Document ID: SEC-2007-0387-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-03-15T04:00Z

[Federal Register: March 15, 2007 (Volume 72, Number 50)]
[Notices]               
[Page 12233-12238]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr07-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55437; File No. SR-Amex-2006-118]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Amendment Nos. 2 and 3 to Proposed Rule Change 
Relating to Generic Listing Standards for Series of Portfolio 
Depositary Receipts and Index Fund Shares Based on Fixed Income Indexes 
and Accelerated Approval of Proposed Rule Change as Amended

March 9, 2007.

I. Introduction

    On December 22, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to generic listing standards for series 
of portfolio depositary receipts (``PDRs'') and index fund shares 
(``IFSs''), together referred to as ``exchange-traded funds'' 
(``ETFs''), based on fixed income indexes. On January 26, 2007, the 
Exchange filed Amendment No. 1. The proposed rule change, as amended, 
was published for comment in the Federal Register on February 7, 2007 
for a 15-day comment period.\3\ The Commission received no comments on 
the proposal. On March 2, 2007, Amex filed Amendment No. 2 to the 
proposed rule change \4\ and on March 7, 2007, Amex filed Amendment No. 
3 to the proposed rule change.\5\ This order provides notice of the 
proposed rule change as modified by Amendments No. 1, 2, and 3 and 
approves the proposed rule change as amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55213 (January 31, 
2007), 72 FR 5768 (``Notice'').
    \4\ In Amendment No. 2, the Exchange (1) Updated its proposal to 
reflect the migration of ETF shares from Amex's legacy platform to 
the AEMI platform and (2) represented that an ETF based on a fixed 
income index or combination index would be covered under the 
Exchange's existing surveillance program for ETFs and that all 
products listed under the proposed generic listing standards would 
be subject to the full panoply of Amex rules and procedures that now 
govern the trading of ETFs on Amex.
    \5\ In Amendment No. 3, the Exchange revised proposed Commentary 
.06(g) to Rule 1000-AEMI and proposed Commentary .05(g) to Rule 
1000A-AEMI to clarify that Rule 1000-AEMI and Rules 1001 through 
1006 as well as Rule 1000A-AEMI and Rules 1001A through 1005A apply 
to the listing and trading of fixed income and combination index 
ETFs.
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II. Description of the Proposal

    The Exchange proposes to revise Amex Rules 1000-AEMI and 1000A-AEMI 
to include generic listing standards to permit the listing and trading 
of ETFs that are based on indexes or portfolios consisting of fixed 
income securities (``Fixed Income Indexes'') or both fixed income and 
equity securities (``Combination Indexes'') pursuant to Rule 19b-4(e) 
under the Act.\6\ Specifically, the Exchange proposes to add 
Commentaries .04, .05, and .06 to Amex Rule 1000-AEMI and Commentaries 
.03, .04, and .05 to Amex Rule 1000A-AEMI and to revise the definitions 
of PDR and IFS, in Amex Rules 1000-AEMI(b)(1) and 1000A-AEMI(b)(1), 
respectively, to include ETFs based on Fixed Income Indexes and 
Combination Indexes.
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    \6\ 17 CFR 240.19b-4(e).
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    The proposed rule change will enable the Exchange to list and trade 
an ETF pursuant to Rule 19b-4(e) under the Act without a rule filing if 
each of the conditions set forth in either Commentaries .04 and .05 to 
Rule 1000-AEMI or Commentaries .03 and .04 to Rule 1000A-AEMI, as 
applicable, is satisfied. The proposed listing standards will apply to 
certain Fixed Income Indexes and Combination Indexes that the 
Commission has yet to review, as well as those Fixed Income Indexes 
described in exchange rules that have previously been approved by the 
Commission under Section 19(b)(2) of the Act \7\ for the trading of 
ETFs, options, or other index-based securities.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ See proposed Commentary .04 to Amex Rule 1000-AEMI and 
Commentary .03 to Amex Rule 1000A-AEMI (permitting the Exchange to 
list and trade an ETF pursuant to Rule 19b-4(e) provided that the 
portfolio or index ``has been reviewed and approved for the trading 
of options, Portfolio Depository Receipts, Index Fund Shares, Index-
Linked Exchangeable Notes or Index-Linked Securities by the 
Commission under Section 19(b)(2) of the Securities Exchange Act of 
1934 and rules thereunder and the conditions set forth in the 
Commission's approval order, continue to be satisfied. * * *'').
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A. Generic Listing Standards

    Rule 19b-4(e) under the Act provides that the listing and trading 
of a new derivative securities product by a self-

[[Page 12234]]

regulatory organization shall not be deemed a proposed rule change, 
pursuant to paragraph (c)(1) of Rule 19b-4,\9\ if the Commission has 
approved, pursuant to Section 19(b) of the Act,\10\ 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.\11\
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    \9\ 17 CFR 240.19b-4(c)(1).
    \10\ 15 U.S.C. 78s(b).
    \11\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (``New Products Release'').
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    The Exchange already has Commission-approved generic listing 
standards for ETFs based on indexes that consist of stocks listed on 
U.S. and non-U.S. exchanges,\12\ for trust certificates linked to 
certain Fixed Income Securities,\13\ and for other index-based 
derivatives.\14\ The Commission has also approved for listing and 
trading on the Exchange ETFs based on certain Fixed Income Indexes \15\ 
and structured notes linked to a basket or index of Fixed Income 
Securities.\16\ This proposal seeks to adopt listing standards, trading 
rules, and procedures, including surveillance, for ETFs based on Fixed 
Income and Combination Indexes that generally reflect existing generic 
listing standards for ETFs based on equities, but are tailored for the 
fixed income markets.\17\
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    \12\ See Securities Exchange Act Release Nos. 54739 (November 9, 
2006), 71 FR 66993 (November 17, 2006) (for ETFs based on global and 
international indexes); and 42787 (May 15, 2000), 65 FR 33598 (May 
24, 2000) (for ETFs based on indexes comprised of U.S. stocks).
    \13\ See Securities Exchange Act Release No. 50355 (September 
13, 2004), 69 FR 56252 (September 20, 2004) (approving generic 
listing standards for trust certificates linked to portfolios of 
investment-grade debt securities, securities of government-sponsored 
entities, and U.S. Treasury securities).
    \14\ See Amex Company Guide Section 107D (Index-Linked 
Securities); Securities Exchange Act Release No. 51563 (April 15, 
2005), 70 FR 21257 (April 25, 2005). Such listing standards permit 
the listing--pursuant to Rule 19b-4(e) under the Act--of such 
securities where the Commission had previously approved the trading 
of specified index-based derivatives on the same index, on the 
condition that all of the standards set forth in the original order 
are satisfied by the exchange employing generic listing standards.
    \15\ See Securities Exchange Act Release Nos. 46252 (July 24, 
2002), 67 FR 49715 (July 31, 2002) (approving the listing and 
trading of funds based on U.S. Treasury or corporate bond indexes); 
46738 (October 29, 2002), 67 FR 67666 (November 6, 2002) (approving 
the listing and trading of FITRs); and 52870 (December 1, 2005), 70 
FR 73039 (December 8, 2005) (approving the trading on a UTP basis of 
the iShares Lehman TIPS Bond Fund).
    \16\ See Securities Exchange Act Release Nos. 41334 (April 27, 
1999), 64 FR 23883 (May 4, 1999) (approving the listing and trading 
of Bond Indexed Term Notes); 46923 (November 27, 2002), 67 FR 72247 
(December 4, 2002) (approving the listing and trading of trust units 
linked to a basket of investment-grade fixed income securities); and 
48484 (September 11, 2003), 68 FR 54508 (September 17, 2003) 
(approving the listing and trading of trust certificates linked to a 
basket of up to five investment-grade fixed income securities plus 
U.S. Treasury securities).
    \17\ The failure of a particular ETF to comply with the proposed 
generic listing standards would not preclude the Exchange from 
submitting a separate rule change pursuant to Section 19(b)(2) of 
the Act to list and trade the ETF.
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B. Exchange-Traded Funds

    Amex Rules 1000-AEMI and Rules 1001 et seq. allow for the listing 
and trading on the Exchange of PDRs. A PDR represents an interest in a 
unit investment trust registered under the Investment Company Act of 
1940 (the ``1940 Act'') \18\ that operates on an open-end basis and 
holds the securities that comprise an index or portfolio. Amex Rules 
1000A-AEMI and 1001A et seq. provide standards for listing IFSs, which 
are securities issued by an open-end management investment company 
(i.e., an open-end mutual fund) based on a portfolio of securities that 
seeks to provide investment results that correspond generally to the 
price and yield performance or total return performance of a specified 
foreign or domestic stock index or fixed income index. Pursuant to 
these rules, ETF shares must be issued in a specified aggregate minimum 
number in return for a deposit of specified securities and/or a cash 
amount, with a value equal to the next-determined net asset value 
(``NAV''). When aggregated in the same specified minimum number, ETF 
shares must be redeemed by the issuer for the securities and/or cash, 
with a value equal to the next-determined NAV. Consistent with Amex 
Rules 1002 and 1002A, the NAV is calculated once a day after the close 
of the regular trading day.
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    \18\ 15 U.S.C. 80a.
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    To meet the investment objective of providing investment returns 
that correspond to the performance of the underlying index, an ETF may 
use a ``replication'' strategy or a ``representative sampling'' 
strategy with respect to the ETF portfolio. An ETF using a replication 
strategy invests in each component security of the underlying index in 
about the same proportion as that security is represented in the index 
itself. An ETF using a representative sampling strategy generally 
invests in a significant number, but perhaps not all, of the component 
securities of the underlying index, and holds securities that, in the 
aggregate, are intended to approximate the full index in terms of 
certain key characteristics. In the context of a fixed income index, 
such characteristics may include liquidity, duration, maturity, and 
yield.
    In addition, an ETF portfolio may be adjusted in accordance with 
changes in the composition of the underlying index or to maintain 
compliance with requirements applicable to a regulated investment 
company under the Internal Revenue Code (``IRC'').

C. Listing and Trading of ETFs Based on Fixed Income Indexes or Fixed 
Income Securities

    Proposed Commentary .04 to Amex Rule 1000-AEMI and Commentary .03 
to Amex Rule 1000A-AEMI 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 such index for the ETF to 
remain listed pursuant to proposed Commentary .04 to Amex Rule 1000-
AEMI or Commentary .03 to Amex Rule 1000A-AEMI.
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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, Amex 
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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[[Page 12235]]

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 Commentary .04 to Amex Rule 1000-
AEMI (for PDRs) or proposed Commentary .03 to Amex Rule 1000A-AEMI (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 Exchange noted in its proposal that 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; \23\
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    \23\ This is virtually identical to the corresponding standard 
in Section 107E(a)(x) of the Amex Company Guide for trust 
certificates.
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     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; \24\
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    \24\ This is consistent with the standard for U.S. equity ETFs 
set forth in Commentary .03(a)(A) to Amex Rule 1000-AEMI and 
Commentary .02(a)(A) to Amex Rule 1000A-AEMI and the standard set 
forth by the Commission and the CFTC in the Joint Rules. See note 22 
supra.
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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; \25\ and
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    \25\ The required number of unaffiliated issuers parallels the 
diversification requirement applicable to U.S. equity ETFs as set 
forth in Commentary .03(a)(A) to Amex Rule 1000-AEMI and Commentary 
.02(a)(A) to Amex Rule 1000A-AEMI.
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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: \26\
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    \26\ The Exchange 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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     From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; \27\
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    \27\ 15 U.S.C. 78m and 78o(d).
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     From issuers that have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more;
     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;
     Exempted securities, as defined in Section 3(a)(12) of the 
Act; \28\ or
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    \28\ 15 U.S.C. 78c(a)(12).
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     From issuers that are governments of foreign countries or 
political subdivisions of foreign countries.
    The proposed generic listing requirements for ETFs based on Fixed 
Income Indexes would not require that component securities in an 
underlying index have an investment-grade rating.\29\ In addition, the 
proposed requirements would not require a minimum trading volume, due 
to the lower trading volume that generally occurs in the fixed income 
markets as compared to the equity markets.\30\ Also, consistent with 
the existing Amex Rule 1000A-AEMI(b)(2)(iii), an IFS based on a Fixed 
Income Index or Combination Index that seeks to provide investment 
results that either exceed the performance of such underlying index or 
correspond to the inverse (opposite) of the performance of such index 
by a specified multiple may not be listed and traded pursuant to the 
proposed generic listing standards.
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    \29\ See Joint Rules, supra note 22, 71 FR at 30537.
    \30\ In its proposal, the Exchange stated its view that the 
minimum principal amount outstanding requirement 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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D. 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 Commentary .05 to Amex Rule 1000-
AEMI (for PDRs) or proposed Commentary .04 to Amex Rule 1000A-AEMI (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 the Exchange 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 Commentary .03 (equities) and proposed Commentary 
.04 (fixed income) for PDRs and Commentary .02 (equities) and proposed 
Commentary .03 (fixed income) for IFSs.\31\
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    \31\ See proposed Commentary .05 to Amex Rule 1000-AEMI and 
Commentary .04 to Amex Rule 1000A-AEMI.
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E. Index Maintenance and Information

    The Exchange proposes to adopt Commentaries .04(b) and .05(a) to 
Amex Rule 1000-AEMI and Commentaries .03(b) and .04(a) to Amex Rule 
1000A-AEMI to establish requirements regarding the maintenance and 
dissemination of index information in connection with ETFs based on 
Fixed Income Indexes and Combination Indexes.
    Commentaries .04(b)(ii) and .05(a)(ii) to Amex Rule 1000-AEMI and 
Commentaries .03(b)(ii) and .04(a)(ii) to Amex Rule 1000A-AEMI 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 the Exchange. 
The rules also 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 the Exchange, 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. In its proposal, the 
Exchange stated 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

[[Page 12236]]

the index value does not change during some or all of the period when 
trading is occurring on the Exchange, the last official calculated 
index value must remain available throughout Exchange trading hours.
    Moreover, if a Fixed Income Index or Combination Index underlying 
an ETF is maintained by 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. 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.

F. Application of General Rules

    Proposed Commentary .06 to Amex Rule 1000-AEMI and Commentary .05 
to Amex Rule 1000A-AEMI set forth requirements governing any ETF based 
on a Fixed Income Index or Combination Index. These include initial 
shares outstanding, minimum price variation, listing fees, surveillance 
procedures, the application of PDR or IFS rules (as applicable), 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.

G. ETF Listing Criteria, Trading Rules, and Procedures

    Under the Exchange's proposal, an ETF based on a Fixed Income Index 
or Combination Index would be subject to the listing criteria set out 
in Amex Rules 1002 and 1002A. Accordingly, an ETF's NAV must be 
calculated at least once each day and disseminated to all market 
participants at the same time.\32\ 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 chooses to 
substitute a new index or portfolio for the existing index or 
portfolio, the Exchange would commence delisting proceedings if the new 
index or portfolio does not meet the requirements of and listing 
standards set forth in Amex Rules 1000-AEMI and Rules 1001 et seq. or 
Amex Rules 1000A-AEMI and 1001A et seq., as applicable. If an ETF chose 
to substitute an index that did not meet any of Amex'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.
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    \32\ See Amex Rules 1002(a)(ii) and 1002A(a)(ii) (requiring 
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).
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    An ETF based on a Fixed Income Index or Combination Index would be 
traded, in all respects, under the Exchange's existing trading rules 
and procedures that apply to ETFs generally, including with respect to 
delisting and trading halts.\33\ In particular, Amex Rules 1002(b)(ii) 
and 1002A(b)(ii) provide that, if the Intraday Indicative Value or the 
index value applicable to that series of ETFs is not being disseminated 
as required, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the Intraday Indicative Value or 
the index value occurs. If the interruption to the dissemination of the 
Intraday Indicative Value or the index value persists past the trading 
day in which it occurred, the Exchange would halt trading no later than 
the beginning of the trading day following the interruption.\34\
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    \33\ See Amex Rules 1000-AEMI and 1001 through 1006 and Amex 
Rules 1000A-AEMI and 1001A through 1005A.
    \34\ If an ETF is traded on the Exchange pursuant to unlisted 
trading privileges, the Exchange 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 Amex Rules 1002(b)(ii) and 1002A(b)(ii).
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    As noted above, if a broker-dealer is responsible for maintaining 
(or has a role in maintaining) the underlying index, such broker-dealer 
would be required to erect and maintain a ``firewall,'' in a form 
satisfactory to the Exchange, 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.

H. Surveillance

    The Exchange represents that an ETF based on a Fixed Income Index 
or Combination Index would be covered under the Exchange's surveillance 
program for ETFs.\35\ The Exchange will implement written surveillance 
procedures for an ETF based on a Fixed Income Index or a Combination 
Index.\36\ The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of ETFs listed pursuant to the 
proposed new listing standards. In addition, the Exchange also has a 
general policy prohibiting the distribution of material, non-public 
information by its employees.
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    \35\ See Amendment No. 2.
    \36\ See proposed Commentary .06(f) to Amex Rule 1000-AEMI and 
Commentary .05(f) to Amex Rule 1000A-AEMI.
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III. Discussion and 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.\37\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Act \38\ 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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    \37\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \38\ 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 \39\ and Rule 19b-4 
thereunder \40\ 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), 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 Amex to list and trade such 
ETFs should promote

[[Page 12237]]

competition, reduce burdens on issuers and other market participants, 
and make such ETFs available to investors more quickly.\41\
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    \39\ 15 U.S.C. 78s(b)(1).
    \40\ 17 CFR 240.19b-4.
    \41\ 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 previously approved generic listing standards 
for ETFs based on indexes that consist of stocks listed on U.S. and 
non-U.S. exchanges, as well as for other index-based derivatives.\42\ 
The Commission has also approved for listing and trading ETFs based on 
certain fixed income indexes and structured notes linked to a basket or 
index of Fixed Income Securities.\43\ The Commission believes that 
adopting additional 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 Amex proposal meets the 
requirements of Rule 19b-4(e). All products listed under the proposed 
generic listing standards will be subject to existing Amex rules that 
governing the trading of ETFs.
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    \42\ See notes 12-14 supra. The Commission notes that such 
listing standards permit an exchange to list new derivative 
securities pursuant to Rule 19b-4(e) under the Act based on 
portfolios or indexes that underlie securities described in other 
previously approved rules, subject to the condition that all of the 
standards set forth in the approval order are satisfied by the 
exchange employing generic listing standards.
    \43\ See notes 15-16 supra.
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    Proposed Commentary .04 to Amex Rule 1000-AEMI (for PDRs) and 
proposed Commentary .03 to Amex Rule 1000A-AEMI (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 require 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 Amex from listing and trading ETFs that might be 
used as a surrogate for trading in unregistered securities.
    The proposed generic listing standards also will permit Amex to 
list and trade an ETF if the Commission previously has approved an 
exchange rule that contemplates listing and trading a derivative 
security based on the same underlying index. Amex would be able to rely 
on that earlier approval order, provided that Amex complies with the 
commitments undertaken by the other SRO set forth in the prior order, 
including any surveillance-sharing arrangements.
    The Commission believes that Amex's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\44\ 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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    \44\ 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 existing Amex Rules 
1002(a)(ii) and 1002A(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. Amex Rules 1002(b)(ii) and 1002A(b)(ii) provide 
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.\45\ 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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    \45\ If an ETF is traded on the Exchange pursuant to unlisted 
trading privileges, the Exchange 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 Amex Rules 1002(b)(ii) and 1002A(b)(ii).
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    The Exchange will implement written surveillance procedures for 
ETFs based on a Fixed Income Indexes or Combination Indexes.\46\ 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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    \46\ See proposed Commentary .06(f) to Amex Rule 1000-AEMI and 
Commentary .05(f) to Amex Rule 1000A-AEMI.
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Acceleration
    The Commission finds good cause to approve the proposal, as 
amended, prior to the thirtieth day after the amended 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 no comments were 
received during the abbreviated comment period, and

[[Page 12238]]

that Amendments No. 2 and 3 do not make any substantial changes to the 
proposal. Thus, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Act,\47\ to grant accelerated approval of the 
proposed rule change, as amended.
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    \47\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments regarding Amendments No. 2 and 3, including whether 
Amendments No. 2 and 3 are consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2006-118 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2006-118. 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 Amex. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Amex-2006-118 and should be submitted on or before April 5, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\48\ that the proposed rule change (SR-Amex-2006-118), as amended, 
be, and hereby is, approved on an accelerated basis.
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    \48\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-4747 Filed 3-14-07; 8:45 am]

BILLING CODE 8010-01-P