Document ID: SEC-2008-1711-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-12-22T05:00Z

[Federal Register: December 22, 2008 (Volume 73, Number 246)]
[Notices]
[Page 78415-78419]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de08-144]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59098; File No. SR-NASDAQ-2008-096]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change Relating to the Generic
Listing Standards for Index Multiple Exchange Traded Fund Shares and
Index Inverse Exchange Traded Fund Shares

December 12, 2008.
    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 December 9, 2008, 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 the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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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 is filing a proposed rule change to amend Nasdaq Rule
4420(j) in connection with generic listing

[[Page 78416]]

standards, which permit Nasdaq to list and trade, or trade pursuant to
unlisted trading privileges (``UTP''), shares of a series of Index
Multiple Exchange Traded Fund Shares (``Multiple Fund Shares'') and
Index Inverse Exchange Traded Fund Shares (``Inverse Fund Shares'')
(collectively, the ``Fund Shares'').
    The proposed rule change would allow the listing and trading of
Fund Shares that sought to provide investment results, before fees and
expenses, in an amount not exceeding -300% (currently -200%) of the
underlying benchmark index pursuant to Rule 19b-4(e) under the Act,\3\
where the other applicable generic listing standards under Nasdaq Rule
4420(j) for Index Fund Shares (``IFSs'') are satisfied. The proposed
rule change is substantially identical to a recent NYSEArca filing,
which has been considered previously by the Commission when the
Commission approved the proposed rule change.\4\
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    \3\ 17 CFR 240.19b-4(e).
    \4\ See Securities Exchange Act Release No. 58825 (October 21,
2008), 73 FR 63756 (October 27, 2008) (SR-NYSEArca-2008-89).
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    The text of the proposed rule change is available from Nasdaq's Web
site at http://nasdaq.cchwallstreet.com, at Nasdaq's principal office,
and at the Commission's Public Reference Room.

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

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

1. Purpose
    Nasdaq Rule 4420(j) provides standards for listing IFSs on the
Exchange. Nasdaq proposes to amend Nasdaq Rule 4420(j)(1)(B)(iii) to
allow the listing and trading of Fund Shares that sought to provide
investment results, before fees and expenses, in an amount not
exceeding -300% (currently -200%) of the underlying benchmark index
where the other applicable generic listing standards under Nasdaq Rule
4420(j) for IFSs are satisfied. The Exchange also notes that the
Commission has approved the original listing and trading of Fund Shares
on the American Stock Exchange LLC.\5\
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    \5\ See Securities Exchange Act Release No. 57660 (April 14,
2008), 73 FR 21391 (April 21, 2008) (SR-Amex-2007-131).
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Generic Listing Standards
    Nasdaq Rule 4420(j) provides standards for listing IFSs, which are
securities issued by an open-end management investment company (open-
end mutual fund) based on a portfolio of securities that seeks to
provide investment results that correspond generally to the price and
yield performance or total return performance of a specified foreign or
domestic securities index or fixed income index. Pursuant to Nasdaq
Rule 4420(j)(1)(A), IFSs 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 net asset value
(``NAV''). When aggregated in the same specified minimum number, IFSs
must be redeemed by the issuer for the securities and/or cash, with a
value equal to the next determined NAV. Consistent with Nasdaq Rule
4420(j)(9)(A)(ii), the NAV is calculated once a day after the close of
the regular trading day.
    The proposed revisions to Nasdaq Rule 4420(j)(1)(B)(iii) would
allow the listing and trading of Multiple Fund Shares and Inverse Fund
Shares that sought to provide investment results, before fees and
expenses, in an amount not exceeding -300%, rather than -200%, of the
underlying benchmark index pursuant to Rule 19b-4(e) under the Act,\6\
where the other applicable generic listing standards for IFSs are
satisfied. In connection with Inverse Funds that seek to provide
investment results, before fees and expenses, in an amount that exceeds
-300% of the underlying benchmark index, the Exchange's proposal would
continue to require specific Commission approval pursuant to Section
19(b)(2) of the Act.\7\ In particular, Nasdaq Rule 4420(j)(1)(B)(iii)
would expressly prohibit Inverse Funds that seek to provide investment
results, before fees and expenses, in an amount that exceeds -300% of
the underlying benchmark index, from being approved by the Exchange for
listing and trading pursuant to Rule 19b-4(e) under the Act.\8\
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    \6\ 17 CFR 240.19b-4(e).
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 17 CFR 240.19b-4(e).
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    The Exchange believes that adopting generic listing and trading
standards for Fund Shares based on domestic equity, international or
global equity and/or fixed income securities indexes and applying Rule
19b-4(e) should fulfill the intended objective of that Rule by allowing
those IFSs that satisfy the proposed standards to commence trading,
without the need for individualized Commission approval. The proposed
rule has the potential to reduce the time frame for bringing Fund
Shares to market, thereby reducing the burdens on issuers and other
market participants.\9\
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    \9\ The Exchange submits that the failure of a particular Fund
Share portfolio to comply with the proposed generic listing and
trading 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 a
particular Fund Share.
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    The Commission has approved generic standards providing for the
listing and trading of derivative products pursuant to Rule 19b-4(e)
based on indexes previously approved by the Commission under Section
19(b)(2) of the Act \10\ and the Exchange \11\ also notes that the
generic listing standards provide for indexes that have been approved
by the Commission in connection with the listing of Portfolio
Depository Receipts, Index Fund Shares or Index-Linked Securities. The
Exchange believes that the application of that standard to Fund Shares
is appropriate because the underlying securities index will have been
subject to detailed and specific Commission review in the context of
the approval of listing of other derivatives.
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    \10\ 15 U.S.C. 78s(b)(2). See Securities Exchange Act Release
No. 54765 (November 16, 2006), 71 FR 67668 (November 22, 2006) (SR-
Nasdaq-2006-009) (Commodity-Linked Securities).
    \11\ See e-mail from Jonathan Cayne, Associate General Counsel,
NASDAQ OMX, to David Liu, Assistant Director, Division of Trading
and Markets, Commission, dated December 12, 2008 (``December 12 E-
mail'').
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    The Exchange notes that existing Nasdaq Rule 4420(j)(9)(B) provides
continued listing standards for all IFSs. For example, where the value
of the underlying index or portfolio of securities on which the IFS is
based is no longer calculated or available, or in the event that the
IFS chooses to substitute a new index or portfolio for the existing
index or portfolio, the Exchange would commence delisting proceedings
if the new index or portfolio does not meet the requirements of and
listing standards set forth in Nasdaq Rule 4420(j). If an IFS chose to
substitute an index that did not meet all of the applicable generic
listing standards of IFSs pursuant to Rule 19b-4(e) of the Act,\12\
then, to continue to list and trade the IFS, approval by the Commission
of a separate filing

[[Page 78417]]

pursuant to Section 19(b)(2) of the Act \13\ is required.\14\ In
addition, the Exchange further notes that existing Nasdaq Rule
4420(j)(9)(A)(ii) provides that, prior to approving an IFS for listing,
the Exchange will obtain a representation from the issuer that the NAV
per share will be calculated daily and made available to all market
participants at the same time.
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    \12\ 17 CFR 240.19b-4(e).
    \13\ 15 U.S.C. 78s(b)(2).
    \14\ See December 12 E-mail, supra, note 11.
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    Nasdaq Rule 4420(j)(1)(B)(iv) provides for the halt of trading for
Fund Shares if the Exchange becomes aware that the open-end investment
company fails to properly disseminate the appropriate NAV to market
participants at the same time. In addition, the rule also requires a
halt to trading if the open-end investment company issuing the Fund
Shares failed to provide daily public Web site disclosure of its
portfolio holdings. In particular, Nasdaq Rule 4420(j)(1)(B)(iv)
provides that the Exchange will halt trading in a series of Multiple
Fund Shares and/or Inverse Fund Shares if the Exchange becomes aware
that the open-end investment company issuing the Fund Shares fails to
disseminate the appropriate NAV to all market participants at the same
time and/or fails to provide daily public Web site disclosure of its
portfolio holdings.
    The investment objective associated with the Fund Shares must be
expected to achieve investment results, before fees and expenses, by a
specified multiple (Multiple Fund Shares) or inversely up to -300%
(Inverse Fund Shares) of the underlying performance benchmark domestic
equity, international or global equity and/or fixed income indexes, as
applicable. Fund Shares differ from traditional exchange-traded fund
shares in that they do not merely correspond to the performance of a
given securities index, but rather attempt to match a multiple or
inverse of such underlying index performance.
    In order to achieve investment results that provide either a
positive multiple or inverse of the benchmark index, Fund Shares may
hold a combination of financial instruments, including, but not limited
to: Stock index futures contracts; options on futures; options on
securities and indices; equity caps, collars and floors; swap
agreements; forward contracts; repurchase agreements; and reverse
repurchase agreements (the ``Financial Instruments''). Normally, 100%
of the value of the underlying portfolios for the Inverse Fund Shares
will be devoted to Financial Instruments and money market instruments,
including U.S. government securities and repurchase agreements (the
``Money Market Instruments''). The underlying portfolios for Multiple
Fund Shares may consist of a combination of securities, Financial
Instruments and Money Market Instruments.
Limitation on Leverage
    In connection with Inverse Funds that seek to provide investment
results, before fees and expenses, in an amount that exceeds -300% of
the underlying benchmark index, the Exchange's proposal would continue
to require specific Commission approval pursuant to Section 19(b)(2) of
the Act.\15\ In particular, Nasdaq Rule 4420(j)(1)(B)(iii) would
expressly prohibit Inverse Funds that seek to provide investment
results, before fees and expenses, in an amount that exceeds -300% of
the underlying benchmark index, from being approved by the Exchange for
listing and trading pursuant to Rule 19b-4(e) under the Act.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 240.19b-4(e).
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    In connection with Multiple Fund Shares, Nasdaq Rule 4420(j)(1)(B)
does not provide a similar limitation on leverage. Instead, the
proposal would permit the underlying registered management investment
company or fund to seek to provide investment results, before fees and
expenses, that correspond to any multiple, without limitation, of the
percentage performance on given day of a particular domestic equity,
international or global equity, or fixed income securities indexes or a
combination thereof.
Availability of Information About Fund Shares and Underlying Indexes
    Nasdaq Rule 4420(j)(1)(B)(iv) provides that the portfolio
composition of a Fund will be disclosed on a public Web site. Web site
disclosure of portfolio holdings that form the basis for the
calculation of the NAV by the issuer of a series of Fund Shares is made
daily and includes, as applicable, the identity and number of shares
held of each specific equity security, the identity and amount held of
each fixed income security, the specific types of Financial Instruments
and characteristics of such instruments, cash equivalents and amount of
cash held in the portfolio of a fund. This public Web site disclosure
of the portfolio composition of a Fund, that forms the basis for the
calculation of the NAV, coincides with the disclosure of the same
information to ``Authorized Participants.'' \17\ Investors have access
to the current portfolio composition of a Fund through the Fund's Web
site and/or at the Exchange's Web site at http://www.nasdaqomx.com.
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    \17\ Authorized Participants are the only persons that may place
orders to create and redeem Creation Units. Authorized Participants
must be registered broker-dealers or other securities market
participants, such as banks and other financial institutions that
are exempt from registration as broker-dealers to engage in
securities transactions, who are participants in DTC. The format of
the disclosure of portfolio holdings to Authorized Participants may
differ from the format of the public Web site disclosure.
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Trading Halts
    Existing trading halt requirements for IFSs apply to Fund Shares.
Nasdaq will halt trading in Fund Shares under the conditions specified
in Nasdaq Rules 4120 and 4121, as well as subject to Nasdaq Rule
4420(j)(1)(B)(iv). The conditions for a halt include a regulatory halt
by the listing market. UTP trading in Fund Shares will also be governed
by provisions of Nasdaq Rule 4120(b) relating to temporary
interruptions in the calculation or wide dissemination of the
calculation of the estimated NAV (``Intraday Indicative Value''), which
is updated regularly during the trading day, among other values.
    If Nasdaq becomes aware that the NAV or the identities and
quantities of the portfolio of securities and other assets (the
``Disclosed Portfolio'') with respect to a Fund Share is not
disseminated to all market participants at the same time, it will halt
trading in such series until such time as the NAV or the Disclosed
Portfolio is available to all market participants.
    In the case of the Financial Instruments held by a Multiple or
Inverse Fund, the Exchange represents that a notification procedure
will be implemented so that timely notice from the investment adviser
of such Multiple or Inverse Fund is received by the Exchange when a
particular Financial Instrument is in default or shortly to be in
default. The Exchange will then determine on a case-by-case basis
whether a default of a particular Financial Instrument justifies a
trading halt of the Multiple and/or Inverse Fund Shares.
    Additionally, Nasdaq may cease trading Fund Shares if other unusual
conditions or circumstances exist which, in the opinion of Nasdaq, make
further dealings on Nasdaq detrimental to the maintenance of a fair and
orderly market. Nasdaq will also follow any procedures with respect to
trading halts as set forth in Nasdaq Rule 4120(c). Finally, Nasdaq will
stop trading Fund Shares if the listing market delists them.

[[Page 78418]]

Suitability
    Prior to commencement of trading, the Exchange will issue an
Information Circular to its members and member organizations providing
guidance with regard to member firm compliance responsibilities
(including suitability obligations) when effecting transactions in the
Fund Shares and highlighting the special risks and characteristics of
Funds Shares as well as applicable Exchange rules.
    Specifically, the Information Circular will discuss the following:
(1) The procedures for purchases and redemptions of Fund Shares in
Baskets (and that Fund Shares are not individually redeemable); (2)
Nasdaq Rule 2310, which imposes suitability obligations on Nasdaq
members with respect to recommending transactions in Fund Shares to
customers; (3) how information regarding the Intraday Indicative Value
is disseminated; (4) the requirement that members deliver a prospectus
to investors purchasing newly issued Fund Shares prior to or
concurrently with the confirmation of a transaction; (5) the risks
involved in trading Fund Shares during the Pre-Market and Post-Market
Sessions when an updated Intraday Indicative Value will not be
calculated or publicly disseminated; and (6) trading information.
    The Exchange notes that investors purchasing Fund Shares directly
from a Fund will receive a prospectus. Members purchasing Fund Shares
from a Fund for resale to investors will deliver a prospectus to such
investors. The Information Circular will also discuss any exemptive,
no-action and interpretive relief granted by the Commission from any
rules under the Act.
    In addition, the Information Circular will reference that Fund
Shares are subject to various fees and expenses described in the
Registration Statement. The Information Circular will also disclose the
trading hours of the Fund Shares of the Funds and that the NAV for the
Fund Shares will be calculated after 4 p.m. (Eastern Time) each trading
day.
Surveillance
    The Exchange utilizes its existing surveillance procedures
applicable to derivative products (including exchange-traded funds) to
monitor trading in Fund Shares. The Exchange represents that such
procedures are adequate to address any concerns about the trading of
Fund Shares on Nasdaq. Trading of Fund Shares through Nasdaq are
subject to FINRA's surveillance procedures for equity securities in
general and ETFs in particular.\18\ The Exchange may obtain information
via the Intermarket Surveillance Group (``ISG'') from other exchanges
who are members or affiliate members of the ISG.\19\
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    \18\ FINRA surveils trading on Nasdaq pursuant to a regulatory
services agreement. Nasdaq is responsible for FINRA's performance
under this regulatory services agreement.
    \19\ For a list of the current members and affiliate members of
ISG, see http://www.isgportal.com.
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2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b)
of the Act \20\ in general and Section 6(b)(5) of the Act \21\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. The Exchange believes that the
proposed rules will facilitate the listing and trading of Fund Shares
and will enhance competition among market participants, to the benefit
of investors and the marketplace.
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    \20\ 15 U.S.C. 78f.
    \21\ 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 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 were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
    Nasdaq has requested accelerated approval of this proposed rule
change prior to the 30th day after the date of publication of the
notice of the filing thereof. The Commission has determined that a 15-
day comment period is appropriate in this case.

IV. 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-2008-096 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2008-096. 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 the 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-NASDAQ-2008-096 and

[[Page 78419]]

should be submitted on or before January 6, 2009.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-30320 Filed 12-19-08; 8:45 am]

BILLING CODE 8011-01-P