Document ID: SEC-2006-0843-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2006-07-03T04:00Z

[Federal Register: July 3, 2006 (Volume 71, Number 127)]
[Notices]               
[Page 37971-37974]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jy06-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54045; File No. SR-PCX-2005-115]

 
Self-Regulatory Organizations; Pacific Exchange, Inc. (n/k/a NYSE 
Arca, Inc.); Notice of Filing of a Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto and Order Granting Partial Accelerated Approval 
Relating to Trading Shares of the Funds of the ProShares Trust Pursuant 
to Unlisted Trading Privileges

June 26, 2006.
    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 October 11, 2005, the Pacific Exchange, Inc.

[[Page 37972]]

(n/k/a NYSE Arca, Inc.) (the ``Exchange''), through its wholly owned 
subsidiary PCX Equities, Inc. (n/k/a/ NYSE Arca Equities, Inc.) (``NYSE 
Arca Equities'' or the ``Corporation''), filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange.\3\ The Exchange filed Amendment No. 1 to the proposed 
rule change on November 21, 2005.\4\ The Exchange filed Amendment No. 2 
to the proposed rule change on May 5, 2006.\5\ On June 21, 2006, the 
Commission published the proposed rule change for notice from 
interested persons and partially approved on an accelerated basis, as 
amended, that portion of the proposal pertaining to the trading, 
pursuant to unlisted trading privileges (``UTP''), of the Shares of the 
Ultra 500 Fund, Ultra 100 Fund, Ultra 30 Fund, Ultra Mid-Cap 400 Fund, 
Short 500 Fund, Short 100 Fund, Short 30 Fund, Short Mid-Cap 400 Fund 
and the portion of the proposal pertaining to NYSE Arca Equities Rule 
9.2(a).\6\ The Commission is now approving on an accelerated basis the 
remainder of the proposed rule change, as amended, pertaining to the 
trading, pursuant to UTP, of the Shares of the Ultra Short 500 Fund, 
Ultra Short 100 Fund, Ultra Short 30 Fund, and Ultra Short Mid-Cap 400 
Fund.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 6, 2006, the Pacific Exchange, Inc. (``PCX''), 
filed with the Commission a proposed rule change, which was 
effective upon filing, to change the name of the Exchange, as well 
as several other related entities, to reflect Archipelago's recent 
acquisition of PCX and the merger of the NYSE with Archipelago. See 
Securities Exchange Act Release No. 56315 (April 7, 2006), 71 FR 
19226 (April 13, 2006) (File No. SR-PCX-2006-24). All references 
herein have been changed to reflect these transactions. Telephone 
Conference between Lisa Dallmer, Director, NYSE Arca Equities, Inc., 
and Florence E. Harmon, Senior Special Counsel, Division of Market 
Regulation (``Division''), Commission, on June 21, 2006.
    \4\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \5\ Amendment No. 2 replaced and superseded Amendment No. 1 in 
its entirety.
    \6\ Securities Exchange Act Release No. 54026 (June 21, 2006) 
(``NYSE Arca Order'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly owned subsidiary NYSE Arca 
Equities, proposes to trade shares (``Shares''), pursuant to UTP, the 
following four funds of the ProShares Trust (f/k/a xtraShares Trust) 
(the ``Trust''): Ultra Short 500 Fund, Ultra Short 100 Fund, Ultra 
Short 30 Fund and Ultra Short Mid-Cap 400 Fund (the ``Funds'').

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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

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

1. Purpose
    Under NYSE Arca Equities Rule 5.2(j)(3), the Exchange may propose 
to list and/or trade pursuant to UTP ``Investment Company Shares.'' 
With this filing, the Exchange proposes to trade pursuant to UTP the 
Shares of the Funds under NYSE Arca Equities Rule 5.2(j)(3). The 
Exchange represents that the Shares, which seek to provide investment 
results that correspond to the inverse or opposite of twice the inverse 
or opposite (-200%) of the index's daily performance, qualify as 
Investment Company Shares as defined in NYSE Arca Equities Rule 
5.2(j)(3). To accommodate the trading of the Shares, the Exchange has 
amended NYSE Arca Equities Rule 9.2(a) (``Diligence as to Accounts''), 
as more fully described in the NYSE Arca Order. The Commission also 
previously approved the trading, pursuant to UTP, of the Shares of 
eight of the Funds on the Exchange in the NYSE Arca Order.
    The four Funds--the Ultra Short 500, Ultra Short 100, Ultra Short 
30, and Ultra Short Mid-Cap400 Funds (the ``Additional Bearish 
Funds'')--seek daily investment results, before fees and expenses, that 
correspond to twice (or two times) the inverse or opposite (-200%) of 
the daily performance of the S&P 500, Nasdaq 100, DJIA and S&P MidCap, 
respectively. If each of these Funds is successful in meeting its 
objective, the net asset value (the ``NAV'') of the Shares of each Fund 
should increase approximately twice as much, on a percentage basis, as 
the respective Underlying Index loses when the prices of the securities 
in the Index decline on a given day, or should decrease approximately 
twice as much as the respective Underlying Index gains when the prices 
of the securities in the Index rise on a given day. A description of 
the Shares, dissemination of information about the Shares and the 
Funds' underlying indexes, surveillance procedures applicable to 
trading of the Shares on the Exchange, and the Exchange's information 
bulletin pertaining to the Shares is set forth in the NYSE Arca 
Order.\7\
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    \7\ See also Securities Exchange Act Release No. 54040 (June 23, 
2006) (SR-AMEX-2006-41 (the ``Amex Order'') (approval to list and 
trade on Amex the Ultra Short 500 Fund, Ultra Short 100 Fund, Ultra 
Short 30 Fund and Ultra Short Mid-Cap 400 Fund).
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(a) UTP Trading Criteria
    The Exchange represents that it will cease trading the Shares of a 
Fund during the listing market's trading hours if: (a) 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 a halt because the IIV 
or the value of the applicable Underlying Index is no longer available 
at least every 15 seconds or the NAV is not disseminated to all market 
participants at the same time \8\ or (b) the listing market delists the 
Shares. Additionally, the Exchange may cease trading the Shares of a 
Fund if such other event shall occur or condition exists which in the 
opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
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    \8\ Telephone Conference between Lisa Dallmer, Director, NYSE 
Arca Equities, Inc., and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on June 26, 2006 (as to simultaneous NAV 
dissemination).
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(b) Trading Rules
    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 9:30 a.m. ET until 8 p.m. ET, even if 
the IIV is not disseminated from 4:15 p.m. ET to 8 p.m. ET.\9\ The 
Exchange states that it has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. The minimum 
trading increment for Shares on the Exchange will be $0.01.
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    \9\ Because National Securities Clearing Corporation (``NSCC'') 
does not disseminate the new basket amount to market participants 
until approximately 6 p.m. to 7 p.m. ET, an updated IIV is not 
possible to calculate during the Exchange's late trading session. 
The Exchange also states that currently the official index sponsors 
for the Funds' indexes do not calculate updated index values during 
the Exchange's late trading session; however, if the index sponsors 
did so in the future, the Exchange will not trade this product 
unless such official index value is widely disseminated. Telephone 
Conference between Lisa Dallmer, Director, NYSE Arca Equities, Inc., 
and Florence E. Harmon, Senior Special Counsel, Division, 
Commission, on June 21, 2006.
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    With respect to trading halts, 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

[[Page 37973]]

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 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 will be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's ``circuit 
breaker'' rule \10\ or by the halt or suspension of trading of the 
underlying securities.\11\
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    \10\ See NYSE Arca Equities Rule 7.12.
    \11\ See ``UTP Trading Criteria'' above for specific instances 
when the Exchange will cease trading the Shares.
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    Shares will be deemed ``Eligible Listed Securities,'' as defined in 
NYSE Arca Equities Rule 7.55, for purposes of the Intermarket Trading 
System (``ITS'') Plan and therefore will be subject to the trade 
through provisions of NYSE Arca Equities Rule 7.56, which require that 
ETP Holders avoid initiating trade-throughs for ITS securities.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\12\ in general, and furthers the 
objectives of Section 6(b)(5),\13\ in particular, in that it is 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transaction in securities, to remove impediments and perfect the 
mechanisms of a free and open market, and, in general, to protect 
investors and the public interest.
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    \12\ 15 U.S.C. 78s(b).
    \13\ 15 U.S.C. 78s(b)(5).
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    In addition, the Exchange believes that the proposal is consistent 
with Rule 12f-5 under the Act \14\ because it deems the Shares to be 
equity securities, thus rendering the Shares subject to the Exchange's 
existing rules governing the trading of equity securities.
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    \14\ 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 
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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-PCX-2005-115 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-PCX-2005-115. 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 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-PCX-2005-115 and should be submitted on or before July 
24, 2006.

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

    The Commission previously approved the portion of the proposed rule 
change, as amended, pertaining to the trading pursuant to UTP of eight 
Funds: Ultra 500 Fund, Ultra 100 Fund, Ultra 30 Fund, Ultra Mid-Cap 400 
Fund, Short 500 Fund, Short 100 Fund, Short 30 Fund, and Short Mid-Cap 
400 Fund (``Original Funds'').\15\ The Commission also previously 
approved the Exchange's Rule 9.2(a) with respect to ``Diligence to 
Accounts.'' \16\ The Commission is now approving the portion of the 
proposed rule change, as amended, pertaining to the trading pursuant to 
UTP of the four remaining Funds: Ultra Short 500 Fund, Ultra Short 100 
Fund, Ultra Short 30 Fund, Ultra Short Mid-Cap 400 Fund (``Subsequent 
Funds''). With regard to the trading pursuant to UTP of the Subsequent 
Funds, 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.\17\ In particular, the Commission finds that the portion of 
the proposed rule change pertaining to the Subsequent Funds is 
consistent with Section 6(b)(5) of the Act,\18\ 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.
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    \15\ See NYSE Arca Order, supra, note 6.
    \16\  Id.
    \17\ 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).
    \18\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the portion of the proposal 
pertaining to the trading of the Original Funds is consistent with 
Section 12(f) of the Act,\19\ which permits an exchange to trade, 
pursuant to UTP, a security that is listed and registered on another 
exchange.\20\ The Commission notes that

[[Page 37974]]

it previously approved the listing and trading of the Shares of all of 
the Funds on the Amex and the trading, pursuant to UTP, of the Original 
Funds on the Exchange.\21\ The Commission also finds that the proposal 
is consistent with Rule 12f-5 under the Act,\22\ 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. NYSEArca rules deem the 
Shares to be equity securities, thus trading in the Shares will be 
subject to the Exchange's existing rules governing the trading of 
equity securities.
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    \19\ 15 U.S.C. 78l(f).
    \20\ 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.
    \21\ See Amex Order, supra note 7.
    \22\ 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,\23\ which sets forth 
Congress's finding that it is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure the availability to brokers, dealers, and investors 
of information with respect to quotations for and transactions in 
securities.
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    \23\ 15 U.S.C. 78k-(a)(1)(C)(iii).
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    In connection with the Exchange's UTP of the Shares of the 
Subsequent Funds, the Exchange will cease trading in the Shares if: (1) 
The listing market stops trading the Shares because of a regulatory 
halt similar to NYSE Arca Equities Rule 7.12 or a halt because the 
Indicative Partnership Value or the value of the applicable Underlying 
Index is no longer available (at least every 15 seconds during the 
trading day), or the NAV is not disseminated to all market participants 
at the same time, or (b) 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.
    In support of the portion of the proposed rule change regarding UTP 
of the Shares, of the Original Funds, the Exchange has made the 
following representations:
    1. The Exchange has appropriate rules to facilitate transactions in 
this type of security in all trading sessions.
    2. The Exchange's surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange.
    3. The Exchange will distribute an Information Bulletin to its 
members prior to the commencement of trading of the Shares on the 
Exchange that explains the special characteristics and risks of trading 
the Shares.
    4. The Exchange will require a member with a customer who purchases 
newly issued Shares on the Exchange to provide that customer with a 
product prospectus and will note this prospectus delivery requirement 
in the Information Bulletin.
    5. The Exchange will cease trading in the Shares 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 and/or a halt because the 
Indicative Partnership Value or the value of the applicable Underlying 
Index is no longer available at least every 15 seconds or the NAV is 
not disseminated to all market participants at the same time, or (2) 
the listing market delists the Shares.
    This approval order is conditioned on the Exchange's adherence to 
these representations.
    The Commission finds good cause for partially approving the 
remaining portion of this proposed rule change with regard to the UTP 
of the Subsequent Funds before the thirtieth day after the publication 
of notice thereof in the Federal Register. As noted previously, the 
Commission previously found that the listing and trading of these 
Shares on the Amex is consistent with the Act.\24\ The Commission 
presently is not aware of any issue that would cause it to revisit that 
earlier finding or preclude the trading of these funds on the Exchange 
pursuant to UTP. Therefore, accelerating approval of this proposed rule 
change should benefit investors by creating, without undue delay, 
additional competition in the market for these Shares.
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    \24\ See Amex Order, supra note 7.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-PCX-2005-115), as amended, is hereby 
partially approved on an accelerated basis.\25\
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-10335 Filed 6-30-06; 8:45 am]

BILLING CODE 8010-01-P