Document ID: SEC-2008-0655-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2008-05-07T04:00Z

[Federal Register: May 7, 2008 (Volume 73, Number 89)]
[Notices]               
[Page 25818-25821]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my08-144]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57751; File No. SR-NYSEArca-2008-29]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Amend the Eligibility Criteria for Components of an Index 
Underlying Investment Company Units

May 1, 2008.

I. Introduction

    On March 13, 2008, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange''), 
through its wholly owned subsidiary, NYSE Arca Equities, Inc. (``NYSE 
Arca Equities''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to amend Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3) 
to modify the eligibility criteria for components of an index 
underlying Investment Company Units (``Units'').\3\ On March 24, 2008, 
the Exchange filed Amendment No. 1 to the proposed rule change. The 
proposed rule change was published for comment in the Federal Register 
on April 1, 2008.\4\ The

[[Page 25819]]

Commission received no comments on the proposal. This order approves 
the proposed rule change, as modified by Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Units are securities that represent 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, that holds securities comprising, or otherwise based 
on or representing an interest in, an index or portfolio of 
securities or securities in another registered investment company 
that holds securities. See NYSE Arca Equities 5.2(j)(3).
    \4\ See Securities Exchange Act Release No. 57561 (March 26, 
2008), 73 FR 17390.
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II. Description of the Proposal

    Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3) provides that 
NYSE Arca Equities may approve a series of Units for listing and 
trading (including trading pursuant to unlisted trading privileges) 
pursuant to Rule 19b-4(e) under the Act,\5\ if such series satisfies 
the criteria set forth in Commentary .01 to NYSE Arca Equities Rule 
5.2(j)(3). The Exchange proposes to exclude Units and certain other 
securities defined in Section 2 of NYSE Arca Equities Rule 8 
(collectively, ``Derivative Securities Products'') \6\ when applying 
the quantitative listing requirements of Commentaries .01(a)(A) and (B) 
to NYSE Arca Equities Rule 5.2(j)(3) relating to the listing of Units 
based on a U.S. index or portfolio or an international or global index 
or portfolio, respectively.
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    \5\ Rule 19b-4(e) under the Act 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 Rule 19b-4(c)(1) under the Act (17 CFR 240.19b-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 derivatives securities 
product, and the SRO has a surveillance program for the product 
class. See 17 CFR 240.19b-4(e).
    \6\ The following securities are included in Section 2 of NYSE 
Arca Equities Rule 8: Portfolio Depositary Receipts (Rule 8.100); 
Trust Issued Receipts (Rule 8.200); Commodity-Based Trust Shares 
(Rule 8.201); Currency Trust Shares (Rule 8.202); Commodity Index 
Trust Shares (Rule 8.203); Partnership Units (Rule 8.300); Paired 
Trust Shares (Rule 8.400); and Managed Fund Shares (Rule 8.600). See 
Securities Exchange Act Release No. 57619 (April 4, 2008), 73 FR 
19544 (April 10, 2008) (SR-NYSEArca-2008-25) (approving, among other 
things, the adoption of listing standards for Managed Fund Shares).
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    With respect to Commentary .01(a)(A) to NYSE Arca Equities Rule 
5.2(j)(3), the Exchange proposes to exclude Derivative Securities 
Products, as components, when applying the following existing component 
eligibility requirements: (1) 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 $75 million (Commentary 
.01(a)(A)(1)); (2) component stocks that, in the aggregate, account for 
at least 90% of the weight of the index or portfolio each must have a 
minimum monthly trading volume during each of the last six months of at 
least 250,000 shares (Commentary .01(a)(A)(2)); and (3) the most 
heavily weighted component stock must not exceed 30% of the weight of 
the index or portfolio, and the five most heavily weighted component 
stocks must not exceed 65% of the weight of the index or portfolio 
(Commentary .01(a)(A)(3)). Component stocks, in the aggregate, 
excluding Derivative Securities Products, would still be required to 
meet the criteria of these provisions. Thus, for example, when 
determining compliance with Commentaries .01(a)(A)(1) and (2) to NYSE 
Arca Equities Rule 5.2(j)(3), component stocks that, in the aggregate, 
account for at least 90% of the remaining index weight, after excluding 
any Derivative Securities Products, would be required to have a minimum 
market value of at least $75 million and minimum monthly trading volume 
of 250,000 shares during each of the last six months, respectively. In 
addition, with respect to Commentary .01(a)(A)(3) to NYSE Arca Equities 
Rule 5.2(j)(3), when determining the component weight for the most 
heavily weighted stock and the five most heavily weighted component 
stocks for an underlying index that includes a Derivative Securities 
Product, the weight of such Derivative Securities Product included in 
the underlying index or portfolio would not be considered.
    In addition, the Exchange proposes to modify the requirement in 
Commentary .01(a)(A)(4) to NYSE Arca Equities Rule 5.2(j)(3), which 
requires that the underlying index or portfolio include a minimum of 13 
component stocks. Specifically, the Exchange proposes that there shall 
be no minimum number of component stocks if: (1) One or more series of 
Units or Portfolio Depositary Receipts (as defined in NYSE Arca 
Equities Rule 8.100) constitute, at least in part, components 
underlying a series of Units; or (2) one or more series of Derivative 
Securities Products account for 100% of the weight of the index or 
portfolio. Thus, for example, if the index or portfolio underlying a 
series of Units includes one or more series of Units or Portfolio 
Depositary Receipts, or if it consists entirely of other Derivative 
Securities Products, then there would not be required to be any minimum 
number of component stocks (i.e., one or more components comprising the 
underlying index or portfolio would be acceptable). However, if the 
index or portfolio consists of Derivative Securities Products, other 
than Units or Portfolio Depositary Receipts, and other securities that 
are not Derivative Securities Products (e.g., common stocks), then 
there would have to be at least 13 components in the underlying index 
or portfolio.
    Consistent with current Commentary .01(a)(A)(5) to NYSE Arca 
Equities Rule 5.2(j)(3), all securities in the index or portfolio 
(including Derivative Securities Products) must nevertheless be U.S. 
Component Stocks \7\ that are listed on a national securities exchange 
and NMS Stocks, as defined in Rule 600 under the Act.\8\
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    \7\ ``U.S. Component Stock'' means an equity security that is 
registered under Section 12(b) or Section 12(g) of the Act or an 
American Depositary Receipt, the underlying equity security of which 
is registered under Section 12(b) or Section 12(g) of the Act. See 
NYSE Arca Equities Rule 5.2(j)(3).
    \8\ See 17 CFR 242.600(b)(47).
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    With respect to Commentary .01(a)(B) to NYSE Arca Equities Rule 
5.2(j)(3), the Exchange proposes to exclude Derivative Securities 
Products, as components, when applying the following existing component 
eligibility requirements: (1) 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 (Commentary 
.01(a)(B)(1)); (2) component stocks that, in the aggregate, account for 
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 (Commentary .01(a)(B)(2)); and (3) 
the most heavily weighted component stock must not exceed 25% of the 
weight of the index or portfolio, and the five most heavily weighted 
component stocks must not exceed 60% of the weight of the index or 
portfolio (Commentary .01(a)(B)(3)). Thus, for example, when 
determining compliance with Commentaries .01(a)(B)(1) and (2) to NYSE 
Arca Equities Rule 5.2(j)(3), component stocks that, in the aggregate, 
account for at least 90% of the remaining index weight, after excluding 
any Derivative Securities Products, would be required to have a minimum 
market value of at least $100 million and minimum worldwide monthly 
trading volume of 250,000 shares during each of the last six months, 
respectively. In addition, with respect to Commentary .01(a)(B)(3) to 
NYSE Arca Equities Rule 5.2(j)(3), when determining the component 
weight for the most heavily weighted stock and the five most heavily 
weighted component stocks for an underlying index that includes a 
Derivative Securities Product, the weight of such Derivative Securities 
Product included in the underlying index or portfolio would not be 
considered.
    In addition, the Exchange proposes to modify the requirement in 
Commentary .01(a)(B)(4) to NYSE Arca Equities

[[Page 25820]]

5.2(j)(3), which requires that the underlying index or portfolio 
include a minimum of 20 component stocks. Specifically, the Exchange 
proposes that there shall be no minimum number of component stocks if: 
(1) One or more series of Units or Portfolio Depositary Receipts (as 
defined in NYSE Arca Equities Rule 8.100) constitute, at least in part, 
components underlying a series of Units, or (2) one or more series of 
Derivative Securities Products account for 100% of the weight of the 
index or portfolio. Thus, for example, if the index or portfolio 
underlying a series of Units includes one or more series of Units or 
Portfolio Depositary Receipts, or if it consists entirely of other 
Derivative Securities Products, then there would not be required to be 
any minimum number of component stocks (i.e., one or more components 
comprising the underlying index or portfolio would be acceptable). 
However, if the index or portfolio consists of Derivative Securities 
Products, other than Units or Portfolio Depositary Receipts, and other 
securities that are not Derivative Securities Products (e.g., common 
stocks), then there would have to be at least 20 components in the 
underlying index or portfolio.
    Consistent with current Commentary .01(a)(B)(5) to NYSE Arca 
Equities Rule 5.2(j)(3), each component that is a U.S. Component Stock 
(including Derivative Securities Products) would be required to be 
listed on a national securities exchange and be an NMS Stock, as 
defined in Rule 600 under the Act,\9\ and each component that is a Non-
U.S. Component Stock \10\ (including Derivative Securities Products) 
would be required to be listed and traded on an exchange that has last-
sale reporting.
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    \9\ See Id.
    \10\ ``Non U.S. Component Stock'' means an equity security that 
is not registered under Section 12(b) or Section 12(g) of the Act 
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 real estate investment trusts and 
income trusts, but excluding investment trusts, unit trusts, mutual 
funds, and derivatives). See NYSE Arca Equities Rule 5.2(j)(3).
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III. Commission's Findings and Order Granting Approval of the Proposed 
Rule Change

    After careful review and based on the Exchange's representations, 
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.\11\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \12\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    Under Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3), one or 
more series of Derivative Securities Products may be included as a 
component comprising the index or portfolio underlying a series of 
Units.\13\ The Commission notes that, based on the trading 
characteristics of Derivative Securities Products, it may be difficult 
for component Derivative Securities Products to satisfy certain 
quantitative index criteria, such as the minimum market value and 
trading volume limitations. However, because Derivative Securities 
Products are themselves subject to specific initial and continued 
listing requirements, the Commission believes that it would be 
reasonable to exclude Derivative Securities Products, as components, 
from certain index component eligibility criteria for Units. For 
example, the index component eligibility standards for Units and 
Portfolio Depositary Receipts require, among others, that there be a 
minimum of 13 component stocks in an underlying U.S. index or portfolio 
and a minimum of 20 component stocks in an international or global 
index or portfolio. If one or more series of Units or Portfolio 
Depositary Receipts constitutes, at least in part, a component of a 
U.S. or international index or portfolio underlying a series of Units, 
the Commission believes that not requiring a minimum number of 
components underlying such overlying Unit would be reasonable because 
each component Unit or Portfolio Depositary Receipt already requires a 
minimum of 13 or 20 component stocks, as the case may be. In addition, 
if one or more series of component Derivative Securities Products 
accounts for 100% of the weight of the index or portfolio underlying a 
series of Units, then a minimum number of components underlying such 
Units would not be required. The Commission notes that, if a series of 
Units is based on the performance of an underlying index or portfolio 
composed, in part, of a: (1) Unit or Portfolio Depositary Receipt and 
another non-Derivative Securities Product (e.g., common stock), or (2) 
Derivative Securities Product other than a Unit or Portfolio Depositary 
Receipt, then the minimum number of component stock requirement will 
continue to apply.
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    \13\ Under Commentary .01(a) to NYSE Arca Equities Rule 
5.2(j)(3), a series of a Derivative Securities Product may be 
included as a U.S. Component Stock or Non-U.S. Component Stock 
underlying a series of Units, so long as the shares of such series 
meet the definitions of U.S. Component Stock and Non-U.S. Component 
Stock, as applicable. See supra notes 7 and 10. See also 
Commentaries .01(a)(A)(5) and 01(a)(B)(5) to NYSE Arca Equities Rule 
5.2(j)(3) (requiring that, in any event, all securities in the 
applicable index or portfolio must be a U.S. Component Stock listed 
on a national securities exchange and an NMS Stock, as defined in 
Rule 600 under the Act, or, in the case of an international or 
global index or portfolio, must be a Non-U.S. Component Stock that 
is listed and traded on an exchange that has last-sale reporting).
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    In addition, because component Derivative Securities Products may 
comprise 100% of the weight of any index underlying a series of Units, 
the Commission believes that providing for an exception to the 
concentration limits contained in Commentaries .01(a)(A)(3) and 
.01(a)(B)(3) to NYSE Arca Equities Rule 5.2(j)(3) with respect to 
component Derivative Securities Products is reasonable.\14\ The 
Commission further notes that component Derivative Securities Products 
that are U.S. Component Stocks comprising, at least in part, an index 
or portfolio underlying a series of Units must meet the definition of 
NMS Stock \15\ and already have been listed and trading on a national 
securities exchange pursuant to a proposed rule change approved by the 
Commission pursuant to Section 19(b)(2) of the Act \16\ or submitted by 
a national securities exchange pursuant to Section 19(b)(3)(A) of the 
Act,\17\ or would have been listed by a national securities exchange 
pursuant to the requirements of Rule 19b-4(e) under the Act.\18\ 
Component Derivative Securities Products that are Non-U.S. Component 
Stocks comprising, at least in part, an international or global index 
or portfolio underlying a series of Units must

[[Page 25821]]

already have been listed and trading on an exchange that has last-sale 
reporting.
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    \14\ The Commission notes that it has approved the adoption of 
certain amendments to NYSE Arca Equities Rule 5.2(j)(6) allowing an 
index or portfolio underlying a series of Equity Index-Linked 
Securities to consist, in whole or in part, of (1) securities of 
closed-end management investment companies, or (2) Units, which, in 
each case, are registered under the Investment Company Act of 1940. 
See Securities Exchange Act Release No. 56879 (December 3, 2007), 72 
FR 69271 (December 7, 2007) (SR-NYSEArca-2007-110).
    \15\ See supra note 8.
    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ See supra note 5.
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    The Commission believes that the proposed rule change will 
facilitate the listing and trading of additional types of exchange-
traded products that will enhance competition among market 
participants, to the benefit of investors and the marketplace. In 
addition, the listing and trading criteria set forth in the proposal 
are intended to protect investors and the public interest. As such, the 
Commission believes it is reasonable and consistent with the Act for 
the Exchange to modify the index component eligibility criteria for 
Units in the manner described in the proposal.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NYSEArca-2008-29), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-10025 Filed 5-6-08; 8:45 am]

BILLING CODE 8010-01-P