Document ID: SEC-2007-1547-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSEArca, Inc.
Posted Date: 2007-11-14T05:00Z

[Federal Register: November 14, 2007 (Volume 72, Number 219)]
[Notices]               
[Page 64103-64106]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14no07-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56763; File No. SR-NYSEArca-2007-81]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change To 
Trade Shares of Funds of the Rydex ETF Trust Pursuant to Unlisted 
Trading Privileges

November 7, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 2, 2007, NYSE Arca, Inc. (the ``Exchange''), through its 
wholly-owned subsidiary, NYSE Arca Equities, Inc. (``NYSE Arca 
Equities''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
This order provides notice of the proposed rule change and approves the 
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through NYSE Arca Equities, proposes to trade shares 
(``Shares'') of 45 funds of the Rydex ETF Trust (``Trust'') based on 
numerous domestic indexes pursuant to unlisted trading privileges 
(``UTP''). The text of the proposed rule change is available at the 
Exchange, the Commission's Public Reference Room, and http://www.nyse.com
.

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

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

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

1. Purpose
    Under NYSE Arca Equities Rule 5.2(j)(3), which permits the trading 
of Shares either by listing or pursuant to UTP,\3\ the Exchange 
proposes to trade pursuant to UTP shares of 45 funds of the Trust that 
are designated as Rydex Leveraged Funds (the ``Leveraged Funds''), 
Rydex Inverse Funds (the ``Inverse Funds''), and Rydex Leveraged 
Inverse Funds (the ``Leveraged Inverse Funds'' and together with the 
Leveraged Funds and Inverse Funds, the ``Funds''). The Commission has 
approved the listing and trading of the Shares on the American Stock 
Exchange LLC (``Amex'').\4\ Each of the Funds will have a distinct 
investment objective by attempting, on a daily basis, to correspond to 
a specified multiple of the performance, or the inverse performance, of 
a particular equity securities index as described in the Amex Notice. A 
detailed discussion of the investment objective of each of the Funds; 
the portfolio management methodology for each of the Funds, including 
specific information about the portfolio composition for each Fund 
(e.g., the ``IIV File'' and portfolio composition file or ``PCF''); the 
investment techniques for each of the Funds; the creation and 
redemption of baskets of Shares for each of the Funds; and the 
calculation methodology of the

[[Page 64104]]

net asset value (``NAV'') for each of the Funds, among other things, 
can be found in the Amex Notice.
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    \3\ In October 1999, the Commission approved NYSE Arca Equities 
Rule 5.2(j)(3), which sets forth the rules related to listing and 
trading criteria for ``Investment Company Units''. See Securities 
Exchange Act Release No. 41983 (October 6, 1999), 64 FR 56008 
(October 15, 1999) (SR-PCX-1998-29). In July 2001, the Commission 
also approved the Exchange's generic listing standards for listing 
and trading, or the trading pursuant to UTP, of Investment Company 
Units under NYSE Arca Equities Rule 5.2(j)(3). See Securities 
Exchange Act Release No. 44551 (July 12, 2001), 66 FR 37716-01 (July 
19, 2001) (SR-PCX-2001-14). The definition of an Investment Company 
Unit is set forth in NYSE Arca Equities Rule 5.1(b)(15), which 
provides that an Investment Company Unit is a security representing 
an interest in a registered investment company that could be 
organized as a unit investment trust, an open-end management 
investment company, or a similar entity.
    \4\ See Securities Exchange Act Release No. 56713 (October 29, 
2007) (SR-Amex-2007-74) (granting approval to list and trade the 
Shares on Amex) (``Amex Approval Order''); Securities Exchange Act 
Release No. 56218 (August 7, 2007), 72 FR 45469 (August 14, 2007) 
(SR-Amex-2007-74) (providing notice of Amex's proposal to list and 
trade the Shares (``Amex Notice'')).
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    The Funds will be based on the following benchmark indexes: (1) The 
S&P 500 Index; (2) the S&P MidCap 400 Index; (3) the S&P Small Cap 600 
Index; (4) the Russell 1000 Index; (5) the Russell 2000 Index; (6) the 
Russell 3000 Index; (7) the S&P 500 Consumer Discretionary Index; (8) 
the S&P 500 Consumer Staples Index; (9) the S&P 500 Energy Index; (10) 
the S&P 500 Financials Index; (11) the S&P 500 HealthCare Index; (12) 
the S&P 500 Industrials Index; (13) the S&P 500 Information Technology 
Index; (14) the S&P 500 Materials Index; and (15) the S&P 500 Utilities 
Index (each index individually referred to as an ``Underlying Index,'' 
and all Underlying Indexes collectively referred to as the ``Underlying 
Indexes'').
    As noted in the Amex Approval Order, quotations and last-sale 
information for the Shares will be disseminated through the facilities 
of the Consolidated Tape Association (``CT''). In addition, the NAV per 
Share of each Fund will be calculated and disseminated daily.\5\ To 
provide updated information relating to each Fund for use by investors, 
professionals, and persons wishing to create or redeem Shares, Amex 
will disseminate through CT and CQ High Speed Lines information with 
respect to an Indicative Intra-Day Value (``IIV'') at least every 15 
seconds throughout Amex's trading day (as calculated by Amex),\6\ 
market value of a Share for each Fund, recent NAV for each Fund, number 
of Shares outstanding for each Fund, and the estimated cash amount and 
total cash amount per Creation Unit.\7\ Amex will also make available 
on its Web site daily trading volume, the closing prices, the NAV, and 
the final dividend amounts to be paid for each Fund.
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    \5\ See Amex Notice, 72 FR at 45477.
    \6\ A detailed discussion of the calculation methodology of the 
IIV for each of the Funds can be found in the Amex Notice. See Amex 
Notice, 72 FR at 45477.
    \7\ Each Fund will issue and redeem Shares only in aggregations 
of at least 50,000, each aggregation, a ``Creation Unit.'' See Amex 
Notice, 72 FR at 45474.
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    In addition, the value of each Underlying Index will be updated 
intra-day on a real-time basis as its individual component securities 
change in price. These intra-day values of each Underlying Index will 
be disseminated at least every 15 seconds throughout the trading day by 
Amex or another organization authorized by the relevant Underlying 
Index provider. Several independent data vendors also package and 
disseminate Underlying Index data in various value-added formats 
(including vendors displaying both securities and Underlying Index 
levels and vendors displaying Underlying Index levels only).
    The Trust's Web site (http://www.rydexinvestments.com) will contain 

the following information for each Fund's Shares: (1) The prior 
business day's closing NAV, the reported closing price, and a 
calculation of the premium or discount of such price in relation to the 
closing NAV; (2) data for a period covering at least the four previous 
calendar quarters (or the life of a Fund, if shorter) indicating how 
frequently each Fund's Shares traded at a premium or discount to NAV 
based on the daily closing price and the closing NAV, and the magnitude 
of such premiums and discounts; (3) its prospectus and product 
description; and (4) other quantitative information, such as daily 
trading volume. The prospectus and/or product description for each Fund 
will inform investors that the Trust's Web site has information about 
the premiums and discounts at which the Fund's Shares have traded.
    The Exchange represents that it will cease trading the Shares of 
the Fund if: (1) The listing market stops trading the Shares because of 
a regulatory halt similar to a halt based on NYSE Arca Equities Rule 
7.12; or (2) the listing market delists the Shares. Additionally, the 
Exchange may cease trading the Shares if such other event shall occur 
or condition exists which in the opinion of the Exchange makes further 
dealings on the Exchange inadvisable.\8\ UTP trading in the Shares is 
also governed by the trading halts provisions of NYSE Arca Equities 
Rule 7.34 relating to temporary interruptions in the calculation or 
wide dissemination of the IIV or the value of the Underlying Index.
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    \8\ The Exchange may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of a Fund. 
Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) The extent to which trading is 
not occurring in the securities comprising an Underlying Index and/
or the Financial Instruments (as defined in the Amex Notice) of a 
Fund, or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present. In addition, trading in Shares could be halted pursuant to 
the Exchange's ``circuit breaker'' rule or by the halt or suspension 
of trading of the underlying securities. See NYSE Arca Equities Rule 
7.12 (Trading Halts Due to Extraordinary Market Volatility).
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    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. Eastern Time (ET) to 8 p.m. ET. 
The Exchange states that it has appropriate rules to facilitate 
transactions in the Shares during all trading sessions.
    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products to monitor trading in the 
Shares. The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules. The Exchange may 
obtain information via the Intermarket Surveillance Group (``ISG'') 
from other exchanges that are members or affiliates of the ISG. In 
addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an Information Bulletin (``Bulletin'') of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Bulletin will discuss the following: (1) The 
procedures for purchases and redemptions of Shares in Creation Unit 
aggregations (and that Shares are not individually redeemable); (2) 
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; \9\ (3) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated IIV will not be calculated or publicly disseminated; (4) how 
information regarding the IIV is disseminated; (5) 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 (6) trading information. In addition, the Bulletin will reference 
that the Fund is subject to various fees and expenses described in the 
registration statement for the Fund. The Bulletin will also

[[Page 64105]]

discuss any exemptive, no-action, and interpretive relief granted by 
the Commission from any rules under the Act.
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    \9\ NYSE Arca Equities Rule 9.2(a) provides that an ETP Holder, 
before recommending a transaction, must have reasonable grounds to 
believe that the recommendation is suitable for the customer based 
on any facts disclosed by the customer as to his other security 
holdings and as to his 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 shall make reasonable efforts to obtain 
information concerning the customer's financial status, tax status, 
investment objectives, and any other information that they believe 
would be useful to make a recommendation. See Securities Exchange 
Act Release No. 54045 (June 26, 2006), 71 FR 37971 (July 3, 2006) 
(SR-PCX-2005-115).
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2. Statutory Basis
    The proposal is consistent with section 6(b) of the Act,\10\ in 
general, and section 6(b)(5) of the Act,\11\ in particular, 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, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
In addition, the proposal is consistent with Rule 12f-5 under the Act 
\12\ because the Exchange deems the Shares to be equity securities, 
thus rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 17 CFR 240.12f-5.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purpose of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

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

File Number SR-NYSEArca-2007-81 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2007-81. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices of the Exchange. 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-NYSEArca-2007-81 and should 
be submitted on or before December 5, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\14\ which 
requires that an exchange have rules designed, among other things, 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. The Commission believes that this proposal should benefit 
investors by increasing competition among markets that trade the 
Shares.
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    \13\ In approving this 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the proposal is consistent 
with section 12(f) of the Act,\15\ which permits an exchange to trade, 
pursuant to UTP, a security that is listed and registered on another 
exchange.\16\ The Commission notes that it previously approved the 
original listing and trading of the Shares on Amex.\17\ The Commission 
finds that the proposal is consistent with Rule 12f-5 under the 
Act,\18\ which provides that an exchange shall not extend UTP to a 
security unless the exchange has in effect a rule or rules providing 
for transactions in the class or type of security to which the exchange 
extends UTP. The Exchange has represented that it meets this 
requirement because it deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.
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    \15\ 15 U.S.C. 78l(f).
    \16\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally 
prohibits a broker-dealer from trading a security on a national 
securities exchange unless the security is registered on that 
exchange pursuant to section 12 of the Act. Section 12(f) of the Act 
excludes from this restriction trading in any security to which an 
exchange ``extends UTP.'' When an exchange extends UTP to a 
security, it allows its members to trade the security as if it were 
listed and registered on the exchange even though it is not so 
listed and registered.
    \17\ See supra note 4.
    \18\ 17 CFR 240.12f-5.
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    The Commission further believes that the proposal is consistent 
with section 11A(a)(1)(C)(iii) of the Act,\19\ 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. Quotations for and last-sale information for the Shares 
will be disseminated through the facilities of the CT. In addition, the 
NAV per Share of each Fund will be calculated and disseminated daily. 
Amex disseminates a variety of information through the facilities of 
the CT including the IIV per Share at least every 15 seconds throughout 
Amex's trading day, including the market value of a Share for each 
Fund, the recent NAV for each Fund, the number of Shares outstanding 
for each Fund, and the estimated cash amount and total cash amount per 
Creation Unit. Moreover, the value of each Underlying Index will be 
updated intra-day on a real-time basis as its individual

[[Page 64106]]

component securities change in price. These intra-day values of each 
Underlying Index will be disseminated at least every 15 seconds 
throughout the trading day by Amex or another organization authorized 
by the relevant Underlying Index provider. Finally, the Trust's Web 
site will provide various information, including data for at least the 
four previous calendar quarters (or the life of a Fund, if shorter) 
indicating how frequently each Fund's Shares traded at a premium or 
discount to NAV based on the daily closing price and the closing NAV, 
and the magnitude of such premiums and discounts.
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    \19\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission also believes that the Exchange's trading halt rules 
are reasonably designed to prevent trading in the Shares when 
transparency is impaired. Existing NYSE Arca Equities Rule 7.34(a)(4), 
which will apply to the trading of the Shares, provides that, if the 
IIV is no longer calculated or disseminated as required (a) during the 
Opening Session (4 a.m. to 9:30 a.m. ET), the Exchange may continue to 
trade the Shares for the remainder of the Opening Session; (b) during 
the Core Trading Session (9:30 a.m. to 4 p.m. ET), the Exchange must 
halt trading in the Shares; and (c) during the Late Trading Session (4 
p.m. to 8 p.m. ET), the Exchange may continue trading in the Shares 
only if the original listing market traded such Shares until the close 
of its regular trading session without halt. If the Indicative IIV 
continues not to be calculated or disseminated as of the next business 
day's Opening Session, the Exchange will not commence trading in the 
Shares in such Opening Session. The Exchange may resume trading in the 
Shares only if the calculation and dissemination of the IIV resumes, or 
trading in the Shares resumes in the original listing market.
    The Commission notes that, if the Shares should be delisted by the 
listing exchange, the Exchange would no longer have authority to trade 
the Shares pursuant to this order.
    In support of this proposal, the Exchange has made the following 
representations:
    (1) The Exchange's surveillance procedures are adequate to address 
any concerns associated with the trading of the Shares on a UTP basis.
    (2) The Exchange would inform its members in an Information 
Bulletin of the special characteristics and risks associated with 
trading the Shares, including risks inherent with trading the Shares 
during the Opening and Late Trading Sessions when the updated IIV is 
not calculated and disseminated and suitability recommendation 
requirements.
    (3) The Exchange would require its members to deliver a prospectus 
or product description to investors purchasing Shares prior to or 
concurrently with a transaction in such Shares and will note this 
prospectus delivery requirement in the Information Bulletin.
    This approval order is based on the Exchange's representations.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. As noted above, the Commission previously approved 
the original listing and trading of the Shares on Amex. The Commission 
presently is not aware of any regulatory issue that should cause it to 
revisit those findings or would preclude the trading of the Shares on 
the Exchange pursuant to UTP. Accelerating approval of this proposal 
should benefit investors by creating, without undue delay, additional 
competition in the market for such Shares.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NYSEArca-2007-81) be, and it 
hereby is, approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22150 Filed 11-13-07; 8:45 am]

BILLING CODE 8011-01-P