[Federal Register Volume 72, Number 31 (Thursday, February 15, 2007)]
[Notices]
[Pages 7490-7496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-2664]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55269; File No. SR-NASDAQ-2006-050]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change as Modified by Amendment No. 3 Thereto Adopting Generic 
Listing Standards for Exchange-Traded Funds Based on International or 
Global Indexes or Indexes Described in Exchange Rules Previously 
Approved by the Commission as Underlying Benchmarks for Derivative 
Securities

February 9, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on November 28, 2006, The NASDAQ Stock Market LLC 
(``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by Nasdaq. On 
November 28, 2006, Nasdaq filed Amendment No. 1 to the proposal. On 
January 29, 2007, Nasdaq filed Amendment No. 2 to the proposal. On 
February 9, 2007, Nasdaq filed Amendment No. 3 to the proposal. This 
order provides notice of the proposal, as amended, and approves the 
proposal 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 revise its listing standards to include generic 
listing standards for series of portfolio depository receipts 
(``PDRs'') and index fund shares (``IFSs'') (PDRs and IFSs together 
referred to as ``exchange-traded funds'' or ``ETFs'') that are based on 
international or global indexes or on indexes described in exchange 
rules that have been previously approved by the Commission for the 
trading of ETFs or other specified index-based securities. The text of 
the proposed rule change is available at Nasdaq, from the Commission's 
Public Reference Room, and on Nasdaq's Web site (http://www.nasdaq.com).

[[Page 7491]]

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
    Nasdaq proposes to revise its listing standards to include generic 
listing standards for series of PDRs and IFSs that are based on 
international or global indexes or on indexes described in rules 
previously approved by the Commission for the trading of ETFs or other 
specified index-based securities.
    This proposal would enable Nasdaq to list and trade ETFs pursuant 
to Rule 19b-4(e) under the Exchange Act.\3\ Rule 19b-4(e) 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 paragraph (c)(1) of Rule 19b-4, if the 
Commission has approved, pursuant to Section 19(b) of the Exchange Act, 
the trading rules of the SRO 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.\4\
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    \3\ 17 CFR 240.19b-4(e).
    \4\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-
4(e) to the Commission within five business days after it begins 
trading the new derivative securities products. See 17 CFR 240.19b-
4(e)(2)(ii).
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Background
Exchange-Traded Funds
    Currently, Nasdaq Rule 4420(i) allows for the listing and trading 
on Nasdaq of PDRs. PDRs represent interests in a unit investment trust 
registered under the Investment Company Act of 1940 \5\ (``1940 Act'') 
that holds the securities that comprise an index or portfolio. Nasdaq 
Rule 4420(j) provides standards for listing IFSs, which are securities 
issued by an open-end management investment company registered under 
the 1940 Act and based on a portfolio of stocks that seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specified foreign or domestic stock index. Pursuant to 
these rules, PDRs and IFSs, eligible for listing on Nasdaq, 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, PDRs or IFSs must be redeemed by the issuer 
for the securities and/or cash, with a value equal to the next 
determined NAV. The NAV is calculated once a day after the close of the 
regular trading day.
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    \5\ 15 U.S.C. 80a.
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    To meet the investment objective of providing investment returns 
that correspond to the price and the dividend and yield performance of 
the underlying index, an ETF may use a ``replication'' strategy or a 
``representative sampling'' strategy with respect to the ETF 
portfolio.\6\ An ETF using a replication strategy will invest in each 
stock of the underlying index in about the same proportion as that 
stock is represented in the index itself. An ETF using a representative 
sampling strategy will generally invest in a significant number but not 
all of the component securities of the underlying index, and will hold 
stocks that, in the aggregate, are intended to approximate the full 
index in terms of key characteristics, such as price/earnings ratio, 
earnings growth, and dividend yield. In addition, an ETF portfolio may 
be adjusted in accordance with changes in the composition of the 
underlying index or to maintain compliance with requirements applicable 
to a regulated investment company under the Internal Revenue Code.
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    \6\ In either case, an ETF, by its terms, may be considered 
invested in the securities of the underlying index to the extent the 
ETF invests in sponsored American Depository Receipts (``ADRs''), 
Global Depository Receipts (``GDRs''), or European Depository 
Receipts (``EDRs'') that trade on exchanges with last-sale reporting 
representing securities in the underlying index.
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Generic Listing Standards for Exchange-Traded Funds
    Nasdaq currently does not have generic listing standards for ETFs 
that are based on international or global indexes or on previously 
approved indexes, but systems operated by Nasdaq and its affiliates 
currently trade such ETFs on an over-the-counter basis as facilities of 
NASD. Nasdaq proposes that after Nasdaq begins to operate as an 
exchange for trading securities not listed on Nasdaq, it would continue 
trading such ETFs pursuant to unlisted trading privileges (``UTP'') in 
much the same manner as they are being traded currently. Nasdaq also 
proposes to makes its facilities available for listing these ETFs.
    The Commission recently approved generic listing standards of the 
American Stock Exchange pursuant to Rule 19b-4(e) under the Exchange 
Act for ETFs based on international or global indexes, as well as on 
indexes described in exchange rule changes that have been previously 
approved by the Commission under Section 19(b)(2) of the Exchange Act 
for the trading of ETFs or other index-based securities. Nasdaq 
believes that approval of its comparable generic listing standards and 
applying Rule 19b-4(e) should fulfill the intended objective of that 
rule by allowing those ETFs that currently trade on Nasdaq systems to 
continue trading on Nasdaq as an exchange, without the need for the 
public comment period and Commission approval. The proposed rules have 
the potential to reduce the time frame for bringing ETFs to market, 
thereby reducing the burdens on issuers and other market participants. 
The failure of a particular ETF to comply with the proposed generic 
listing standards under Rule 19b-4(e) would not, however, preclude 
Nasdaq from submitting a separate filing pursuant to Section 19(b)(2) 
requesting Commission approval to list a particular ETF.
Requirements for Listing and Trading ETFs Based on International and 
Global Indexes or Previously Approved Indexes
    ETFs that are listed pursuant to the proposed generic listing 
standards or that are traded UTP would be traded, in all other 
respects, under Nasdaq's existing trading rules and procedures that 
apply to ETFs and would be covered under Nasdaq's surveillance program 
for ETFs. To list a PDR or an IFS pursuant to the proposed generic 
listing standards for international and global indexes, the index 
underlying the PDR or IFS must satisfy all the conditions contained in 
the proposed amendments to Rule 4420(i) (for PDRs) or Rule 4420(j) (for 
IFSs). As with the existing generic standards for ETFs based on 
domestic indexes, these generic listing standards are intended to 
ensure that stocks with substantial market capitalization and trading 
volume account for a substantial portion of the weight of an index or 
portfolio. While the standards in this proposal are based on the 
standards contained in the current generic listing standards for ETFs 
based on domestic indexes, they have been adapted as appropriate to 
apply to international and global indexes.

[[Page 7492]]

    As proposed, the definition section of each of Rule 4420(i) and (j) 
would be revised to include definitions of U.S. Component Stock and 
Non-U.S. Component Stock. These new definitions would provide the basis 
for the standards for indexes with either domestic or international 
stocks, or a combination of both. A ``Non-U.S. Component Stock'' would 
mean an equity security: (1) That is not registered under Section 12(b) 
or 12(g) of the Exchange Act; \7\ (2) that is issued by an entity that 
is not organized, domiciled, or incorporated in the United States; and 
(3) that is issued by an entity that is an operating company (including 
a real estate investment trust (REIT) or income trust, but excluding an 
investment trust, unit trust, mutual fund, or derivative). This 
definition is designed to create a category of component stocks that 
are issued by companies that are not based in the United States, are 
not subject to oversight through Commission registration, and would 
include sponsored GDRs and EDRs. A ``U.S. Component Stock'' would mean 
an equity security that is registered under Section 12(b) or 12(g) of 
the Exchange Act or an ADR, the underlying equity security of which is 
registered under Section 12(b) or 12(g) of the Exchange Act. An ADR 
with an underlying equity security that is registered pursuant to the 
Exchange Act is considered a U.S. Component Stock because the issuer of 
that security is subject to Commission jurisdiction and must comply 
with Commission rules.
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    \7\ 15 U.S.C. 78l(b) or (g).
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    Nasdaq proposes that, to list a PDR or an IFS based on an 
international or global index or portfolio pursuant to the generic 
listing standards, such index or portfolio must meet the following 
criteria:
     Component stocks that in the aggregate account for at 
least 90% of the weight of the index or portfolio each shall have a 
minimum market value of at least $100 million;
     Component stocks representing at least 90% of the weight 
of the index or portfolio each shall have a minimum worldwide monthly 
trading volume during each of the last six months of at least 250,000 
shares;
     The most heavily weighted component stock may not exceed 
25% of the weight of the index or portfolio and the five most heavily 
weighted component stocks may not exceed 60% of the weight of the index 
or portfolio;
     The index or portfolio shall include a minimum of 20 
component stocks; and
     Each U.S. Component Stock in the index or portfolio shall 
be listed on a national securities exchange and an NMS stock as defined 
in Rule 600 of Regulation NMS under the Exchange Act, and each Non-U.S. 
Component Stock in the index or portfolio shall be listed on an 
exchange that has last-sale reporting.
    Nasdaq believes that these proposed standards are reasonable for 
international and global indexes, and, when applied in conjunction with 
the other listing requirements, would result in the listing and trading 
on Nasdaq of ETFs that are sufficiently broad-based in scope and not 
readily susceptible to manipulation. Nasdaq also believes that the 
proposed standards would result in ETFs that are adequately diversified 
in weighting for any single security or small group of securities to 
significantly reduce concerns that trading in an ETF based on an 
international or global index could become a surrogate for the trading 
of securities not registered in the United States.
    Nasdaq further notes that, while these standards are similar to 
those for indexes that include only U.S. Component Stocks, they differ 
in certain important respects and are generally more restrictive, 
reflecting greater concerns over portfolio diversification with respect 
to ETFs investing in components that are not individually registered 
with the Commission. First, in the proposed standards, component stocks 
that in the aggregate account for at least 90% of the weight of the 
index or portfolio each shall have a minimum market value of at least 
$100 million, compared to a minimum market value of at least $75 
million for indexes with only U.S. Component Stocks.\8\ Second, in the 
proposed standards, the most heavily weighted component stock cannot 
exceed 25% of the weight of the index or portfolio, in contrast to a 
30% standard for an index or portfolio comprised of only U.S. Component 
Stocks. Third, in the proposed standards, the five most heavily 
weighted component stocks shall not exceed 60% of the weight of the 
index or portfolio, compared to a 65% standard for indexes comprised of 
only U.S. Component Stocks. Fourth, the minimum number of stocks in the 
proposed standards is 20, in contrast to a minimum of 13 in the 
standards for an index or portfolio with only U.S. Component Stocks. 
Finally, the proposed standards require that each Non-U.S. Component 
Stock included in the index or portfolio be listed and traded on an 
exchange that has last-sale reporting.
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    \8\ Market value is calculated by multiplying the total shares 
outstanding by the price per share of the component stock.
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    Nasdaq also proposes to modify Rules 4420(i) and (j) to require 
that the index value for an ETF listed pursuant to the proposed 
standards for international and global indexes be widely disseminated 
by one or more major market data vendors at least every 60 seconds 
during the time when the ETF shares trade on Nasdaq. If the index value 
does not change during some or all of the period when trading is 
occurring on Nasdaq, the last official calculated index value must 
remain available throughout Nasdaq's trading hours. In contrast, the 
index value for an ETF listed pursuant to the existing standards for 
domestic indexes must be disseminated at least every 15 seconds during 
the trading day. This modification reflects limitations, in some 
instances, on the frequency of intra-day trading information with 
respect to Non-U.S. Component Stocks and that, in many cases, trading 
hours for overseas markets overlap only in part, or not at all, with 
Nasdaq's trading hours.
    In addition, Rules 4420(i) and (j) would be modified to define the 
term ``Intraday Indicative Value'' (``IIV'') as the estimate of the 
value of a share of each ETF that is updated at least every 15 seconds 
during regular market hours and during any pre-market trading session 
for the ETF.\9\ Nasdaq also proposes to clarify in these rules that the 
IIV would be updated at least every 15 seconds during regular market 
hours and during any pre-market trading session for the ETF to reflect 
changes in the exchange rate between the U.S. dollar and the currency 
in which any component stock is denominated. If the IIV does not change 
during some or all of the period when trading is occurring on Nasdaq, 
then the last official calculated IIV must remain available throughout 
Nasdaq's trading hours.
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    \9\ Nasdaq's regular market hours are 9:30 a.m. to 4 p.m. or 
4:15 p.m. Eastern Time. Its pre-market session begins at 7 a.m. 
Eastern Time, and its post-market session ends at 8 p.m. Eastern 
Time.
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    Nasdaq is proposing that it may designate an ETF for trading during 
its pre-market session and/or its post-market session as long as the 
index value and IIV dissemination requirements of Nasdaq Rules 
4420(i)(3)(B)(iii) and 4420(i)(3)(C) and 4420(j)(3)(B)(iii) and 
4420(j)(3)(C) are met. If there is no overlap with the trading hours of 
the primary market trading the underlying components of an ETF, Nasdaq 
may designate the ETF for pre-market trading as long as the last

[[Page 7493]]

official calculated IIV remains available. Although the IIV does not 
need to be calculated during Nasdaq's current post-market session, the 
last official calculated IIV must also remain available during such 
post-market trading session.
    Nasdaq is also proposing to add provisions regarding the creation 
and redemption process for ETFs and compliance with federal securities 
laws for ETFs listed pursuant to the new generic listing standards. 
These new provisions would require that the statutory prospectus or the 
application for exemption from provisions of the 1940 Act for the ETF 
being listed pursuant to these new standards must state that the ETF 
must comply with the federal securities laws in accepting securities 
for deposits and satisfying redemptions with redemption securities, 
including that the securities accepted for deposits and the securities 
used to satisfy redemption requests are sold in transactions that would 
be exempt from registration under the Securities Act of 1933.
    Nasdaq also proposes to include, in the generic standards for the 
listing of PDRs and IFSs, indexes that have been approved by the 
Commission in connection with the listing of options, PDRs, IFSs, 
index-linked exchangeable notes, or index-linked securities. Nasdaq 
believes that the application of that standard to ETFs is appropriate 
because the underlying index would have been subject to detailed and 
specific Commission review in the context of the approval of listing of 
those other derivatives. This new generic standard would be limited to 
stock indexes and would require that each component stock be either: 
(1) A U.S. Component Stock that is listed on a national securities 
exchange and is an NMS stock as defined in Rule 600 of Regulation NMS; 
or (2) a Non-U.S. Component Stock that is listed and traded on an 
exchange that has last-sale reporting.
    Nasdaq represents that its surveillance procedures are adequate to 
properly monitor the trading of the PDRs and IFSs that would be listed 
pursuant to the proposed new listing standards or traded on a UTP 
basis. Specifically, Nasdaq would rely on its existing surveillance 
procedures governing PDRs and IFSs. Nasdaq has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. It should also be noted that, as provided by existing Nasdaq 
Rule 4420, Nasdaq would commence delisting proceedings for an ETF if 
the value of the underlying index or portfolio is no longer calculated 
or available.
    Nasdaq also proposes to modify the initial and continued listing 
standards relating to disseminated information relating to ETFs to 
formalize in the rules existing best practices for providing equal 
access to material information about the value of ETFs. Prior to 
approving an ETF for listing, Nasdaq would obtain a representation from 
the ETF issuer that the NAV per share would be calculated daily and 
made available to all market participants at the same time. With regard 
to trading halts, the proposed rules specifically set out that if the 
IIV or the index value applicable to an ETF that Nasdaq lists is not 
being disseminated as required, Nasdaq may halt trading during the day 
in which the interruption to the dissemination of the IIV or the index 
value occurs. If the interruption to the dissemination of the IIV or 
the index value persists past the trading day in which it occurred, 
Nasdaq would halt trading no later than the beginning of the trading 
day following the interruption. The rule change would also include 
language providing that Nasdaq has discretion to halt trading in a 
series of PDRs or IFSs based on a consideration of the following 
factors: (1) Trading in securities comprising the underlying index 
applicable to that series has been halted in the primary market(s); (2) 
the extent to which trading has ceased in securities underlying the 
index; or (3) the presence of other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market.\10\
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    \10\ Nasdaq notes that the new language is reflective of 
Nasdaq's existing policies with regard to trading halts of ETFs 
listed on Nasdaq, as discussed in the predecessor NASD rule change 
to establish listing standards for ETFs. In particular, Nasdaq's 
general policy has been to halt trading in an ETF listed on Nasdaq 
when securities accounting for 20% or more of the value of the 
underlying index are halted or suspended. See Securities Exchange 
Act Release No. 45920 (May 13, 2002), 67 FR 35605 (May 20, 2002) 
(SR-NASD-2002-45).
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    With respect to PDRs, IFSs, and other ``Derivative Securities 
Products'' \11\ that Nasdaq trades on a UTP basis, Nasdaq is adopting a 
new trade halt provision to reflect the scope of Nasdaq's deference to 
trading halts called by the listing market when a ``Required Value'' 
relating to the product is not being disseminated. The rule would 
define Required Value as: (1) The value of any index underlying a 
Derivative Securities Product; and (2) the indicative optimized 
portfolio value, intraday indicative value, or other comparable 
estimate of the value of a share of a Derivative Securities Product 
updated regularly during the trading day.
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    \11\ The term ``Derivative Securities Product'' is defined to 
include a series of PDRs, IFSs, or Trust Issued Receipts (as defined 
in Nasdaq Rule 4420), a series of Commodity-Based Trust Shares (as 
defined in Nasdaq Rule 4630), securities representing interests in 
unit investment trusts, investment companies, or commodity pools, or 
securities representing interests in partnerships that invest in any 
combination of futures contracts, options on futures contracts, 
forward contracts, commodities, and/or securities.
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    If a Derivative Securities Product begins trading on Nasdaq in its 
Pre-Market Session \12\ and subsequently a temporary interruption 
occurs in the calculation or wide dissemination of an applicable 
Required Value, Nasdaq may continue to trade the Derivative Securities 
Product for the remainder of the Pre-Market Session. During Nasdaq's 
Regular Market Session,\13\ if a temporary interruption occurs in the 
calculation or wide dissemination of an applicable Required Value with 
respect to a Derivative Securities Product that Nasdaq trades pursuant 
to UTP, Nasdaq, upon notification by the listing market of a halt due 
to such temporary interruption, also shall immediately halt trading in 
the Derivative Securities Product on its market.
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    \12\ The rule defines the ``Pre-Market Session'' as the trading 
session for that begins at 7 a.m. and continues until 9:30 a.m. 
Eastern Time.
    \13\ The rule defines the ``Regular Market Session'' as the 
trading session that runs from 9:30 a.m. to 4 or 4:15 p.m. Eastern 
Time.
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    If an applicable Required Value continues not to be calculated or 
widely disseminated after the close of the Regular Market Session, 
Nasdaq may trade the Derivative Securities Product in its Post-Market 
Session \14\ only if the listing market traded the Derivative 
Securities Product until the close of its regular trading session 
without a halt. If an applicable Required Value continues not to be 
calculated or widely disseminated as of the beginning of the Pre-Market 
Session on the next trading day, Nasdaq shall not commence trading of 
the Derivative Securities Product in the pre-market session that day. 
If an interruption in the calculation or wide dissemination of a 
Required Value continues, Nasdaq may resume trading in the Derivative 
Securities Product only if calculation and wide dissemination of the 
applicable Required Value resumes or trading in the Derivative 
Securities Product resumes in the listing market.
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    \14\ The rule defines the ``Post-Market Session'' as the trading 
session for UTP trading that begins at 4 p.m. or 4:15 p.m., and that 
continues until 8 p.m. Eastern Time.
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    Nasdaq is also amending Rule 4420 to stipulate that, as provided by

[[Page 7494]]

Commission Rule 12f-5,\15\ Nasdaq may extend unlisted trading 
privileges to any security, such as PDRs or IFSs, for which Nasdaq has 
in effect rules providing for transactions in such class or type of 
security. Provisions of Rule 4420 that govern trading hours and 
surveillance procedures, and that relate to information circulars and 
prospectus delivery, also apply to securities traded on a UTP basis (as 
do applicable trade halt provisions of Rule 4120). Nasdaq does not, 
however, apply quantitative listing standards to securities traded on a 
UTP basis. Accordingly, language in Rule 4420(l) that could be read to 
require unlisted securities to meet Nasdaq's quantitative listing 
standards for Trust Issued Receipts in order to trade on a UTP basis is 
being deleted.
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    \15\ 17 CFR 240.12f-5.
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    Proposed rules 4420(i)(3)(B)(iv) and (j)(3)(B)(iv) would be added 
to make sure that an entity that advises index providers or calculators 
and related entities has in place procedures designed to prevent the 
use and dissemination of material non-public information regarding the 
index underlying the ETF. Finally, Nasdaq is proposing several minor 
and clarifying changes to Rules 4120 and 4420, such as deletion of 
certain redundant language, correction of typographical errors, and 
clarification of the hours during which ETFs are eligible to trade.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Exchange Act,\16\ in general, and 
with Section 6(b)(5) of the Exchange Act,\17\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to 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\ 15 U.S.C. 78f.
    \17\ 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 would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange 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 Exchange 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 [email protected]. Please include 
File Number SR-NASDAQ-2006-050 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-2006-050. 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 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-2006-050 and should be submitted on or before 
March 8, 2007.

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, as amended, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\18\ In particular, the Commission finds that the 
proposal is consistent with section 6(b)(5) of the Exchange Act \19\ 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, 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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    \18\ 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).
    \19\ 15 U.S.C. 78f(b)(5).
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    Currently, Nasdaq does not have generic listing standards for ETFs 
based on international or global indexes or on indexes described in 
exchange rules that have been previously approved by the Commission, 
but systems operated by Nasdaq and its affiliates currently trade such 
ETFs on an over-the-counter basis as facilities of NASD. After Nasdaq 
begins to operate as an exchange for non-Nasdaq-listed securities, 
Nasdaq proposes to continue trading such ETFs pursuant to UTP in 
substantially the same manner as they trade currently and to trade 
additional ETFs as the original listing market. Rule 19b-4(e) provides 
that the listing and trading of a new derivative securities product by 
an SRO will not be deemed a proposed rule change pursuant to Rule 19b-
4(c)(1) if the Commission has approved, pursuant to section 19(b) of 
the Exchange Act, the SRO's trading rules, procedures, and listing 
standards for the product class that would include the new derivative 
securities product, and the SRO has a surveillance program for the 
product class. Nasdaq's proposed rules for the listing and trading of 
ETFs pursuant to Rule 19b-4(e) based on (1) Certain indexes with 
components that include foreign securities or (2) indexes or portfolios 
previously described in exchange rules that have been approved by the 
Commission as underlying benchmarks for derivative securities, fulfill 
these requirements. Use of Rule 19b-4(e) by Nasdaq to list and trade 
such ETFs should promote competition, reduce burdens on issuers and 
other market participants, and make such ETFs available to investors 
more quickly.\20\
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    \20\ The Commission notes, however, that the failure of a 
particular ETF to meet these generic listing standards would not 
preclude Nasdaq from submitting a separate proposed rule change to 
list and trade the ETF.

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[[Page 7495]]

    The Commission previously has approved generic listing standards 
for other exchanges, the American Stock Exchange LLC (``Amex'') and the 
New York Stock Exchange LLC (``NYSE''), that are substantially similar 
to those proposed here by Nasdaq.\21\ This proposal does not appear to 
raise any novel regulatory issues. Therefore, the Commission finds that 
Nasdaq's proposal is consistent with the Exchange Act on the same basis 
that it approved Amex's and NYSE's generic listing standards for ETFs 
based on international or global indexes or on indexes or portfolios 
described in exchange rules that have been previously approved by the 
Commission as underlying benchmarks for derivative securities.
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    \21\ See Securities Exchange Act Release No. 54739 (November 9, 
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (approving 
generic listing standards for ETFs based on international or global 
indexes or indexes described in exchange rules that have been 
previously approved by the Commission as underlying benchmarks for 
derivative securities); Securities Exchange Act Release No. 55018 
(December 28, 2006), 72 FR 1040 (January 9, 2007) (SR-Amex-2006-109) 
(making clarifying changes to the generic listing standards set 
forth in SR-Amex-2006-78); Securities Exchange Act Release No. 55113 
(January 17, 2007), 72 FR 3179 (January 24, 2007) (SR-NYSE-2006-101) 
(approving generic listing standards for ETFs based on international 
or global indexes or indexes described in exchange rules that have 
been previously approved by the Commission as underlying benchmarks 
for derivative securities).
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    Proposed Nasdaq Rules 4420(i)(3)(A)(ii) and 4420(j)(3)(A)(ii) 
establish standards for the composition of an index or portfolio 
underlying an ETF. These requirements are designed, among other things, 
to require that components of an index or portfolio underlying the ETF 
are adequately capitalized and sufficiently liquid, and that no one 
security dominates the index. The Commission believes that, taken 
together, these standards are reasonably designed to ensure that 
securities with substantial market capitalization and trading volume 
account for a substantial portion of any underlying index or portfolio, 
and with the other applicable listing requirements will permit the 
listing and trading of ETFs that are sufficiently broad-based to 
minimize potential manipulation. The Commission further believes that 
the proposed listing standards are reasonably designed to preclude 
Nasdaq from listing and trading ETFs that might be used as surrogate 
for trading in unregistered securities. The requirement that each 
component security underlying an ETF be an NMS stock (in the case of a 
U.S. Component Stock) or listed on an exchange and subject to last-sale 
reporting (in the case of a Non-U.S. Component Stock) also should 
contribute to the transparency of the market for these ETFs.
    The proposed generic listing standards will permit Nasdaq to list 
and trade an ETF if the Commission has previously approved an SRO rule 
that contemplates listing and trading a derivative product based on the 
same underlying index. Nasdaq would be able to rely on that earlier 
approval order, provided that: (1) The securities comprising the 
underlying index consist of U.S. Component Stocks or Non-U.S. Component 
Stocks, as set forth in proposed Nasdaq Rules 4420(i)(1)(C) and (D) and 
4420(j)(1)(C) and (D); and (2) Nasdaq complies with the commitments 
undertaken by the other SRO set forth in the prior order, including any 
surveillance-sharing arrangements with a foreign market.
    The Commission believes that Nasdaq's proposal is consistent with 
section 11A(a)(1)(C)(iii) of the Exchange Act,\22\ which sets forth 
Congress' 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. Nasdaq's proposal requires the value of the index or 
portfolio underlying an ETF based on a global or international index to 
be disseminated at least once every 60 seconds during Nasdaq trading 
hours.\23\ Nasdaq has represented that, if an underlying index or 
portfolio value is no longer calculated or available, it would commence 
delisting proceedings for the associated ETF. Furthermore, these 
generic listing standards provide that the issuer of an ETF must 
represent that it will calculate the NAV and make it available daily to 
all market participants at the same time.\24\
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    \22\ 15 U.S.C. 78k7-1(a)(1)(C)(iii).
    \23\ See proposed Nasdaq Rules 4420(i)(3)(B)(iii)(b) and (c) and 
4420(j)(3)(B)(iii)(b) and (c). If an index or portfolio value does 
not change for some of the time that the ETF trades on the Exchange, 
the last official calculated value must remain available throughout 
Exchange trading hours.
    \24\ See proposed Nasdaq Rules 4420(i)(6)(A)(ii) and 
4420(j)(6)(A)(ii).
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    In addition, an IIV, which represents an estimate of the value of a 
share of each ETF, must be updated and disseminated at least once every 
15 seconds during regular market hours and during any pre-market 
trading session for the ETF. The IIV must reflect changes in the 
exchange rate between the U.S. dollar and the currency in which any 
component stock is denominated. When there is no overlap with the 
trading hours of the primary market or markets trading the underlying 
components of an ETF, Nasdaq may trade such ETF during any pre-market 
trading session without an IIV being updated, as long as the last 
official calculated IIV remains available. Although the IIV is not 
calculated during any post-market trading session, the last official 
calculated IIV must also remain available during such post-market 
session. The Commission believes that the proposed rules regarding the 
dissemination of the index value and the IIV are reasonably designed to 
promote transparency in the pricing of ETFs and thus are consistent 
with the Exchange Act.
    Similarly, Nasdaq's trading halt rules are reasonably designed to 
prevent trading in an ETF when transparency cannot be assured. Proposed 
Nasdaq Rule 4120(a)(9) provides that, when Nasdaq is the listing 
market, Nasdaq may halt trading when an interruption occurs in the 
calculation or dissemination of the IIV or index value applicable to an 
ETF. If the interruption continues, Nasdaq would halt trading no later 
than the beginning of the next trading day. In addition, proposed 
Nasdaq Rule 4120(b) sets forth trading halt procedures when Nasdaq 
trades the ETF pursuant to UTP. This rule is substantially similar to 
those recently adopted by other exchanges and found by the Commission 
to be consistent with the Exchange Act.\25\
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    \25\ See NYSE Arca Equities Rule 7.34; NYSE Rule 1100(f)(2); 
Securities Exchange Act Release No. 54997 (December 21, 2006), 71 FR 
78501 (December 29, 2006) (SR-NYSEArca-2006-77); Securities Exchange 
Act Release No. 55113 (January 17, 2007), 72 FR 3179 (January 24, 
2007) (SR-NYSE-2006-101).
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    In approving this proposal, the Commission relied on Nasdaq's 
representation that its surveillance procedures are adequate to 
properly monitor the trading of the PDRs and IFSs listed pursuant to 
the proposed new listing standards or traded on a UTP basis. This 
approval is conditioned on the continuing accuracy of that 
representation.
Acceleration
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing thereof in the Federal Register. The Commission 
notes that Nasdaq's proposal is substantially similar to Amex and NYSE 
proposals that have been approved by the Commission.\26\

[[Page 7496]]

The Commission does not believe that Nasdaq's proposal raises any novel 
regulatory issues and, therefore, that good cause exists for approving 
the filing before the conclusion of a notice-and-comment period. 
Accelerated approval of the proposal will expedite the listing and 
trading of additional ETFs by Nasdaq, subject to consistent and 
reasonable standards. Furthermore, accelerated approval of this 
proposal will facilitate Nasdaq's ability to continue trading certain 
non-Nasdaq-listed ETFs as Nasdaq becomes an exchange with respect to 
non-Nasdaq-listed securities, where there appears to be no regulatory 
concerns about such trading. Therefore, the Commission finds good 
cause, consistent with section 19(b)(2) of the Exchange Act,\27\ to 
approve the proposed rule change, as amended, on an accelerated basis.
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    \26\ See supra note 21.
    \27\ 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 
Exchange Act,\28\ that the proposed rule change (SR-NASDAQ-2006-050), 
as amended, be, and it hereby is, approved on an accelerated basis.
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    \28\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-2664 Filed 2-14-07; 8:45 am]
BILLING CODE 8010-01-P