that it may halt trading during the day in which an 
interruption to the dissemination of the Index value, IFV, or the value 
of the underlying futures contracts occurs. If the interruption to the 
dissemination of the Index value, IFV, or the value of the underlying 
futures contracts persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption. In addition, the Web site 
disclosure of the portfolio composition of each Fund will occur at the 
same time as the disclosure by the Sponsor of the portfolio composition 
to Authorized Participants so that all market participants are provided 
portfolio composition information at the same time. Therefore, the same 
portfolio information will be provided on the public Web site as well 
as in electronic files provided to Authorized Participants. 
Accordingly, each investor will have access to the current portfolio 
composition of each Fund through the Funds' Web site and/or at the 
Exchange's Web site. The Exchange may halt trading in the Shares if 
trading is not occurring in the underlying futures contracts or if 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\17\ In addition, 
the Exchange represents that certain parties involved with the 
sponsoring and/or maintenance of the Index will be subject to 
restrictions on the use or disclosure of any material non-public 
information relating to changes to the composition and/or the 
calculation of the Index.\18\ Lastly, the trading of the Shares will be 
subject to NYSE Arca Equities Rule 8.200, Commentary .02(e), which sets 
forth certain restrictions on ETP Holders \19\ acting as registered 
Market Makers \20\ in Trust Issued Receipts to facilitate surveillance.
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    \16\ The Exchange will obtain a representation (prior to listing 
the Shares of the Funds) from the Trust that the NAV per Share will 
be calculated daily and made available to all market participants at 
the same time.
    \17\ With respect to trading halts, the Exchange may consider 
other relevant factors in exercising its discretion to halt or 
suspend trading in the Shares of the Funds. Trading in the Shares of 
the Funds will be subject to halts caused by extraordinary market 
volatility pursuant to the Exchange's circuit breaker rules in NYSE 
Arca Equities Rule 7.12. Trading also may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable.
    \18\ UBS Securities LLC, a co-sponsor of the Index, is a 
registered broker-dealer and has represented to the Exchange that it 
will: (1) Implement and maintain procedures reasonably designed to 
prevent the use and dissemination by its relevant personnel of 
material non-public information relating to changes in the 
composition or method of computation or calculation of the Index; 
and (2) periodically review the requirements of such procedures as 
they relate to certain of its personnel directly responsible for 
such changes. CME Group Index Services LLC, another co-sponsor of 
the Index, is not engaged in the business of trading in commodities 
or securities. CME Group Inc., which, together with its 
subsidiaries, operates derivatives exchanges, maintains a Code of 
Conduct applicable to all personnel that prohibits disclosure of any 
confidential information obtained during the course of one's 
employment and the use or disclosure of any material non-public 
information relating to changes to the composition of the Index or 
changes to the Index methodology in violation of applicable laws, 
rules or regulations. Dow Jones & Company, Inc. also maintains a 
Code of Conduct applicable to all personnel that prohibits 
disclosure of any confidential information relating to changes to 
the composition of the Index or changes to the Index methodology 
obtained during the course of one's employment and the use of any 
material non-public information in violation of applicable laws, 
rules or regulations.
    \19\ See NYSE Arca Equities Rule 1.1(n) (defining ETP Holder).
    \20\ See NYSE Arca Equities Rule 1.1(u) (defining Market Maker).
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    The Exchange has represented that the Shares are deemed to be 
equity

[[Page 52040]]

securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Funds will be subject to the criteria in NYSE Arca Equities 
Rule 8.200 and Commentary .02 thereto for initial and continued listing 
of the Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.
    (4) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders of the suitability requirements of NYSE Arca Equities 
Rule 9.2(a) in an Information Bulletin. Specifically, ETP Holders will 
be reminded in the Information Bulletin that, in recommending 
transactions in the Shares, they must have a reasonable basis to 
believe that (a) 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 (b) the customer can evaluate the special characteristics, 
and is able to bear the financial risks, of an investment in the 
Shares. In connection with the suitability obligation, the Information 
Bulletin will also provide that members must 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.\21\ Further, the Exchange's 
Information Bulletin regarding the Funds will provide information 
regarding the suitability of an investment in the Shares, as stated in 
the Registration Statements.
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    \21\ FINRA has implemented increased sales practice and customer 
margin requirements for FINRA members applicable to leveraged ETFs 
(which include the Shares) and options on leveraged ETFs, as 
described in FINRA Regulatory Notices 09-31 (June 2009), 09-53 
(August 2009) and 09-65 (November 2009) (``FINRA Regulatory 
Notices''). The Exchange represents that ETP Holders that carry 
customer accounts will be required to follow the FINRA guidance set 
forth in these notices.
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    (5) With respect to the Funds' futures contracts traded on 
exchanges, not more than 10% of the weight of such futures contracts in 
the aggregate shall consist of components whose principal trading 
market is not a member of the Intermarket Surveillance Group or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
    (6) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (a) 
The risks involved in trading the Shares during the Opening and Late 
Trading Sessions when an updated IFV will not be calculated or publicly 
disseminated; (b) the procedures for purchases and redemptions of 
Shares in creation baskets and redemption baskets (and that Shares are 
not individually redeemable); (c) NYSE Arca Equities Rule 9.2(a), which 
imposes a duty of due diligence on its ETP Holders to learn the 
essential facts relating to every customer prior to trading the Shares; 
(d) how information regarding the IFV is disseminated; (e) a static IFV 
will be disseminated between the close of trading of Natural Gas 
Futures Contracts on NYMEX and the close of the NYSE Arca Core Trading 
Session; (f) the requirement that ETP Holders deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (g) trading information. In 
addition, the Information Bulletin will reference the FINRA Regulatory 
Notices regarding sales practice and customer margin requirements for 
FINRA members applicable to leveraged products.
    (7) A minimum of 100,000 Shares will be outstanding as of the start 
of trading on the Exchange.
    (8) For the initial and continued listing of the Shares, the Funds 
will be in compliance with NYSE Arca Equities Rule 5.3 and Rule 10A-3 
under the Act.
    This approval order is based on the Exchange's representations.\22\
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    \22\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions, which is the 
responsibility of the Commodity Futures Trading Commission 
(``CFTC''). The CFTC has the authority to set limits on the 
positions that any person may take in futures. These limits may be 
directly set by the CFTC or by the markets on which the futures are 
traded. The Commission has no role in establishing position limits 
on futures, even though such limits could impact an exchange-traded 
product that is under the jurisdiction of the Commission.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \23\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \23\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSEArca-2011-24) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21175 Filed 8-18-11; 8:45 am]
BILLING CODE 8011-01-P