Document ID: SEC-2006-1229-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-09-22T04:00Z

[Federal Register: September 22, 2006 (Volume 71, Number 184)]
[Notices]               
[Page 55533-55535]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se06-160]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54459; File No. SR-NASDAQ-2006-035]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Amend Existing Rules for Portfolio Depository Receipts, 
Index Fund Shares, and Index-Linked Securities

September 15, 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 September 14, 2006, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and to approve 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

    Nasdaq proposes to amend its existing rules for portfolio 
depository receipts, index fund shares, and index-linked securities to 
provide that an eligible index may be calculated following a 
methodology weighting components based on one or more of the following: 
Sales, cash flow, book value, and dividends.
    The text of the proposed rule change is below. Proposed new 
language is italicized; there are no proposed deletions.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://www.complinet.com/nasdaq
.

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* * * * *
4420. Quantitative Listing Criteria
    (a)-(h) No Change.
(i) Portfolio Depository Receipts
    (1)-(2) No Change.
    (3)(A) No Change.
    (3)(B) Index Methodology and Calculation
    (i) The index underlying a series of Portfolio Depository Receipts 
will be calculated based on [either] the market capitalization, 
modified market capitalization, price, equal-dollar or modified equal-
dollar weighting or a methodology weighting components of the index 
based on any, some or all of the following: Sales, cash flow, book 
value and dividends;
    (3)(B)(ii)-(iii) No Change.
    (3)(C)-(E) No Change.
    (4)-(7) No Change.
(j) Index Fund Shares
    (1)-(2) No Change.
    (3)(A) No Change.
    (3)(B) Index Methodology and Calculation
    (i) The index underlying a series of Index Fund Shares will be 
calculated based on [either] the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
or a

[[Page 55534]]

methodology weighting components of the index based on any, some or all 
of the following: Sales, cash flow, book value and dividends;
    (3)(B)(ii)-(iii) No Change.
    (3)(C)-(E) No Change.
    (4)-(7) No Change.
    (k)-(l) No Change.
(m) Index-Linked Securities
    (1)-(6) No Change.
    (7) No Change.
    (7)(i)-(ii) No Change.
    (iii) Each index will be calculated based on a capitalization, 
modified capitalization, price, equal-dollar or modified equal-dollar 
weighting or a methodology weighting components of the index based on 
any, some or all of the following: Sales, cash flow, book value and 
dividends;
    (7)(iv)-(ix) No Change.
    (8)-(10) No Change.
* * * * *

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

    In its filing with the Commission, Nasdaq 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. Nasdaq 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
    According to Nasdaq, the purpose of this proposed rule change is to 
amend Nasdaq's existing generic listing standards pursuant to Rule 19b-
4(e) of the Act \4\ for portfolio depository receipts, index fund 
shares \5\ and index-linked securities to provide that an eligible 
index may be calculated following a methodology weighting components 
based on one or more of the following: Sales, cash flow, book value and 
dividends. This methodology is also referred to as the fundamentals 
weighting methodology.
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    \4\ 17 CFR 240.19b-4(e).
    \5\ Portfolio depository receipts and index fund shares are 
registered investment companies under the Investment Company Act of 
1940 and are referred to in this filing as exchange traded funds 
(``ETFs'').
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    Nasdaq currently has generic listing standards (within the meaning 
of Rule 19b-4(e) of the Act \6\), which permit the listing and trading 
of various qualifying ETFs and index linked notes (``ILNs'') subject to 
the procedures contained in Rule 19b-4(e). The existence of a generic 
listing standard allows qualifying ETFs and ILNs to list or trade 
without the need to file a rule change for each security under Rule 
19b-4 of the Act.\7\ By amending its generic listing standards pursuant 
to Rule 19b-4(e), Nasdaq intends to reduce the time frame for listing 
portfolio depository receipts, index fund shares and index-linked 
securities that rely on an index utilizing a fundamentals weighting 
methodology and thereby reduce the burdens on issuers and other market 
participants.
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    \6\ 17 CFR 240.19b-4(e).
    \7\ 17 CFR 240.19b-4.
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    The current rules already provide that eligible indexes may be 
calculated based on either the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
methodology. The proposed rule change will specify one additional 
methodology. The fundamentals weighting methodology allows the 
weighting of the individual components of the index based on any, some 
or all of the following: sales, cash flow, book value, and 
dividends.\8\
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    \8\ In each instance, the index methodology will set forth the 
means of calculating sales, cash flow, book value, and dividends.
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    ``Sales'' refers to the total of reported operating revenues less 
various adjustments to gross sales, such as returns, discounts, 
allowances, excise taxes, insurance charges, sales taxes, and value 
added taxes. In calculating the sales value, an index provider may opt 
to average the company's applicable figures for several prior years 
(e.g., five prior years as reflected in the company's Annual Report on 
Form 10-K).
    ``Cash Flow'' refers to operating income plus depreciation. For 
example, a manufacturer typically reports its operating income as its 
net sales plus other operating income minus the cost of goods sold and 
selling, general and administrative expenses. Depreciation expense for 
a manufacturer typically includes the depreciation that is directly 
related to or associated with tangible fixed assets and includes 
amortization of fixed assets that are part of plant, property and 
equipment, such as leased assets, leasehold improvements, and internal 
use software. For example, for a manufacturer depreciation expense 
excludes amortization of intangible assets. For banks, financial 
companies, and REITs, operating income refers to their total operating 
revenue minus total operating expenses. For REITs, depreciation expense 
includes depreciation relating to real estate property and includes 
corporate fixed asset depreciation if not separated from property 
depreciation. In calculating cash flow, an index provider may opt to 
average the company's applicable figures for several prior years (e.g., 
five prior years as reflected in the company's Annual Report on Form 
10-K).
    ``Book Value'' refers to a company's book value at the index review 
date. In accordance with accounting principles, book value generally 
means total common equity, which is derived from adding share capital 
and additional paid-in capital to retained earnings. In calculating 
book value, an index provider may opt to average the company's 
applicable figures for several prior years (e.g., five prior years as 
reflected in the company's Annual Report on Form 10-K).
    ``Dividends'' refers to total dividend distributions, including 
both special and regular dividends paid in cash. Generally, the total 
dividend amount that is declared to all classes of common shareholders 
includes regular cash, as well as special cash dividends, and excludes 
returns of capital and in-specie dividends. In calculating dividends, 
an index provider may opt to average the company's applicable figures 
for several prior years (e.g., five prior years as reflected in the 
company's Annual Report on Form 10-K).
    Nasdaq believes that the fundamentals weighting methodology is a 
transparent methodology that provides investors with an alternative to 
capitalization weighted index methodologies. Nasdaq believes that by 
amending its generic listing standards to provide for this new index 
calculation methodology, it is providing investors with more investment 
choices and thereby increasing competition in the marketplace. Nasdaq 
notes that products based on indexes using this methodology are already 
subject to the other requirements of the generic listing standards 
pursuant to Rule 19b-4(e).\9\ Therefore, Nasdaq requests accelerated 
approval in order to avoid unnecessary delay in the listing of 
otherwise eligible securities linked to fundamentals weighted indexes.
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    \9\ 17 CFR 240.19b-4(e).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\10\ in general and with Section 
6(b)(5) of the Act,\11\ in particular, in that it is designed

[[Page 55535]]

to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. Nasdaq believes that the 
proposed rule change should facilitate the listing and trading of 
portfolio depository receipts, index fund shares, and index-linked 
securities that rely on an index utilizing a fundamentals weighting 
methodology and should thereby reduce the burdens on issuers and other 
market participants.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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 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 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 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-NASDAQ-2006-035 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-NASDAQ-2006-035. 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 Nasdaq. 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-NASDAQ-2006-035 and should be submitted on or before 
October 13, 2006.

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.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\13\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \12\ 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).
    \13\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change amends Nasdaq's existing generic listing 
standards pursuant to Rule 19b-4(e) \14\ for portfolio depository 
receipts, index fund shares, and index-linked securities to provide 
that an eligible index may be calculated following the ``fundamentals 
weighting'' or ``fundamental index'' methodology. This index 
calculation methodology weights components based on one or more of the 
following: sales, cash flow, book value, and dividends.\15\
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    \14\ 17 CFR 240.19b-4(e).
    \15\ According to Nasdaq, in each instance, the index 
methodology will set forth the means of calculating sales, cash 
flow, book value, and dividends and thus will be transparent.
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    Including this index calculation methodology in Nasdaq's generic 
listing standards will provide investors with more investment choices 
by offering an alternative to the other index methodologies, such as 
capitalization-weighted ones. The Commission notes that the indexes 
that would be based on the fundamentals weighting methodology will 
already be subject to the requirements of the generic listing standards 
pursuant to Rule 19b-4(e) of the Act,\16\ including trading volume and 
liquidity requirements. In addition, by amending its generic listing 
standards pursuant to Rule 19b-4(e) of the Act,\17\ Nasdaq should 
reduce the time frame for listing portfolio depository receipts, index 
fund shares, and index-linked securities that rely on an index 
utilizing a fundamentals weighting methodology. The proposed rule 
change should therefore facilitate the listing and trading of such 
securities and thereby reduce the burdens on issuers and other market 
participants.
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    \16\ 17 CFR 240.19b-4(e).
    \17\ Id.
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    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause for approving the proposed 
rule change prior to the 30th day after the date of publication of the 
notice of filing in the Federal Register. The Commission believes the 
proposed rule change should provide investors with an alternative to 
the current index calculation methodologies. In addition, the proposed 
rule change should reduce the burden on issuers and market participants 
to list and trade portfolio depository receipts, index fund shares, and 
index-linked securities based on the fundamentals weighting 
methodology. Therefore, the Commission finds good cause, consistent 
with Section 19(b)(2) of the Act,\18\ to approve the proposed rule 
change on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NASDAQ-2006-035) is approved 
on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-8043 Filed 9-21-06; 8:45 am]

BILLING CODE 8010-01-P