Document ID: SEC-2006-1278-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-10-02T04:00Z

[Federal Register: October 2, 2006 (Volume 71, Number 190)]
[Notices]               
[Page 58034-58036]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02oc06-141]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54490; File No. SR-NYSEArca-2006-61]

 
 Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change To 
Amend Existing Rules for Investment Company Units

September 22, 2006.
    Pursuant to the provisions of 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 19, 2006, NYSE Arca, Inc. (the 
``Exchange''), through its wholly-owned subsidiary NYSE Arca Equities, 
Inc. (``NYSE Arca Equities''), filed with the Securities and Exchange 
Commission (the ``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 and order 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

    The Exchange, through NYSE Arca Equities, proposes to amend 
Commentary .01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3). The text of 
the proposed rule change is below. Proposed new language is italicized; 
proposed deletions are in brackets.
* * * * *
    (b) Index Methodology and Calculation.
    (1) The index underlying a series of Units 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;
* * * * *

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 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. The Exchange 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 has adopted listing standards applicable to Investment 
Company Units (``Investment Company Units'' or ``ICUs'') that are 
consistent with the listing criteria currently used by other national 
securities exchanges, and trading standards pursuant to which the 
Exchange may either list and trade ICUs or trade such ICUs on the 
Exchange on an unlisted trading privileges (``UTP'') basis.\3\ An 
Investment Company Unit is defined in NYSE Arca Equities Rule 
5.1(b)(15) as a security representing 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. A 
registered investment company is registered under the Investment 
Company Act of 1940.\4\
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    \3\ In October 1999, the Commission approved NYSE Arca Equities 
Rule 5.2(j)(3), which sets forth the rules related to listing and 
trading criteria for Investment Company Units. Securities Exchange 
Act Release No. 41983 (October 6, 1999), 64 FR 56008 (October 15, 
1999)(SR-PCX-1998-29). In July 2001, the Commission also approved 
the Exchange's listing standards pursuant to Rule 19b-4(e) for 
listing and trading, or the trading pursuant to UTP, of Investment 
Company Units under NYSE Arca Equities Rule 5.2(j)(3). Securities 
Exchange Act Release No. 44551 (July 12, 2001), 66 FR 37716-01 (July 
19, 2001)(SR-PCX-2001-14).
    \4\ 15 U.S.C. 80a.
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    The ``generic'' listing criteria of Commentary .01 to NYSE Arca 
Equities Rule 5.2(j)(3) permits listing or trading pursuant to UTP of 
ICUs that satisfy such criteria in reliance upon Rule 19b-4(e) under 
the Act \5\, without a filing pursuant to Rule 19b-4 under the Act.\6\ 
Commentary .01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3) requires that 
if a series of ICUs approved for trading (including pursuant to UTP) on 
the Exchange in reliance upon Rule 19b-4(e) under the Act,\7\ the index 
underlying the series of ICUs must be calculated based on either the 
market capitalization, modified market capitalization, price, equal-
dollar or

[[Page 58035]]

modified equal-dollar weighting methodology.
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    \5\ 17 CFR 240.19b-4(e).
    \6\ 17 CFR 240.19b-4.
    \7\ 17 CFR 240.19b-4(e).
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    According to the Exchange, the proposed rule change will specify 
one additional methodology. The Exchange proposes to amend Commentary 
.01(b)(1) to NYSE Arca Equities Rule 5.2(j)(3) to permit a series of 
ICUs to be listed or traded pursuant to UTP under the generic standards 
pursuant to Rule 19b-4(e) under the Act \8\ if the underlying index for 
such series is weighted based on any, some or all of the following: 
sales, cash flow, book value, and dividends (``fundamentals weighted 
indexes'').\9\ The Exchange states that the proposed rule change is 
based on the proposed rule change of the NASDAQ Stock Market LLC 
(``Nasdaq'').\10\
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    \8\ Id.
    \9\ In each instance, the index methodology will set forth the 
means for calculating sales, cash flow, book value, and dividends.
    \10\ See Securities Exchange Act Release No. 54459 (September 
15, 2006), 71 FR 55533 (September 22, 2006)(SR-NASDAQ-2006-035).
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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).
    The Exchange believes that the fundamentals weighting methodology 
is a transparent methodology that is appropriately included in the ICU 
generic listing criteria as an alternative to traditional weighting 
techniques. According to the Exchange, fundamental indexing provides an 
investor with additional choices in selecting exchange-traded funds 
whose underlying index emphasizes financial factors that the investor 
may believe are important. The Exchange 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).\11\ The Exchange has requested accelerated approval in order to 
avoid delay in the listing and trading (including pursuant to UTP) of 
securities linked to fundamental weighted indexes.\12\
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    \11\ 17 CFR 240.19b-4(e).
    \12\ Telephone conference on September 21, 2006 between Michael 
Cavalier, Assistant General Counsel, NYSE Group, Inc. and Mitra 
Mehr, Special Counsel, Division of Market Regulation, Commission 
(``September 21st Telephone Conference'').
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \13\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5) \14\ of the Act, 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 mechanisms of a free and open market and a national market system. 
The Exchange believes that the proposed rule change should facilitate 
the listing and trading (including pursuant to UTP) of Investment 
Company Units that rely on an index using a fundamental weighting 
methodology and should thereby reduce the burdens on issuers and other 
market participants.\15\
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ September 21st Telephone Conference.
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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 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 No. SR-NYSEArca-2006-61 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-NYSEArca-2006-61. This

[[Page 58036]]

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 offices 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-NYSEArca-2006-61 and should be submitted on or before 
October 23, 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.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ 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 foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and 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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    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change amends NYSE's existing generic listing 
standards pursuant to Rule 19b-4(e) \18\ for Investment Company Units 
to provide that an eligible index may be calculated following the 
``fundamentals weighted'' 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.\19\
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    \18\ 17 CFR 240.19b-4(e).
    \19\ According to the NYSE, 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 NYSE'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,\20\ including trading volume and 
liquidity requirements. In addition, by amending its generic listing 
standards pursuant to Rule 19b-4(e) of the Act,\21\ NYSE should reduce 
the time frame for listing and trading Investment Company Units that 
rely on an index utilizing a fundamentals weighting methodology. The 
proposed rule change should therefore facilitate the listing and 
trading (including on an unlisted trading privileges basis) of such 
securities and thereby reduce the burdens on issuers and other market 
participants.
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    \20\ 17 CFR 240.19b-4(e).
    \21\ 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. The proposed rule change 
is substantially identical to that approved for another exchange.\22\ 
The Commission does not believe that the proposed rule change raises 
any novel regulatory issues. Therefore, the Commission finds good 
cause, consistent with Section 19(b)(2) of the Act,\23\ to approve the 
proposed rule change on an accelerated basis.
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    \22\ See Securities Exchange Act Release No. 54459 (September 
15, 2006), 71 FR 55533 (September 22, 2006) (SR-NASDAQ-2006-035).
    \23\ 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,\24\ that the proposed rule change (SR-NYSEArca-2006-61) is 
approved on an accelerated basis.
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    \24\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-16111 Filed 9-29-06; 8:45 am]

BILLING CODE 8010-01-P