Document ID: SEC-2007-1446-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: International Securities Exchange, LLC
Posted Date: 2007-10-16T04:00Z

[Federal Register: October 16, 2007 (Volume 72, Number 199)]
[Notices]               
[Page 58696-58702]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc07-122]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56633; File No. SR-ISE-2007-60]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 4 Thereto, Adopting 
Generic Listing Standards for Exchange-Traded Funds Based on 
International or Global Indexes or Indexes Described in Exchange Rules 
Previously Approved by the Commission as Underlying Benchmarks for 
Derivative Securities

October 9, 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 July 12, 2007, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') 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. On August 6, 2007, ISE submitted Amendment No. 1 to the 
proposed rule change. On August 7, 2007, ISE withdrew Amendment No. 1 
and filed Amendment No. 2 to the proposed rule change. On August 15, 
2007, ISE filed Amendment No. 3 to the proposed rule change, and on 
October 9, 2007, ISE filed Amendment No. 4 to the proposed rule 
change.\3\ This order provides notice of the proposal, as amended, and 
approves the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 4 replaces and supersedes the original rule 
filing and all previous amendments thereto.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ISE proposes to revise its Rule 2123 to include generic listing 
standards for series of Investment Company Units (``ICUs'') that are 
based on U.S. indexes or portfolios, international or global

[[Page 58697]]

indexes or portfolios, or on indexes or portfolios described in 
proposed rule changes previously approved by the Commission under 
Section 19(b)(2) of the Act for the trading of ETFs, options, or other 
specified index-based securities. Additionally, the Exchange proposes 
to adopt ISE Rule 2131 to allow for the listing and trading of 
Portfolio Depositary Receipts (``PDRs'') \4\ that are based on U.S. 
indexes or portfolios, international or global indexes or portfolios, 
or on indexes or portfolios previously approved by the Commission under 
Section 19(b)(2) of the Act for the trading of ETFs, options, or other 
specified index-based securities. Further, the Exchange proposes to 
modify subsection (c)(4) of ISE Rule 2123 to eliminate the requirement 
that the calculation methodology for the index underlying a series of 
ICUs be one of those enumerated in subsection (c)(4). The text of the 
proposed rule change is available at ISE, on ISE's Web site (http://www.ise.com
), and from the Commission's Public Reference Room.

---------------------------------------------------------------------------

    \4\ ICUs and PDRs are referred to collectively as ``ETFs.''
---------------------------------------------------------------------------

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

    In its filing with the Commission, ISE 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. ISE 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
    The Exchange proposes to revise its Rule 2123 and adopt ISE Rule 
2131 to include generic listing standards for series of ICUs and PDRs 
that are based on U.S. indexes or portfolios, international or global 
indexes or portfolios, or on indexes or portfolios described in rules 
previously approved by the Commission under Section 19(b)(2) of the Act 
for the trading of ETFs, options, or other specified index-based 
securities. Additionally, proposed ISE Rule 2131 includes generic 
listing standards for PDRs based on an index or portfolio that consists 
of stocks listed on U.S. exchanges. This proposed rule change would 
enable the Exchange to list and trade ETFs pursuant to Rule 19b-4(e) 
under the Act \5\ if each of the conditions set forth in ISE Rules 2123 
or 2131, as applicable, is satisfied. Rule 19b-4(e) provides that the 
listing and trading of a new derivative securities product by a self-
regulatory organization (``SRO'') shall not be deemed a proposed rule 
change, pursuant to paragraph (c)(1) of Rule 19b-4,\6\ 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 derivatives securities product, and 
the SRO has a surveillance program for the product class.\7\ The 
Commission has approved similar proposals by other exchanges.\8\
---------------------------------------------------------------------------

    \5\ 17 CRF 240.19b-4(e).
    \6\ 17 CFR 240.19b-4(c)(1).
    \7\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after the exchange 
begins trading the new derivative securities products. See 17 CFR 
240.19b-4(e)(2)(ii).
    \8\ See Securities Exchange Act Release No. 55621 (April 12, 
2007), 72 FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86); 
Securities Exchange Act Release No. 55269 (February 9, 2007), 72 FR 
7490 (February 15, 2007) (SR-Nasdaq-2006-050); Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 
2007) (SR-NYSE-2006-101); Securities Exchange Act Release No. 54739 
(November 9, 2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-
78); Securities Exchange Act Release No. 44532 (July 10, 2001), 66 
FR 37078 (July 19, 2001) (SR-Amex-2001-25) (modifying generic 
listing standards for PDRs).
---------------------------------------------------------------------------

a. Background on ETFs
    Currently, ISE Rule 2123 provides standards for the listing of ICUs 
on the Exchange. ICUs are securities issued by a unit investment trust, 
an open-end management investment company (``open-end mutual fund'') 
registered under the Investment Company Act of 1940 \9\ (``1940 Act''), 
or similar entity based on a portfolio of securities (including fixed 
income securities) that seeks to provide investment results that 
correspond generally to the price and yield performance of an index or 
portfolio of securities. The net asset value (``NAV'') is calculated 
once a day after the close of the regular trading day. Proposed ISE 
2131 allows for the listing and trading of PDRs on the Exchange. PDRs 
represent securities based on a unit investment trust that holds the 
securities that comprise an index or portfolio underlying a series of 
PDRs. Pursuant to ISE Rules 2123 and 2131, ICUs and PDRs 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 NAV. When aggregated in the same specified minimum 
number, ICUs and PDRs must be redeemable by the issuer for the 
securities and/or cash, with a value equal to the next determined NAV.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 80a.
---------------------------------------------------------------------------

    To meet the investment objective of providing investment returns 
that correspond to the price and the dividend and yield performance of 
the underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF 
portfolio.\10\
---------------------------------------------------------------------------

    \10\ In either case, an ETF, by its terms, may be considered 
invested in the securities of the underlying index to the extent the 
ETF invests in sponsored American Depository Receipts (``ADRs''), 
Global Depository Receipts (``GDRs''), or European Depository 
Receipts (``EDRs'') that trade on exchanges with last-sale reporting 
representing securities in the underlying index.
---------------------------------------------------------------------------

    An ETF using a replication strategy invests in each stock of the 
underlying index in about the same proportion as that stock is 
represented in the index itself. An ETF using a representative sampling 
strategy generally invests in a significant number, but not all of the 
component securities of the underlying index, and will hold stocks 
that, in the aggregate, are intended to approximate the full index in 
terms of key characteristics, such as price/earnings ratio, earnings 
growth, and dividend 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'').\11\
---------------------------------------------------------------------------

    \11\ For an ETF to qualify for tax treatment as a regulated 
investment company, it must meet several requirements under the IRC, 
including requirements with respect to the nature and value of the 
ETF's assets.
---------------------------------------------------------------------------

    ETFs listed pursuant to these proposed generic listing standards 
(discussed below) or that are traded pursuant to unlisted trading 
privileges (``UTP'') would be traded, in all other respects, under the 
Exchange's existing trading rules and procedures that apply to ETFs, 
and would be covered under the Exchange's surveillance program for 
equities. The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of ETFs listed pursuant to the 
proposed new listing standards or traded pursuant to UTP. In addition, 
the Exchange has a general policy prohibiting the dissemination of 
material, non-public information by its employees.
    The Exchange believes that adopting generic listing standards and 
applying Rule 19b-4(e) should fulfill the intended objective of that 
rule by

[[Page 58698]]

allowing those ETFs that satisfy the proposed generic listing standards 
to commence trading, without the need for a public comment period and 
Commission approval. The proposed rules have the potential to reduce 
the time frame for bringing ETFs to market, thereby reducing the 
burdens on issuers and other market participants. The failure of a 
particular index or portfolio to comply with the proposed generic 
listing standards under Rule 19b-4(e) would not, however, preclude the 
Exchange from submitting a separate filing pursuant to Section 19(b)(2) 
requesting Commission approval to list and trade an ETF based on that 
index or portfolio.
b. Proposed Generic Listing Standards for PDRs Based on U.S. Stocks
    The Commission has previously approved generic listing standards 
for ETFs based on indexes or portfolios that consist of stocks listed 
on U.S. exchanges.\12\ Proposed Rule 2131 sets forth generic listing 
standards for PDRs based on an index or portfolio of U.S. Component 
Stocks, which shall meet the following criteria:
---------------------------------------------------------------------------

    \12\ See ISE Rule 2123; Securities Exchange Act Release No. 
54528 (September 28, 2006), 71 FR 58650 (October 4, 2006) (SR-ISE-
2006-48) (approving generic listing standards for ICUs); Securities 
Exchange Act Release No. 44532 (July 10, 2001), 66 FR 37078 (July 
19, 2001) (SR-Amex-2001-25) (modifying generic listing standards for 
PDRs).
---------------------------------------------------------------------------

     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each shall have a 
minimum market value of at least $75 million (.01(a)(1)(i) of the 
Supplementary Material to Rule 2131);
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each shall have a 
minimum monthly trading volume during each of the last six months of at 
least 250,000 shares (.01(a)(1)(ii) of the Supplementary Material to 
Rule 2131);
     The most heavily weighted component stock shall not exceed 
25% of the weight of the index or portfolio, and the five most heavily 
weighted component stocks shall not exceed 65% of the weight of the 
index or portfolio (.01(a)(1)(iii) of the Supplementary Material to 
Rule 2131);
     The index or portfolio shall include a minimum of 13 
component stocks (.01(a)(1)(iv) of the Supplementary Material to Rule 
2131); and
     All securities in the index or portfolio shall be U.S. 
Component Stocks listed on a national securities exchange and shall be 
NMS stocks as defined in Rule 600 of Regulation NMS under the Act 
(.01(a)(1)(v) of the Supplementary Material to Rule 2131).
c. Proposed Listing and Trading Requirements for ETFs Based on 
International or Global Indexes or Portfolios
    To list an ICU or PDR pursuant to the proposed generic listing 
standards for international and global indexes or portfolios, the index 
or portfolio underlying the ETF must satisfy all the conditions 
contained in proposed ISE Rule 2123(c)(2)(ii) or (iii) and .01(a)(2) or 
(3) of the Supplementary Material to proposed ISE Rule 2131, 
respectively. However, for ICUs and PDRs traded on the Exchange 
pursuant to UTP, only the provisions of proposed ISE Rules 2123(c)(3), 
(c)(5), (e), (f), and (i); 2131(c) and (e)(2)(ii); and .01(c), (e), 
(f), and (g) of Supplementary Material to proposed ISE Rule 2131, 
respectively, will apply. These paragraphs relate to the dissemination 
of information, surveillance procedures, trading halts, prospectus 
delivery, trading hours, and minimum price variation.
    As with the existing generic listing standards for ETFs based on 
domestic indexes or portfolios, these generic listing standards for 
international and global indexes or portfolios are intended to ensure 
that stocks with substantial market capitalization and trading volume 
account for a substantial portion of the weight of an index or 
portfolio. While the standards in this proposal are based on the 
standards contained in the current generic listing standards for ETFs 
based on domestic indexes or portfolios, they have been adapted as 
appropriate to apply to international and global indexes or portfolios. 
The proposed criteria for the underlying component securities in the 
international and global indexes are similar to those for the domestic 
indexes or portfolios, but with modifications for the issues and risks 
associated with non-U.S. securities. In addition, the Commission has 
previously approved similar generic listing standards as those proposed 
in this filing.\13\
---------------------------------------------------------------------------

    \13\ See supra note 8.
---------------------------------------------------------------------------

    ISE Rules 2123(b) and 2131(a) would include definitions of ``U.S. 
Component Stock'' and ``Non-U.S. Component Stock.'' These new 
definitions would provide the basis for the standards for indexes or 
portfolios with either domestic or international stocks, or a 
combination of both. A ``Non-U.S. Component Stock'' would mean an 
equity security that is not registered under Section 12(b) or 12(g) of 
the Act,\14\ and that is issued by an entity that: (a) is not 
organized, domiciled, or incorporated in the United States; and (b) is 
an operating company (including a real estate investment trust (REIT) 
or income trust, but excluding an investment trust, unit trust, mutual 
fund, or derivative). This definition is designed to create a category 
of component stocks that are issued by companies that are not based in 
the United States, but are not subject to oversight through Commission 
registration, and would include sponsored GDRs and EDRs. A ``U.S. 
Component Stock'' would mean an equity security that is registered 
under Section 12(b) or 12(g) of the Act or an ADR, the underlying 
equity security of which is registered under Section 12(b) or 12(g) of 
the Act.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78l(b) or (g).
---------------------------------------------------------------------------

    An ADR with an underlying equity security that is registered 
pursuant to the Act is considered a U.S. Component Stock because the 
issuer of that underlying security is subject to Commission 
jurisdiction and must comply with Commission rules. The Exchange 
proposes that, to list an ETF based on an international or global index 
or portfolio pursuant to the generic listing standards, such index or 
portfolio must meet the following criteria:
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each must have a 
minimum market value of at least $100 million (proposed ISE Rule 
2123(c)(2)(ii)(A) and .01(a)(2)(i) of the Supplementary Material to 
proposed ISE Rule 2131);
     Component stocks representing at least 90% of the weight 
of the index or portfolio each must have a minimum worldwide monthly 
trading volume during each of the last six months of at least 250,000 
shares (proposed ISE Rule 2123(c)(2)(ii)(B) and .01(a)(2)(ii) of the 
Supplementary Material to proposed ISE Rule 2131);
     The most heavily weighted component stock may not exceed 
25% of the weight of the index or portfolio and the five most heavily 
weighted component stocks may not exceed 60% of the weight of the index 
or portfolio (proposed ISE Rule 2123(c)(2)(ii)(C) and .01(a)(2)(iii) of 
the Supplementary Material to proposed ISE Rule 2131);
     The index or portfolio shall include a minimum of 20 
component stocks (proposed ISE Rule 2123(c)(2)(ii)(D) and .01(a)(2)(iv) 
of the Supplementary Material to proposed ISE Rule 2131); and
     Each U.S. Component Stock in the index or portfolio must 
be listed on a national securities exchange and be an NMS stock as 
defined in Rule 600 of

[[Page 58699]]

Regulation NMS under the Act, and each Non-U.S. Component Stock in the 
index or portfolio must be listed on an exchange that has last-sale 
reporting (proposed ISE Rule 2123(b)(2)(ii)(E) and .01(a)(2)(v) of the 
Supplementary Material to proposed ISE Rule 2131).
    The Exchange believes that these proposed standards are reasonable 
for international and global indexes and portfolios and, when applied 
in conjunction with the other listing requirements, would result in the 
listing and trading on the Exchange of ETFs that are sufficiently 
broad-based in scope and not readily susceptible to manipulation. The 
Exchange also believes that the proposed standards would result in ETFs 
that are adequately diversified in weighting for any single security or 
small group of securities to significantly reduce concerns that trading 
in an ETF based on an international or global index or portfolio could 
become a surrogate for the trading of securities not registered in the 
United States.
    The Exchange further notes that, while these standards are similar 
to those for indexes and portfolios that include only U.S. Component 
Stocks, they differ in certain important respects and are generally 
more restrictive, reflecting greater concerns over portfolio 
diversification with respect to ETFs investing in components that are 
not individually registered with the Commission. First, in the proposed 
standards, component stocks that in the aggregate account for at least 
90% of the weight of the index or portfolio each shall have a minimum 
market value of at least $100 million, compared to a minimum market 
value of at least $75 million for indexes with only U.S. Component 
Stocks.\15\ Second, in the proposed standards, the most heavily 
weighted component stock cannot exceed 25% of the weight of the index 
or portfolio, in contrast to a 30% standard for an index or portfolio 
comprised of only U.S. Component Stocks. Third, in the proposed 
standards, the five most heavily weighted component stocks shall not 
exceed 60% of the weight of the index or portfolio, compared to a 65% 
standard for indexes comprised of only U.S. Component Stocks. Fourth, 
the minimum number of component stocks in the proposed standards is 20, 
in contrast to a minimum of 13 in the standards for an index or 
portfolio with only U.S. Component Stocks. Finally, the proposed 
standards require that each Non-U.S. Component Stock included in the 
index or portfolio be listed and traded on an exchange that has last-
sale reporting.
---------------------------------------------------------------------------

    \15\ Market value is calculated by multiplying the total shares 
outstanding by the price per share of the component stock.
---------------------------------------------------------------------------

    The Exchange also proposes to modify ISE Rule 2123(c)(3) and to 
adopt .01(b)(2) of the Supplementary Material to proposed ISE Rule 2131 
to require that the index value for an ETF listed pursuant to the 
proposed standards for international and global indexes be widely 
disseminated by one or more major market data vendors at least every 60 
seconds during the time when the ETF shares trade on the Exchange. If 
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. In 
contrast, the index value for an ETF listed pursuant to the existing 
standards for domestic indexes must be disseminated at least every 15 
seconds during the trading day. This modification reflects limitations, 
in some instances, on the frequency of intra-day trading information 
with respect to Non-U.S. Component Stocks and that, in many cases, 
trading hours for overseas markets overlap only in part, or not at all, 
with Exchange's trading hours.
    In addition, ISE Rule 2123(c)(3) is being modified and .01(c) of 
the Supplementary Material to proposed ISE Rule 2131 is being adopted 
to define the term ``Intraday Indicative Value'' (``IIV'') as the 
estimate of the value of a share of each ETF that is updated at least 
every 15 seconds during ISE's trading hours. The Exchange also proposes 
to clarify in ISE Rule 2123(c)(3) that the IIV would be updated during 
the hours the ETF trades on the Exchange to reflect changes in the 
exchange rate between the U.S. dollar and the currency in which any 
component stock is denominated.
    The Exchange is also proposing to add an ISE Rule 2123(c)(6) and 
.01(h) of the Supplemental Material to proposed ISE Rule 2131 regarding 
the creation and redemption process for ETFs and compliance with 
federal securities laws for, in particular, ETFs listed pursuant to the 
new generic listing standards for international and global indexes or 
portfolios described in rules previously approved by the Commission 
under Section 19(b)(2) of the Act. These new provisions would apply to 
ICUs listed pursuant to ISE Rule 2123(c)(2)(ii) or (iii) or PDRs listed 
pursuant to .01(a)(2) and (3) of the Supplementary Material to proposed 
ISE Rule 2131, respectively. These new standards would require that the 
statutory prospectus or the application for exemption from provisions 
of the 1940 Act \16\ for the ETF being listed pursuant to these new 
standards state that the ETF must comply with the federal securities 
laws in accepting securities for deposits and satisfying redemptions 
with redemption securities, including that the securities accepted for 
deposits and the securities used to satisfy redemption requests are 
sold in transactions that would be exempt from registration under the 
Securities Act of 1933.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 80a.
    \17\ 15 U.S.C. 77a. et seq.
---------------------------------------------------------------------------

d. Proposed Listing and Trading Requirements for ETFs Based on Indexes 
or Portfolios Described in a Previously Approved Rule
    The Commission has approved generic listing standards providing for 
the listing pursuant to Rule 19b-4(e) of other derivative securities 
products based on indexes or portfolios described in rules previously 
approved by the Commission under Section 19(b)(2) of the Act. The 
Exchange proposes to add generic listing standards for ETFs that are 
based on such indexes or portfolios. The Exchange believes that the 
application of this standard to ETFs is appropriate because the 
underlying index or portfolio would have been subject to Commission 
review in the context of the approval of those other proposed rule 
changes.
    This new generic listing standard would be limited to stock indexes 
and portfolios and would require that each component stock be either: 
(a) a U.S. Component Stock that is listed on a national securities 
exchange and is an NMS stock as defined in Rule 600 of Regulation NMS 
under the Act; or (b) a Non-U.S. Component Stock that is listed and 
traded on an exchange that has last-sale reporting.
e. Other Proposals
    The Exchange is proposing to delete general language addressing the 
applicability of trading halts, which appears in ISE Rule 2123(b)(3), 
and to add a paragraph (e) to ISE Rule 2123 to more thoroughly address 
trading halts. The Exchange is also adopting ISE Rule 2131(e)(2)(ii) to 
address trading halts in PDRs. Specifically, proposed Rule 2123(e) and 
2131(e)(2)(ii) require the Exchange to halt trading in a series of ICUs 
or PDRs (as applicable) whenever a market-wide trading halt has been 
implemented in response to extraordinary market conditions. In 
exercising its discretion to halt or suspend trading in a series of 
ETFs, the Exchange may consider factors such as the extent to which 
trading in the

[[Page 58700]]

underlying securities is not occurring or whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present, in addition to other factors that may 
be relevant. When the Exchange is the listing market for a series of 
ETFs, if the IIV or the official index value applicable to that ETF 
series is not being disseminated as required, the Exchange may halt 
trading during the day in which the interruption to the dissemination 
of the IIV or the index value occurs. If the interruption to the 
dissemination of the IIV or the official index value 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.
    When the Exchange is trading a series of an ETF pursuant to UTP, 
the Exchange will immediately halt trading in that ETF series if a 
temporary interruption occurs in the calculation or wide dissemination 
of the applicable IIV or value of the underlying index by a major 
market data vendor and the listing market halts trading in such ETF 
series. Further, if the IIV or the value of the underlying index 
continues not to be calculated or widely available as of the next 
business day, the Exchange will not begin trading in that series of 
ETFs. If an interruption in the calculation or wide dissemination of 
the IIV or the value of the underlying index continues, the Exchange 
may resume trading in the ETF series only if calculation and wide 
dissemination of the IIV or the value of the underlying index resumes 
or trading in such series resumes in the listing market.
    The Exchange proposes to adopt ISE Rule 2131(f) to limit its 
liability with respect to the dissemination of information related to 
PDRs. ISE already has in place a similar provision in ISE Rule 2123(e). 
Further, proposed ISE Rule 2131(f) is identical to NYSE Arca Rule 
8.100(f) (Limitation of Liability of the Corporation).
    The Exchange also proposes to eliminate the requirement that the 
prescribed calculation methodology for the index underlying a series of 
ICUs must be one of those enumerated in the ISE Rule 2123(c)(4). The 
proposed rule change is based on approved rule changes of the Amex, 
NYSE, and NYSE Arca.\18\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 55546 (March 27, 
2007), 72 FR 15929 (April 3, 2007) (SR-NYSEArca-2007-14) (approving 
the elimination of the requirement regarding index weighting and 
calculation methodology); Securities Exchange Act Release No. 55545 
(March 27, 2007), 72 FR 15928 (April 3, 2007) (SR-NYSE-2007-12); 
Securities Exchange Act Release No. 55544 (March 27, 2007), 72 FR 
15923 (April 3, 2007) (SR-Amex-2007-07).
---------------------------------------------------------------------------

    The Exchange is proposing other minor and clarifying changes to ISE 
Rule 2123. ISE Rule 2123(c)(2)(i)(E) has been modified to reflect the 
adoption of Regulation NMS. Proposed Rule 2123(c) has been added to 
make sure that an entity that advises an index provider or calculator 
and related entities has in place procedures designed to prevent the 
use and dissemination of material non-public information regarding the 
index underlying the ETFs.
    Additionally, the Exchange is proposing to amend Appendix A to 
Chapter 21 (ISE Stock Exchange, LLC Trading Rules) to include reference 
to ISE Rules 702 (Trading Halts) and 703 (Trading Halts Due to 
Extraordinary Market Volatility) to clarify that both of these rules 
apply to securities traded on the ISE Stock Exchange.
2. Statutory Basis
    The basis under the Act for this proposed rule change is found in 
Section 6(b)(5) of the Act.\19\ The Exchange believes that the proposed 
rule change is consistent with Section 6(b)(5) requirements that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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-ISE-2007-60 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-ISE-2007-60. 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 office of ISE. 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-ISE-2007-60 and should be 
submitted on or before November 6, 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, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In

[[Page 58701]]

particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act \21\ 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.
---------------------------------------------------------------------------

    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Currently, the Exchange must file a proposed rule change with the 
Commission pursuant to Section 19(b)(1) of the Act \22\ and Rule 19b-4 
thereunder \23\ to list and trade, or trade pursuant to UTP, any ETF 
based on an index or portfolio comprised of foreign securities. The 
Exchange also must file a proposed rule change to list and trade, or 
trade pursuant to UTP, ETFs based on indexes or portfolios described in 
rule changes that have previously been approved by the Commission as 
underlying benchmarks for derivative securities. However, Rule 19b-4(e) 
provides that the listing or 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. ISE's proposed rules for the listing and trading of ETFs 
pursuant to Rule 19b-4(e) based on (1) certain indexes or portfolios 
with components that include foreign securities or (2) indexes or 
portfolios described in exchange rules that have been previously 
approved by the Commission as underlying benchmarks for derivative 
securities, fulfill these requirements. Use of Rule 19b-4(e) by ISE to 
list and trade such ETFs should promote competition, reduce burdens on 
issuers and other market participants, and make such ETFs available to 
investors more quickly.\24\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(1).
    \23\ 17 CFR 240.19b-4.
    \24\ The Commission notes, however, that the failure of a 
particular ETF to meet these generic listing standards would not 
preclude ISE from submitting a separate proposed rule change to list 
and trade the ETF.
---------------------------------------------------------------------------

    The Commission previously has approved generic listing standards 
for other exchanges that are substantially similar to those proposed 
here by ISE.\25\ This proposal does not appear to raise any novel 
regulatory issues. Therefore, the Commission finds that ISE's proposal 
is consistent with the Act on the same basis that it approved the other 
exchanges' generic listing standards for ETFs based on U.S. component 
stocks, international or global indexes or portfolios, and indexes or 
portfolios described in exchange rules that have been previously 
approved by the Commission as underlying benchmarks for derivative 
securities.
---------------------------------------------------------------------------

    \25\ See, e.g., Securities Exchange Act Release No. 55621 (April 
12, 2007), 72 FR 19571 (April 18, 2007) (SR-NYSEArca-2006-86); 
Securities Exchange Act Release No. 55269 (February 9, 2007), 72 FR 
19571 (February 15, 2007) (SR-NASDAQ-2006-50); Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 
2007) (SR-NYSE-2006-101); Securities Exchange Act Release No. 54739 
(November 9, 2006), 71 FR 66993 (November 17, 2007) (SR-Amex-2006-
78).
---------------------------------------------------------------------------

    Proposed ISE Rule 2123(c) and .01(a) of the Supplementary Material 
to proposed ISE Rule 2131 establish standards for the composition of an 
index or portfolio underlying an ETF that may be listed or traded on 
ISE. 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, taken 
together, these standards are reasonably designed to ensure that 
securities with substantial market capitalization and trading volume 
account for a substantial portion of any underlying index or portfolio, 
and when applied in conjunction with the other applicable listing 
requirements will permit the listing and trading of only 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 ISE from listing and trading ETFs that 
might be used as surrogate for trading in unregistered securities. The 
requirement that each component security underlying an ETF be an NMS 
stock (in the case of a U.S. Component Stock) or listed on an exchange 
and subject to last-sale reporting (in the case of a Non-U.S. Component 
Stock) also should contribute to the transparency of the market for 
these ETFs.
    The proposed generic listing standards will permit ISE to list and 
trade an ETF if the Commission has previously approved an SRO rule 
change that contemplates listing and trading a derivative product based 
on the same underlying index. ISE would be able to rely on that earlier 
approval order, provided that: (1) Each of the securities comprising 
the underlying index is (a) a U.S. Component Stock listed on a national 
securities exchange, and an NMS stock, as that term is defined by Rule 
600 of Regulation NMS; or (b) a Non-U.S. Component Stock that is listed 
and traded on an exchange that has last-sale reporting; and (2) ISE 
complies with the commitments undertaken by the other SRO set forth in 
the prior order, including any surveillance-sharing and information 
dissemination.
    The Commission believes that ISE's proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\26\ 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. ISE's proposal requires the value of the index or portfolio 
underlying an ETF based on a global or international index to be 
disseminated at least once every 60 seconds during the time when the 
ETF shares trade on the Exchange.\27\ ISE has represented that, if an 
underlying index or portfolio value is no longer calculated or 
available, it would commence delisting proceedings for the associated 
ETF.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \27\ See proposed ISE Rule 2123(c)(3) and .01(b)(2) to the 
Supplemental Material to proposed ISE Rule 2131. If an index or 
portfolio value does not change for some of the time that the ETF 
trades on the Exchange, the last official calculated value must 
remain available throughout Exchange trading hours. See proposed ISE 
Rule 2123(c)(3) and .01(c) to the Supplemental Material to proposed 
ISE Rule 2131.
---------------------------------------------------------------------------

    In addition, an IIV, which represents an estimate of the value of a 
share of each ETF, must be updated and disseminated at least once every 
15 seconds during trading hours for the ETF on the Exchange. The IIV 
must reflect changes in the exchange rate between the U.S. dollar and 
the currency in which any index or portfolio component stock is 
denominated. The Commission believes that the proposed rules regarding 
the dissemination of the index value and the IIV are reasonably 
designed to promote transparency in the pricing of ETFs and thus are 
consistent with the Act.
    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. These generic listing 
standards provide that

[[Page 58702]]

the issuer of an ETF must represent that it will calculate the NAV and 
make it available daily to all market participants at the same 
time.\28\
---------------------------------------------------------------------------

    \28\ See proposed ISE Rules 2123(a)(6) and 2131(e)(1)(ii).
---------------------------------------------------------------------------

    The Commission believes that the proposal is reasonably designed to 
preclude trading of ETFs when transparency is impaired. Proposed ISE 
Rules 2123(e) and 2131(e)(2)(ii) provide that, when ISE is the listing 
market, ISE may halt trading when an interruption occurs in the 
calculation or dissemination of the IIV or index value applicable to an 
ETF. If the interruption continues, ISE would halt trading no later 
than the beginning of the next trading day. In addition, proposed ISE 
Rules 2123(e) and 2131(e)(2)(ii) set forth trading halt procedures when 
ISE trades the ETF pursuant to UTP. This rule is substantially similar 
to those recently adopted by other exchanges and found by the 
Commission to be consistent with the Act.\29\
---------------------------------------------------------------------------

    \29\ See NYSE Arca Equities Rule 7.34; NYSE Rule 1100(f)(2); 
Securities Exchange Act Release No. 55113 (January 17, 2007), 72 FR 
3179 (January 24, 2007) (SR-NYSE-2006-101); Securities Exchange Act 
Release No. 54997 (December 21, 2006), 71 FR 78501 (December 29, 
2006) (SR-NYSEArca-2006-77).
---------------------------------------------------------------------------

    In approving this proposal, the Commission relied on ISE's 
representation that its surveillance procedures are adequate to 
properly monitor the trading of the ETFs listed pursuant to the 
proposed new listing standards or traded on a UTP basis.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing thereof in the Federal Register. The Commission 
notes that ISE's proposal is substantially similar to other proposals 
that have been approved by the Commission.\30\ The Commission does not 
believe that ISE's proposal raises any novel regulatory issues and, 
therefore, that good cause exists for approving the filing before the 
conclusion of a notice-and-comment period. Accelerated approval of the 
proposal will expedite the listing and trading of additional ETFs by 
ISE, subject to consistent and reasonable standards. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\31\ to approve the proposed rule change, as amended, on an 
accelerated basis.
---------------------------------------------------------------------------

    \30\ See supra notes 8 and 12.
    \31\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-ISE-2007-60), as amended, 
be, and it hereby is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \32\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-20360 Filed 10-15-07; 8:45 am]

BILLING CODE 8011-01-P