[Federal Register Volume 73, Number 11 (Wednesday, January 16, 2008)]
[Notices]
[Pages 2964-2967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57115; File No. SR-ISE-2007-103]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Permit 
Trading Pursuant to Unlisted Trading Privileges of Shares of Eight 
Funds of the ProShares Trust

 January 8, 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 October 26, 2007, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') 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 January 4, 20007, the Exchange filed Amendment No. 1 
to the proposed rule change. This order provides notice of the proposed 
rule change, 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

    The Exchange proposes to trade, pursuant to unlisted trading 
privileges (``UTP''), shares (``Shares'') of the following eight funds 
of the ProShares Trust (``Trust''): (1) Short MSCI Emerging Markets 
ProShares; (2) Short MSCI Japan ProShares; (3) Short MSCI EAFE 
ProShares; (4) Short FTSE/Xinhua China 25 ProShares; (5) UltraShort 
MSCI Emerging Markets ProShares; (6) UltraShort MSCI Japan ProShares; 
(7) UltraShort MSCI EAFE ProShares; and (8) UltraShort FTSE/Xinhua 
China 25 ProShares (collectively, ``Funds'').
    The text of the proposed rule change is available at the Exchange's 
principal office, on the Exchange's Web site (http://www.ise.com), 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, ISE 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 the Shares pursuant to UTP. The 
Commission has approved a proposal by the American Stock Exchange LLC 
(``Amex'') to list and trade the funds.\3\ The Exchange is submitting 
this filing because its current generic listing standards for exchange-
traded funds (``ETFs'') do not extend to ETFs where the investment 
objective corresponds to a specified multiple of the performance, or 
the inverse performance, of an index that underlies a Fund (each such 
index is referred to below as an ``Underlying Index''), rather than 
merely mirroring the performance of the index. Currently, the Shares 
trade on the Amex and NYSE Arca.\4\
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    \3\ See Securities Exchange Act Release No. 56223 (August 8, 
2007), 72 FR 45837 (August 15, 2007) (SR-Amex-2007-60).
    \4\ See Securities Exchange Act Release No. 56601 (October 2, 
2007), 72 FR 51625 (October 10, 2007) (SR-NYSEArca-2007-79).
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    Short Funds. Certain Funds 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 net asset 
value (``NAV'') \5\ of the corresponding Shares should increase 
approximately as much (on a percentage basis) as the Underlying Index 
loses when the prices of the securities in the Underlying Index decline 
on a given day or, alternatively, should decrease approximately as much 
as the Underlying Index gains when prices in the Underlying Index rise 
on a given day. The Short Funds are: (1) Short MSCI Emerging Markets 
ProShares; (2) Short MSCI Japan ProShares; (3) Short MSCI EAFE 
ProShares; and (4) Short FTSE/Xinhua China 25 ProShares.
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    \5\ 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.
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UltraShort Funds
    Certain Funds seek daily investment results, before fees and 
expenses, that correspond to twice the inverse

[[Page 2965]]

(-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 
Underlying 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. The UltraShort Funds are: (5) 
UltraShort MSCI Emerging Markets ProShares; (6) UltraShort MSCI Japan 
ProShares; (7) UltraShort MSCI EAFE ProShares; and (8) UltraShort FTSE/
Xinhua China 25 ProShares.
    Access to the current portfolio composition of each Fund is 
currently available through the Trust's Web site (http://www.proshares.com). \6\The Underlying Indexes are identified in the 
filing authorizing Amex to list and trade the Funds (``Original 
Filing'').\7\ The Original Filing states 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''), quotations for and last-
sale information concerning the Shares, the recent NAV, the number of 
Shares outstanding, and the estimated cash amount and total cash amount 
per Creation Unit. Amex will make available on its Web site the daily 
trading volume, closing price, NAV, and final dividend amounts, if any, 
to be paid for each Fund. The NAV of each Fund is calculated and 
determined each business day at the close of regular trading, typically 
4 p.m. Eastern Time (``ET''). The NAV would be calculated and 
disseminated at the same time to all market participants.\8\
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    \6\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 informs 
investors that the Trust's Web site has information about the 
premiums and discounts at which the Fund's Shares have traded.
    \7\ See supra note 3.
    \8\ The Original Filing states 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 ISE would 
halt trading in the Shares immediately, as set forth in ISE Rule 
2123(e).
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    The Original Filing states 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 Filing further states that 
data regarding each Underlying Index is also available from the 
respective index provider to subscribers. According to the Original 
Filing, several independent data vendors package and disseminate index 
data in various value-added formats.
    The Original Filing states 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 value of each Underlying 
Index is disseminated at least every 15 seconds throughout Amex's 
trading day by Amex or another organization authorized by the relevant 
Underlying Index provider. The IIV is updated to reflect changes in 
currency exchange rates and is published via the facilities of the CTA 
on a 15-second delayed basis during ISE's trading hours.
    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 and CQ High 
Speed Lines information: (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 ISE from 9:30 a.m. ET until 4:15 p.m. ET. ISE 
will halt trading in the Shares of a Fund under the conditions 
specified in ISE Rules 702, 703, and 2123. The conditions for a halt 
include a regulatory halt by the listing market. UTP trading in the 
Shares will also be governed by provisions of ISE Rule 2123 relating to 
temporary interruptions in the calculation or wide dissemination of the 
IIV or the value of the Underlying Index. Additionally, ISE may cease 
trading the Shares if other unusual conditions or circumstances exist 
which, in the opinion of ISE, makes further dealings on ISE detrimental 
to the maintenance of a fair and orderly market. ISE will also follow 
any procedures with respect to trading halts as set forth in ISE rules.
    Prior to the commencement of trading, the Exchange will inform 
Equity Electronic Access Members (``Equity EAM'') in a Regulatory 
Information Circular (``RIC'') of the special characteristics and risks 
associated with trading the Shares. Specifically, the RIC will discuss 
the following: (1) The procedures for purchases and redemptions of 
Shares in Creation Unit Aggregations (and that Shares are not 
individually redeemable); (2) ISE Rule 2123(l), which imposes a duty of 
due diligence on Equity EAMs to learn the essential facts relating to 
every customer prior to trading the Shares; (3) how information 
regarding the IIV is disseminated; (4) the requirement that Equity EAMs 
deliver a written description to investors purchasing Shares prior to 
or concurrently with a transaction; and (5) trading information. In 
addition, the RIC will reference that the Fund is subject to various 
fees and expenses described in the Registration Statement. The RIC will 
also discuss any exemptive, no-action, and/or interpretive relief 
granted by the Commission from the Act and rules under the Act. The RIC 
will also disclose that the NAV for the Shares will be calculated after 
4 p.m. ET each trading day.
    The Exchange intends to utilize its existing surveillance 
procedures applicable to equities to monitor trading in the Shares. The 
Exchange represents that these procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules. The Exchange's current 
trading surveillance focuses on detecting securities trading outside 
their normal patterns. When such situations are detected, surveillance 
analysis follows and investigations are opened, where appropriate, to 
review the behavior of all relevant parties for all relevant trading 
violations. Additionally, the Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges that are 
members or affiliates of the ISG.\9\ The Exchange also has a general 
policy prohibiting the distribution of material, non-public information 
by employees.
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    \9\ For a list of the current members and affiliate members of 
ISG, see http://www.isgportal.com.
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2. Statutory Basis
    The statutory basis under the Act for this proposed rule change is 
found in Section 6(b)(5), \10\ in that the proposed rule change is 
designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanisms 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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    \10\ 15 U.S.C. 78f(b)(5).

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[[Page 2966]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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-ISE-2007-103 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-ISE-2007-103. 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 ISE. 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-ISE-2007-103 and should be 
submitted on or before February 6, 2008.

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.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ 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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    \11\ 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).
    \12\ 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,\13\ which permits an exchange to trade, 
pursuant to UTP, a security that is listed and registered on another 
exchange.\14\ The Commission notes that it previously approved the 
listing and trading of the Shares on Amex.\15\ The Commission also 
finds that the proposal is consistent with Rule 12f-5 under the 
Act,\16\ 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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    \13\ 15 U.S.C. 78l(f).
    \14\ 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.
    \15\ See supra note 3.
    \16\ 17 CFR 240.12f-5.
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    Further, the Commission believes that the proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\17\ 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 continuously throughout ISE's trading day 
through the facilities of the CTA. Furthermore, the IIV, updated to 
reflect changes in currency exchange rates, is calculated by Amex and 
published via the facilities of the CTA and the Consolidated Quotation 
System on a 15-second delayed basis throughout ISE's trading hours. As 
mentioned above, Amex's Web site provides information relating to the 
value of the Shares such as the prior business day's closing NAV, the 
reported closing price, and the daily trading volume. The Commission 
also believes that the Exchange's trading halt rules are reasonably 
designed to prevent trading in the Shares when transparency is 
impaired. If the listing market halts trading when the IIV is not being 
calculated or disseminated, the Exchange would halt trading in the 
Shares pursuant to ISE Rule 2123(e). The Exchange has represented that 
it would follow the procedures with respect to trading halts set forth 
in ISE Rules 702, 703, and 2123.
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    \17\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    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.
    In support of this proposal, the Exchange has made the following 
representations:
    1. The Exchange believes that its 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 
EAMs in a RIC of the special characteristics and risks associated with 
trading the Shares.

[[Page 2967]]

    3. ISE would 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.
    This approval order is based on these representations.
    The Commission finds good cause for approving this proposal before 
the 30th day after the publication of notice thereof in the Federal 
Register. As noted previously, the Commission previously found that the 
listing and trading of the Shares on Amex is consistent with the Act. 
Additionally, the Commission has approved the trading of the Shares 
pursuant to UTP on another national securities exchange.\18\ 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.
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    \18\ See Securities Exchange Act Release No. 56601 (October 2, 
2007), 72 FR 51625 (October 10, 2007) (SR-NYSEArca-2007-79).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-ISE-2007-103), as modified 
by Amendment No. 1 thereto, be, and it hereby is, approved on an 
accelerated basis.
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    \19\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-646 Filed 1-15-08; 8:45 am]
BILLING CODE 8011-01-P