[Federal Register Volume 72, Number 227 (Tuesday, November 27, 2007)]
[Notices]
[Pages 66206-66210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-23000]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56817; File No. SR-CBOE-2007-124]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Trade Shares of 93 Funds of the ProShares Trust Pursuant to Unlisted 
Trading Privileges

November 19, 2007.
    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 October 30, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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 
the Exchange. On November 15, 2008, the Exchange filed Amendment No. 1 
to the proposed rule change. This order provides notice of, and 
approves, the proposed rule change, as modified by Amendment No. 1 
thereto, 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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[[Page 66207]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE is proposing to trade on its stock trading facility, the CBOE 
Stock Exchange (``CBSX''), shares (``Shares'') of the 93 funds 
identified below (collectively, the ``Funds'') of the ProShares Trust 
(``Trust'') pursuant to unlisted trading privileges (``UTP'').
    The text of the proposed rule change is available from the 
Exchange's Web site (http://www.cboe.org/Legal), at the principal 
office of the Exchange, 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, 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 proposes to trade, pursuant to UTP, the Shares of 93 
Funds, which are exchange-traded funds (``ETFs''). The Commission has 
approved exchange rules for the original listing and trading of the 
Shares on the American Stock Exchange (``Amex''). CBOE is submitting 
this filing because its current generic listing standards for ETFs do 
not extend to ETFs with the investment objective of corresponding to a 
specified multiple of the performance, or the inverse performance, of 
an index that underlies each Fund (each such index is referred to below 
as an ``Underlying Index''), rather than merely mirroring the 
performance of the index. Some of the Shares were approved for listing 
and trading only recently, and actual trading has not yet commenced.

Ultra Funds

    Certain Funds seek daily investment results, before fees and 
expenses, that correspond to twice (200%) the daily performance of the 
Underlying Indexes (``Ultra Funds''). If such Funds meet their 
objective, the net asset value (the ``NAV'') \3\ of the Shares of each 
Fund should increase (on a percentage basis) approximately twice as 
much as the Fund's Underlying Index when the prices of the securities 
in such Index increase on a given day, and should lose approximately 
twice as much when such prices decline on a given day. This filing 
applies to the following Ultra Funds: Four Ultra Funds listed and 
traded on Amex pursuant to Commission order on May 10, 2006: \4\ (1) 
Ultra S&P 500, (2) Ultra Nasdaq-100, (3) Ultra Dow 30, and (4) Ultra 
S&P Mid-Cap 400; and 27 Ultra Funds listed and traded on Amex pursuant 
to Commission order on January 17, 2007: \5\ (1) Ultra Russell 2000, 
(2) Ultra S&P SmallCap 600, (3) Ultra S&P500/Citigroup Value, (4) Ultra 
S&P500/Citigroup Growth, (5) Ultra S&P MidCap 400/Citigroup Value, (6) 
Ultra S&P MidCap 400/Citigroup Growth, (7) Ultra S&P SmallCap 600/
Citigroup Value, (8) Ultra S&P SmallCap 600/Citigroup Growth, (9) Ultra 
Basic Materials, (10) Ultra Consumer Goods, (11) Ultra Consumer 
Services, (12) Ultra Financials, (13) Ultra Health Care, (14) Ultra 
Industrials, (15) Ultra Oil & Gas, (16) Ultra Real Estate, (17) Ultra 
Semiconductors, (18) Ultra Technology, (19) Ultra Utilities, (20) Ultra 
Russell Midcap Index, (21) Ultra Russell Midcap Growth Index, (22) 
Ultra Russell Midcap Value Index, (23) Ultra Russell 1000 Index, (24) 
Ultra Russell 1000 Growth Index, (25) Ultra Russell 1000 Value Index, 
(26) Ultra Russell 2000 Growth Index, and (27) Ultra Russell 2000 Value 
Index.
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    \3\ NAV per Share of each Fund is computed by dividing the value 
of the net assets of such Fund (i.e., the value of its total assets 
less total liabilities) by its total number of Shares outstanding. 
Expenses and fees are accrued daily and taken into account for 
purposes of determining NAV.
    \4\ Securities Exchange Act Release No. 53784 (May 10, 2006), 71 
FR 28721 (May 17, 2006). These Funds were subsequently approved for 
UTP trading on NYSE Arca, Inc. and The NASDAQ Stock Market LLC. See 
Securities Exchange Act Release Nos. 54026 (June 21, 2006), 71 FR 
36850 (June 28, 2006) and 55353 (February 26, 2007), 72 FR 9802 
(March 5, 2007).
    \5\ Securities Exchange Act Release No. 55117 (January 17, 
2007), 72 FR 3442 (January 25, 2007). These Funds were subsequently 
approved for UTP trading on NYSE Arca, Inc. and The NASDAQ Stock 
Market LLC. See Securities Exchange Act Release Nos. 55125 (January 
18, 2007), 72 FR 3462 (January 25, 2007) and 55353 (February 26, 
2007), 72 FR 9802 (March 5, 2007).
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Short Funds

    CBOE also proposes to trade Shares of certain Funds that seek daily 
investment results, before fees and expenses, that correspond to the 
inverse or opposite of the daily performance (-100%) of the Underlying 
Indexes (``Short Funds''). If such a Fund is successful in meeting its 
objective, the NAV of the corresponding Shares should increase 
approximately as much (on a percentage basis) as the respective 
Underlying Index loses when the prices of the securities in the Index 
decline on a given day, or should decrease approximately as much as the 
respective Index gains when prices in the Index rise on a given day.
    This filing applies to the following Short Funds: Four Short Funds 
listed and traded on Amex pursuant to Commission order on May 10, 2006: 
\6\ (1) Short S&P 500, (2) Short Nasdaq-100, (3) Short Dow 30, and (4) 
Short S&P Mid-Cap 400; and 27 Short Funds listed and traded on Amex 
pursuant to Commission order on January 17, 2007: \7\ (1) Short Russell 
2000, (2) Short S&P SmallCap 600, (3) Short S&P500/Citigroup Value, (4) 
Short S&P500/Citigroup Growth, (5) Short S&P MidCap 400/Citigroup 
Value, (6) Short S&P MidCap 400/Citigroup Growth, (7) Short S&P 
SmallCap 600/Citigroup Value, (8) Short S&P SmallCap 600/Citigroup 
Growth, (9) Short Basic Materials, (10) Short Consumer Goods, (11) 
Short Consumer Services, (12) Short Financials, (13) Short Health Care, 
(14) Short Industrials, (15) Short Oil & Gas, (16) Short Real Estate, 
(17) Short Semiconductors, (18) Short Technology, (19) Short Utilities, 
(20) Short Russell Midcap Index, (21) Short Russell Midcap Growth 
Index, (22) Short Russell Midcap Value Index, (23) Short Russell 1000 
Index, (24) Short Russell 1000 Growth Index, (25) Short Russell 1000 
Value Index, (26) Short Russell 2000 Growth Index, and (27) Short 
Russell 2000 Value Index.
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    \6\ See supra note 2.
    \7\ See supra note 3.
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UltraShort Funds

    CBOE also proposes to trade Shares of certain Funds that seek daily 
investment results, before fees and expenses, that correspond to twice 
the inverse (-200%) of the daily performance of the Underlying Indexes 
(``UltraShort Funds''). If such a Fund is successful in meeting its 
objective, the NAV of the corresponding Shares should increase 
approximately twice as much (on a percentage basis) as the respective 
Underlying Index loses when the prices of the securities in the Index 
decline on a given day, or should decrease approximately twice as much 
as the respective Underlying Index gains when such prices rise on a 
given day.
    This filing applies to the following UltraShort Funds: Four 
UltraShort Funds listed and traded on Amex pursuant to Commission order 
on June

[[Page 66208]]

23, 2006: \8\ (1) UltraShort S&P 500, (2) UltraShort Nasdaq-100, (3) 
UltraShort Dow 30, and (4) UltraShort S&P Mid-Cap 400; and 27 
UltraShort funds listed and traded on Amex pursuant to Commission order 
on January 17, 2007: \9\ (1) UltraShort Russell 2000, (2) UltraShort 
S&P SmallCap 600, (3) UltraShort S&P500/Citigroup Value, (4) UltraShort 
S&P500/Citigroup Growth, (5) UltraShort S&P MidCap 400/Citigroup Value, 
(6) UltraShort S&P MidCap 400/Citigroup Growth, (7) UltraShort S&P 
SmallCap 600/Citigroup Value, (8) UltraShort S&P SmallCap 600/Citigroup 
Growth, (9) UltraShort Basic Materials, (10) UltraShort Consumer Goods, 
(11) UltraShort Consumer Services, (12) UltraShort Financials, (13) 
UltraShort Health Care, (14) UltraShort Industrials, (15) UltraShort 
Oil & Gas, (16) UltraShort Real Estate, (17) UltraShort Semiconductors, 
(18) UltraShort Technology, (19) UltraShort Utilities, (20) UltraShort 
Russell Midcap Index, (21) UltraShort Russell Midcap Growth Index, (22) 
UltraShort Russell Midcap Value Index, (23) UltraShort Russell 1000 
Index, (24) UltraShort Russell 1000 Growth Index, (25) UltraShort 
Russell 1000 Value Index, (26) UltraShort Russell 2000 Growth Index, 
and (27) UltraShort Russell 2000 Value Index.
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    \8\ Securities Exchange Act Release No. 54040 (June 23, 2006), 
71 FR 37629 (June 30, 2006). These Funds were subsequently approved 
for UTP trading on NYSE Arca. See Securities Exchange Act Release 
No. 54045 (June 26, 2006), 71 FR 37971 (July 3, 2006).
    \9\ See supra note 5.
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    Access to the current portfolio composition of each Fund is 
currently available through the Trust's Web site (http://www.proshares.com).\10\ The Underlying Indexes are identified in Amex's 
proposed rule changes to list the Funds (the ``Original Filings'').\11\ 
The Original Filings state that Amex would disseminate for each Fund on 
a daily basis by means of Consolidated Tape Association (``CTA'') and 
CQ High Speed Lines information with respect to an Indicative Intra-Day 
Value (``IIV''), the daily trading volume, closing price, NAV, and 
final dividend amounts, if any, to be paid for each Fund.\12\
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    \10\ The Trust's Web site is publicly accessible at no charge 
and contains the following information for each Fund's Shares: (1) 
The prior business day's closing NAV, the reported closing price, 
and a calculation of the premium or discount of such price in 
relation to the closing NAV; (2) data for a period covering at least 
the current and three immediately preceding calendar quarters (or 
the life of a Fund, if shorter) indicating how frequently each 
Fund's Shares traded at a premium or discount to NAV based on the 
daily closing price and the closing NAV, and the magnitude of such 
premiums and discounts; (3) its prospectus and product description; 
and (4) other quantitative information such as daily trading volume. 
The prospectus and/or product description for each Fund would inform 
investors that the Trust's Web site has information about the 
premiums and discounts at which the Fund's Shares have traded.
    \11\ See supra notes 4, 5, and 8.
    \12\ The Original Filings explain that, if the IIV is not 
disseminated as required, Amex would halt trading in the shares of 
the Funds. If Amex halts trading for this reason, then CBOE would do 
so as well.
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    The Original Filings state that the daily closing index value and 
the percentage change in the daily closing index value for each 
Underlying Index would be publicly available on various Web sites such 
as http://www.bloomberg.com. The Original Filings further state that 
data regarding each Underlying Index are also available from the 
respective index provider to subscribers. According to the Original 
Filings, several independent data vendors package and disseminate index 
data in various value-added formats (including vendors displaying both 
securities and index levels and vendors displaying index levels only).
    The Original Filings state that the value of each Underlying Index 
is updated intra-day on a real-time basis as its individual component 
securities change in price, and the intra-day values of each Underlying 
Index are disseminated at least every 15 seconds throughout Amex's 
trading day by Amex or another organization authorized by the relevant 
Underlying Index provider.
    To provide updated information relating to each Fund for use by 
investors, professionals, and persons wishing to create or redeem 
Shares, Amex disseminates through the facilities of the CTA: (1) 
Continuously throughout Amex's trading day, the market value of a 
Share; and (2) at least every 15 seconds throughout Amex's trading day, 
the IIV as calculated by Amex.
    Shares would trade on CBOE from 8:15 a.m. until 3:15 p.m. Central 
Time. CBOE has appropriate rules to facilitate transactions in the 
Shares during that trading session.
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Funds. Trading in the Funds may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Funds inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities comprising 
an underlying Index and/or the financial instruments of the Funds, or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. In addition, 
trading in the Funds would be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's ``circuit 
breaker'' rule.\13\
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    \13\ See CBOE Rule 6.3B.
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    Moreover, the Exchange represents that it would cease trading a 
Fund if the listing market stopped trading that Fund because of a 
regulatory halt similar to a halt based on CBOE Rule 6.3. UTP trading 
in the Funds is also governed by the trading halts provisions of CBOE 
Rule 52.3 relating to temporary interruptions in the calculation or 
wide dissemination of IIVs or the values of underlying indexes. 
Finally, CBOE would stop trading the Shares of a Fund if the listing 
market delists them.
    In connection with the trading of the Shares, CBOE will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares, as well as the requirements 
of CBOE Rule 53.6, which requires members of the Exchange to determine 
that a particular security is suitable for a customer before 
recommending a transaction in it. The Exchange also will require its 
members to deliver a prospectus or product description to investors 
purchasing the Shares prior to or concurrently with a transaction in 
the Shares.
    CBOE deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to the Exchange's existing rules 
applicable to UTP trading of equity securities. The Exchange intends to 
utilize its existing surveillance procedures applicable to equity 
securities to monitor trading in the Shares. The Exchange represents 
that these procedures are adequate to monitor Exchange trading of the 
Shares.
    Finally, the Exchange is proposing to amend CBOE Rule 53.6, the 
CBSX suitability rule, so that each member organization's obligation 
under that rule is heightened. Specifically, the Exchange proposes to 
amend CBOE Rule 53.6 to provide that, in making a recommendation to a 
customer, a member organization must have reasonable grounds for the 
recommendation upon the basis of the information furnished by the 
customer after reasonable inquiry concerning the customer's investment 
objectives, tax status, financial situation and needs, and any other 
information known by such member organization. Other exchanges have 
adopted similar rule text.\14\ That enhanced obligation would apply to 
a member organization's recommendation of any security that is

[[Page 66209]]

subject to Chapters 50 through 54 of the Exchange's rules, including 
the Shares.
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    \14\ See, e.g., Amex Rule 411, Commentary .05; NYSE Arca Rule 
9.2(a)(2).
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2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange and, in particular, section 6(b) of the Act.\15\ 
Specifically, CBOE believes that the proposed rule change is consistent 
with the section 6(b)(5) \16\ requirements that an exchange have rules 
designed to promote just and equitable principles of trade, 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. In addition, CBOE believes that the proposal is 
consistent with Rule 12f-5 under the Act \17\ because it deems the 
Shares to be equity securities, thus rendering trading in the Shares 
subject to the Exchange's existing rules governing the trading of 
equity securities.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 17 CFR 240.12f-5.
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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

    The Exchange neither solicited nor received comments on the 
proposal.

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 [email protected]. Please include 
File Number SR-CBOE-2007-124 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-CBOE-2007-124. 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 such 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-CBOE-2007-124 and should be 
submitted on or before December 18, 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 is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\18\ In particular, the Commission finds that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\19\ which 
requires that an exchange have rules designed, among other things, to 
promote just and equitable principles of trade, 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. The Commission believes that this proposal should benefit 
investors by increasing competition among markets that trade the 
Shares.
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    \18\ In approving this rule change, the Commission notes that it 
has considered the proposal'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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    In addition, the Commission finds that the proposal is consistent 
with section 12(f) of the Act,\20\ which permits an exchange to trade, 
pursuant to UTP, a security that is listed and registered on another 
exchange.\21\ The Commission notes that it previously approved the 
listing and trading of the Shares on Amex and the trading of the Shares 
on NYSE Arca and The NASDAQ Stock Market pursuant to UTP.\22\ The 
Commission also finds that the proposal is consistent with Rule 12f-5 
under the Act,\23\ which provides that an exchange shall not extend UTP 
to a security unless the exchange has in effect a rule or rules 
providing for transactions in the class or type of security to which 
the exchange extends UTP. The Exchange has represented that it meets 
this requirement because it deems the Shares to be equity securities, 
thus rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.
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    \20\ 15 U.S.C. 78l(f).
    \21\ Section 12(a) of the Act, 15 U.S.C. 78l(a), generally 
prohibits a broker-dealer from trading a security on a national 
securities exchange unless the security is registered on that 
exchange pursuant to Section 12 of the Act. Section 12(f) of the Act 
excludes from this restriction trading in any security to which an 
exchange ``extends UTP.'' When an exchange extends UTP to a 
security, it allows its members to trade the security as if it were 
listed and registered on the exchange even though it is not so 
listed and registered.
    \22\ See supra notes 4-9.
    \23\ 17 CFR 240.12f-5.
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    The Commission further believes that the proposal is consistent 
with section 11A(a)(1)(C)(iii) of the Act,\24\ 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. Quotations for and last-sale information regarding the 
Shares are disseminated through the facilities of the CTA and the 
Consolidated Quotation System. Furthermore, the IIV, updated to reflect 
changes in currency exchange rates, is calculated by Amex and published 
via the facilities of the Consolidated Tape Association on a 15-second 
delayed basis throughout the trading hours for the Shares.
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    \24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission also believes that the proposal appears reasonably 
designed to preclude trading of the Shares when transparency is 
impaired. Trading in the

[[Page 66210]]

Shares will be subject to CBOE Rule 52.3, which provides that, if the 
listing market halts trading when the IIV or value of the underlying 
index is not being calculated or disseminated, the Exchange also would 
halt trading.
    In support of this proposal, the Exchange has made the following 
additional representations:
    1. The Exchange's surveillance procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules.
    2. Prior to the commencement of trading, the Exchange would inform 
its members in an Information Bulletin of the special characteristics 
and risks associated with trading the Shares.
    3. The Information Bulletin also would discuss the requirement that 
members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction.

This approval order is based on the Exchange's representations.
    The Commission notes that, if the Shares should be delisted by the 
listing exchange, the Exchange would no longer have authority to trade 
the Shares pursuant to this order.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. As noted above, the Commission previously found that 
the listing and trading of the Shares on Amex and the trading of the 
Shares on NYSE Arca and The NASDAQ Stock Market pursuant to UTP are 
consistent with the Act. The Commission presently is not aware of any 
regulatory issue that should cause it to revisit those findings or 
would preclude the trading of the Shares on the Exchange pursuant to 
UTP. Therefore, accelerating approval of this proposal should benefit 
investors by creating, without undue delay, additional competition in 
the market for the Shares.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-CBOE-2007-124), as modified 
by Amendment No. 1 thereto, be, and it hereby is, approved on an 
accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23000 Filed 11-26-07; 8:45 am]
BILLING CODE 8011-01-P