[Federal Register: October 11, 2005 (Volume 70, Number 195)]
[Notices]
[Page 59100-59106]
[DOCID:fr11oc05-77]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52553; File No. SR-Amex-2004-62]

Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Approval to Proposed Rule Change and Amendment Nos. 1, 2, and
3 and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 4 Relating to Listing and Trading of Shares of the
xtraShares Trust

October 3, 2005.

I. Introduction

    On August 2, 2004, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Amex Rule 411 (``Duty to
Know and Approve Customers'') and Rule 1000A (``Index Fund Shares'')
and related Commentary .02 to accommodate the listing of Index Fund
Shares that seek to provide investment results that exceed the
performance of a securities index by a specified percentage or that
seek to provide investment results that correspond to the inverse or
opposite of the index's performance. The proposed rule change will
accommodate listing on the Exchange of the following eight (8) funds of
the xtraShares Trust (the ``Trust''): Ultra500 Fund; Ultra100 Fund;
Ultra30 Fund; UltraMid-Cap 400 Fund; Short500 Fund; Short100 Fund;
Short30 Fund; and ShortMid-Cap 400 Fund (the ``Funds''). On March 4,
2005, the Exchange filed Amendment No. 1.\3\ On May 9, 2005, the
Exchange filed Amendment No. 2.\4\ The Exchange filed Amendment No. 3
on August 1, 2005.\5\ The proposed rule change, as amended, was
published for comment in the Federal Register on August 9, 2005.\6\ The
Commission received no comments on the proposal. On September 15, 2005,
the Exchange filed Amendment No. 4.\7\ This order approves the proposed
rule change as amended. Simultaneously, the Commission provides notice
of, and grants accelerated approval to, Amendment No. 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange modified the proposed rule
text and accompanying description. Amendment No. 1 replaced Amex's
original submission in its entirety.
    \4\ In Amendment No. 2, the Exchange clarified the portfolio
investment methodology and made certain other clarifications to the
description of the proposal.
    \5\ In Amendment No. 3, the Exchange provided additional details
regarding the disclosure of the portfolio holdings of the Fund
Shares and made certain other minor corrections to the rule text and
proposal. Amendment No. 3 replaced Amex's earlier submissions in
their entirety.
    \6\ See Securities Exchange Act Release No. 52197 (August 2,
2005), 70 FR 46228 (``Notice'').
    \7\ In Amendment No. 4, the Amex clarified that Authorized
Participants (``APs''), as defined in the proposal, who create and
redeem Index Fund Shares, will deposit and receive only stock and/or
cash, not other financial instruments.
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II. Description of Proposed Rule Change

    As set forth in the Notice, the Exchange proposes to amend Rule
1000A and related Commentary .02 to accommodate the listing of Index
Fund Shares that seek to provide investment results that exceed the
daily performance of a specified stock index by a specified percentage
(e.g., equal to 200 percent of the index value) or that seek to provide
investment results that correspond to the inverse or opposite of the
index's daily performance.\8\
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    \8\ Amex Rules 1000A et seq. provide standards for the listing
of Index Fund Shares, which are securities issued by an open-end
management investment company for exchange trading. These securities
are registered under the Investment Company Act of 1940 (``1940
Act''), as well as the Exchange Act. Index Fund Shares are defined
in Rule 1000A as securities based on a portfolio of stocks or fixed
income securities that seek to provide investment results that
correspond generally to the price and yield of a specified foreign
or domestic stock index or fixed income securities index.
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    The Exchange proposes to list, under amended Rule 1000A, the shares
of the Funds (``Shares''). Four of the Funds--the Ultra500, Ultra100,
Ultra30, and UltraMid-Cap400 Funds (the ``Bullish Funds'')--seek daily
investment results, before fees and expenses, that correspond to twice
(200%) the daily performance of the Standard and Poor's 500[supreg]
Index (``S&P 500''), the Nasdaq-100[supreg] Index (``Nasdaq 100''), the
Dow Jones Industrial AverageSM (``DJIA''), and the S&P
MidCap400TM Index (``S&P MidCap''), respectively. (These
indexes are referred to herein as ``Underlying Indexes''.) \9\ Each of
these Funds, if successful in meeting its objective, should gain, 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. In addition, four other Funds--the Short500,
Short100, Short30, and ShortMid-Cap400 Funds (the ``Bearish Funds'')--
seek daily investment results, before fees and expenses, which
correspond to the inverse or opposite of the daily performance (-100%)
of the S&P 500, Nasdaq-100, DJIA, and S&P MidCap, respectively.\10\ If
each of these Funds is successful in meeting its objective, the net
asset value (the ``NAV'') \11\ of Shares of each Fund 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 the prices of the securities in the index
rise on a given day.
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    \9\ Exchange-traded funds (``ETFs'') based on each of the
Underlying Indexes are listed and/or traded on the Exchange. See
Securities Exchange Act Release Nos. 31591 (December 11, 1992), 57
FR 60253 (December 18, 1992) (S&P 500 SPDR); 39143 (September 29,
1997), 62 FR 51917 (October 3, 1997) (DIAMONDS); 41119 (February 26,
1999), 64 FR 11510 (March 9, 1999) (QQQ); and 35689 (May 8, 1995),
60 FR 26057 (May 16, 1995) (S&P MidCap 400). The Statement of
Additional Information (``SAI'') for the Funds discloses that each
Fund reserves the right to substitute a different Index.
Substitution could occur if the Index becomes unavailable, no longer
serves the investment needs of shareholders, the Fund experiences
difficulty in achieving investment results that correspond to the
Index, or for any other reason determined in good faith by the
Board. In such instance, the substitute index will attempt to
measure the same general market as the current index. Shareholders
will be notified (either directly or through their intermediary) in
the event a Fund's current index is replaced. In the event a Fund
substitutes a different index, the Exchange will file a new Rule
19b-4 filing with the Commission.
    \10\ Id.
    \11\ The NAV of each Fund is calculated and determined each
business day at the close of regular trading, typically 4:00 p.m.
e.s.t.
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    ProFunds Advisors LLC is the investment adviser (the ``Advisor'')
to each Fund. The Advisor is registered under the Investment Advisers
Act of

1940.\12\ While the Advisor will manage each Fund, the Trust's Board of
Trustees (the ``Board'') will have overall responsibility for the
Funds'' operations. The composition of the Board is, and will be, in
compliance with the requirements of Section 10 of the 1940 Act, and the
Funds will comply with Rule 10A-3 of the Exchange Act.
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    \12\ The Trust, Advisor, and Distributor (``Applicants'') have
filed with the Commission an Application for an Order under Sections
6(c) and 17(b) of the 1940 Act (the ``Application'') for the purpose
of exempting the Funds of the Trust from various provisions of the
1940 Act. (File No. 812-12354). The Exchange states that the
information provided in this Rule 19b-4 filing relating to the Funds
is based on information included in the Application, which contains
additional information regarding the Trust and Funds.
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    SEI Investments Distribution Company (the ``Distributor'' or
``SEI''), a broker-dealer registered under the Exchange Act, will act
as the distributor and principal underwriter of the Shares.
    JPMorgan Chase Bank will act as the Index Receipt Agent for the
Trust, for which it will receive fees. The Index Receipt Agent will be
responsible for transmitting the Deposit List (as defined below) to
National Securities Clearing Corporation (``NSCC'') and for the
processing, clearance and settlement of purchase and redemption orders
through the facilities of Depository Trust Company (``DTC'') and NSCC
on behalf of the Trust. The Index Receipt Agent will also be
responsible for the coordination and transmission of files and purchase
and redemption orders between the Distributor and NSCC.\13\
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    \13\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on August 2, 2005 (as to Index Receipt Agent).
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    Shares of the Funds issued by the Trust \14\ will be a class of
exchange-traded securities that represent an interest in the portfolio
of a particular Fund. Additional details about the Trust, the operation
of the Funds, and trading of the Shares are set out in the Notice.
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    \14\ The Fund is also registered as a business trust under the
Delaware Corporate Code. Telephone Conversation between Jeffrey P.
Burns, Associate General Counsel, Amex, and Florence Harmon, Senior
Special Counsel, Division, Commission, on July 12, 2005.
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Investment Objective of the Funds

    Each Bullish Fund will invest its assets, according to the
Exchange, based upon the same strategies as conventional index funds.
These Bullish Funds generally will hold at least 85% of their assets in
the component equity securities (``Equity Securities'') of the relevant
Underlying Index. The remainder of assets will be devoted to financial
instruments (as defined below) that are intended to create the
additional needed exposure to such Underlying Index necessary to pursue
the Fund's investment objective.
    The Bearish Funds will not invest directly in the component
securities of the relevant Underlying Index, but instead, will create
short exposure to such Index. Each Bearish Fund will rely on
establishing positions in financial instruments (as defined below) that
provide, on a daily basis, the inverse or opposite of the investment
results of the relevant Underlying Index. Normally 100% of the value of
the portfolios of each Bearish Fund will be devoted to such financial
instruments and money market instruments, including U.S. government
securities and repurchase agreements (the ``Money Market
Instruments'').
    The financial instruments to be held by any of the Bullish or
Bearish Funds may include stock index futures contracts, options on
futures contracts,\15\ options on securities and indices, equity caps,
collars and floors as well as swap agreements, forward contracts,
repurchase agreements and reverse repurchase agreements (the
``Financial Instruments''), and Money Market Instruments. The Advisor
may invest in such Money Market Instruments and Financial Instruments,
rather than in Equity Securities, when it would be more efficient or
less expensive for the Funds.
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    \15\ Each Fund may engage in transactions in futures contracts
on designated contract markets where such contracts trade and will
only purchase and sell futures contracts traded on a U.S. futures
exchange or board of trade.
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    The Exchange states that the counterparties to the swap agreements
and/or forward contracts will be major broker-dealers and banks. The
creditworthiness of each potential counterparty is assessed by the
Advisor's credit committee pursuant to guidelines approved by the
Board. Existing counterparties are reviewed periodically by the Board.
Each Fund may also enter into repurchase and reverse repurchase
agreements with terms of less than one year and will only enter into
such agreements with (i) Members of the Federal Reserve System, (ii)
primary dealers in U.S. government securities, or (iii) major broker-
dealers.\16\ Each Fund may also invest in Money Market Instruments, in
pursuit of its investment objectives, as ``cover'' for Financial
Investments, as required by the 1940 Act, or to earn interest.
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    \16\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on September 22, 2005 (as to insertion of term
``major'' in describing broker-dealer counterparties).
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    Additional details about the Funds' investment techniques,
including additional regulatory requirements, are described in the
Notice.
    While the Advisor will attempt to minimize any ``tracking error''
between the investment results of a particular Fund and the performance
or inverse performance (and specified multiple thereof) of its
Underlying Index, certain factors may tend to cause the investment
results of a Fund to vary from such relevant Underlying Index or
specified multiple thereof.\17\ The Funds are expected to have a daily
tracking error of less than 5% \18\ (500 basis points) relative to the
specified (inverse) multiple of the performance of the relevant
Underlying Index.
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    \17\ Factors that may cause a Fund to vary from the relevant
Underlying Index and investment objective are described in more
detail in the Notice.
    \18\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on August 1, 2005 (as to removal of
terminology ``in absolute return'').
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The Portfolio Investment Methodology

    The Advisor seeks to establish investment exposure for each Bullish
and Bearish Fund corresponding to each Fund's investment objective
based upon its portfolio investment methodology (the ``Methodology'').
    The Methodology takes into account a variety of specified criteria
and data (the ``Inputs''), the most important of which are: (i) Net
assets (taking into account creations and redemptions) in each Fund's
portfolio at the end of each trading day; (ii) the amount of exposure
required to the Underlying Index; and (iii) the positions in Equity
Securities, Financial Instruments and/or Money Market Instruments at
the beginning of each trading day. The Advisor, pursuant to the
Methodology, will then mathematically determine the end-of-day
positions to establish the solution (the ``Solution''), which may
consists of Equity Securities, Financial Instruments, and Money Market
Instruments. The difference between the start-of-day positions and the
required end-of-day positions is the actual amount of Equity
Securities, Financial Instruments, and/or Money Market Instruments that
must be bought or sold for the day. The Solution accordingly represents
the required exposure and is converted into an order or orders, as
applicable, to be filled that same day.
    Generally, portfolio trades effected pursuant to the Solution are
reflected in the NAV on the first business day (T+1) after the date the
relevant trades are

made. Thus, the NAV calculated for a Fund on any given day reflects the
trades executed pursuant to the prior day's Solution. For example,
trades pursuant to the Solution calculated on a Monday afternoon are
executed on behalf of the Fund in question on that day. These trades
will then be reflected in the NAV for that Fund that is calculated as
of 4 p.m. on Tuesday.
    The timeline for the Methodology is as follows. APs have a 3 p.m.
cut-off for orders submitted by telephone, facsimile, and other
electronic means of communication and a 4 p.m. cut-off for orders
received via mail. AP orders by mail are exceedingly rare. Orders are
received by the Distributor and relayed to the Advisor within ten (10)
minutes. The Advisor will know by 3:10 p.m. the number of creation/
redemption orders by APs for that day. The Advisor, taking into account
creation and redemption orders for that day, then places orders,
consistent with the Solution, at approximately 3:40 p.m. as market-on-
close (MOC) orders. At 4 p.m., the Advisor will again look at the
exposure to make sure that these orders placed are consistent with the
Solution, and as described above, the Advisor will execute any other
transactions in Financial Instruments to assure that the Fund's
exposure is consistent with the Solution.

Availability of Information About the Shares and Underlying Indexes

    The Trust's or Advisor's Web site and/or that of the Exchange,
which is and will be publicly accessible at no charge, will contain the
following information for each Fund's Shares: (i) 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;\19\
(ii) data for a period covering at least the four previous 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
reported closing price and NAV, and the magnitude of such premiums and
discounts; (iii) its Prospectus and Product Description; and (iv) other
quantitative information such as daily trading volume. The Product
Description for each Fund will inform investors that the Advisor's Web
site has information about the premiums and discounts at which the
Fund's Shares have traded.\20\
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    \19\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on August 1, 2005 (as to removal of language
regarding Web site disclosure of the ``mid-point of the bid-asked
spread at the time that the Fund's NAV is calculated'' and
substitution of Web site disclosure of the ``reported closing
price'').
    \20\ See ``Prospectus Delivery'' below regarding the Product
Description. The Application requests relief from Section 24(d) of
the 1940 Act, which would permit dealers to sell Shares in the
secondary market unaccompanied by a statutory prospectus when
prospectus delivery is not required by the Securities Act of 1933.
Additionally, Commentary .03 of Amex Rule 1000A requires that Amex
members and member organizations provide to all purchasers of a
series of Index Fund Shares a written description of the terms and
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later
than the time of confirmation of the first transaction in such
series is delivered to such purchaser. Also, any sales material must
reference the availability of such circular and the prospectus.
Telephone Conversation between Jeffrey P. Burns, Associate General
Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on July 12, 2005.
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    The Amex will 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 (the ``IIV'')
(defined and discussed below under ``Dissemination of Indicative Intra-
Day Value (IIV)''), recent NAV, shares outstanding, estimated cash
amount, and total cash amount per Creation Unit (defined below). The
Exchange will make available on its Web site daily trading volume,
closing price, the NAV, and final dividend amounts, if any, to be paid
for each Fund. The closing prices of the Deposit Securities (defined
below) are readily available from, as applicable, exchanges, automated
quotation systems, published or other public sources, or on-line
information services such as Bloomberg or Reuters.
    Each Fund's total portfolio composition will be disclosed on the
Web site of the Trust (http://www.profunds.com) and/or the Exchange (http://www.amex.com). The Trust expects that Web site disclosure of

portfolio holdings will be made daily and will include, as applicable,
the names and number of shares held of each specific Equity Security,
the specific types of Financial Instruments and characteristics of such
instruments, cash equivalents and amount of cash held in the portfolio
of each Fund. This public Web site disclosure of the portfolio
composition of each Fund will coincide with the disclosure by the
Advisor of the ``IIV File'' (described below) and the ``PCF File''
(described below). Therefore, the same portfolio information (including
accrued expenses and dividends) will be provided on the public Web site
as well as in the IIV File and PCF File provided to APs. The format of
the public Web site disclosure and the IIV and PCF Files will differ
because the public Web site will list all portfolio holdings, while the
IIV and PCF Files will similarly provide the portfolio holdings but in
a format appropriate for APs, i.e., the exact components of a Creation
Unit (defined below). Accordingly, all investors will have access to
the current portfolio composition of each Fund through the Trust Web
site at http://www.profunds.com and/or the Exchange's Web site at

http://www.amex.com.\21\

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    \21\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on July 12, 2005 (as to daily disclosure to
the public of the portfolio composition that will be used to
calculate the Fund's NAV later that day).
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    Beneficial owners of Shares (``Beneficial Owners'') will receive
all of the statements, notices, and reports required under the 1940 Act
and other applicable laws. They will receive, for example, annual and
semi-annual fund reports, written statements accompanying dividend
payments, proxy statements, annual notifications detailing the tax
status of fund distributions, and Form 1099-DIVs. Some of these
documents will be provided to Beneficial Owners by their brokers, while
others will be provided by the Fund through the brokers.
    The daily closing index value and the percentage change in the
daily closing index value for each Underlying Index will be publicly
available on various Web sites, e.g., http://www.bloomberg.com. Data

regarding each Underlying Index is also available from the respective
index provider to subscribers. Several independent data vendors also
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 value of each Underlying
Index will be updated intra-day on a real time basis as its individual
component securities change in price. These intra-day values of each
Underlying Index will be disseminated every 15 seconds throughout the
trading day by the Amex or another organization authorized by the
relevant Underlying Index provider.

Creation and Redemption of Shares

    Each Fund will issue and redeem Shares only in initial aggregations
of at least 50,000 (``Creation Units''). Purchasers of Creation Units
will be able to separate the Units into individual Shares. Once the
number of Shares in a Creation Unit is determined, it will not change
thereafter (except in the event of a stock split or similar

revaluation). The initial value of a Share for each of the Bullish
Funds and Bearish Funds is expected to be in the range of $50-$250.
    At the end of each business day, the Trust will prepare the list of
names and the required number of shares of each Deposit Security (as
defined below) to be included in the next trading day's Creation Unit
for each Bullish Fund. The Trust will then add to the Deposit List (as
defined below), the cash information effective as of the close of
business on that business day and create a portfolio composition file
(``PCF'') for each Fund, which it will transmit (via the Index Receipt
Agent) to NSCC before the open of business the next business day. The
information in the PCF will be available to all participants in the
NSCC system.
    Because the NSCC's system for the receipt and dissemination to its
participants of the PCF is not currently capable of processing
information with respect to Financial Instruments, the Advisor has
developed an ``IIV File,'' which it will use to disclose the Funds'
holdings of Financial Instruments.\22\ The IIV File will contain, for
each Bullish Fund (to the extent that it holds Financial Instruments)
and Bearish Fund, information sufficient by itself or in connection
with the PCF File and other available information for market
participants to calculate a Fund's IIV and effectively arbitrage the
Fund.\23\
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    \22\ The Trust or the Advisor will post the IIV File to a
password-protected Web site before the opening of business on each
business day, and all NSCC participants and the Exchange will have
access to the password and the Web site containing the IIV File.
However, the Fund will disclose to the public identical information,
but in a format appropriate to public investors, at the same time
the Fund discloses the IIV and PCF files to industry participants.
Telephone conversation between Jeffrey P. Burns, Associate General
Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on August 2, 2005.
    \23\ An example of the information that will be provided in the
IIV File for a Bullish Fund holding Equity Securities and Bearish
Fund holding swaps and futures contracts (and Bullish Fund to the
extent it holds such financial instruments) is set forth in the
Notice.
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    The information in the IIV File will be sufficient for participants
in the NSCC system to calculate the IIV for Bearish Funds (e.g., the
amount of the cash deposited for Creation Unit Aggregations or paid
upon redemption of the Shares) and, together with the information on
Equity Securities contained in the PCF, will be sufficient for
calculation of IIV for Bullish Funds, during such next business
day.\24\ The IIV File, together with the applicable information in the
PCF in the case of Bullish Funds, will also be the basis for the next
business day's NAV calculation.
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    \24\ As noted below in ``Dissemination of Indicative Intra-Day
Value (IIV),'' the Exchange will disseminate through the facilities
of the CTA, at regular intervals (currently anticipated to be 15
second intervals) during the Exchange's regular trading hours, the
IIV on a per Fund Share basis.
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    For the Bullish Funds, the PCF File will be prepared by the Trust
after 4 p.m. and transmitted by the Index Receipt Agent to NSCC by 6:30
p.m. By 6:30 p.m., all NSCC participants (such as APs) and the Exchange
will also have access to the Web site containing the IIV File. The IIV
File will reflect the trades made on behalf of a Fund that business day
and the creation/redemption orders for that business day. Accordingly,
by 6:30 p.m., APs will know the composition of the Fund's portfolio for
the next trading day.
    The Cash Balancing Amount (defined below) will also be determined
shortly after 4 p.m. each business day. Although the Cash Balancing
Amount for most exchange-traded funds is a small amount reflecting
accrued dividends and other distributions, for both the Bullish and
Bearish Funds it is expected to be larger due to changes in the value
of the Financial Instruments, i.e., daily mark-to-market.\25\
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    \25\ See Notice for an example of the calculation of the Cash
Balancing Amount.
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Creation and Redemption of the Bullish Funds

    The process for APs \26\ purchasing Creation Units from Funds or
redeeming Shares in Creation Unit-Size Aggregations from the Funds is
set forth in the Notice. In summary, persons purchasing Creation Unit
Aggregations from the Bullish Funds do so through an ``in-kind''
process in which a basket of securities (the ``Deposit Securities''),
together with an amount of cash (the ``Cash Balancing Amount''), plus
the applicable transaction fee is deposited with the Fund. The
redeeming AP deposits Bullish Fund Shares in Creation Unit-Size
Aggregations in exchange for a basket of securities (the ``Redemption
Securities''), which in most cases will be the same as the Deposit
Securities required of investors purchasing Creation Units on the same
day. The redeeming AP may receive from or pay to the Fund a Cash
Balancing Amount and also must pay to the Fund a transaction fee. A
Fund has the right to require creation payments or a right to make
redemption payments in cash, in kind, or a combination of each.
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    \26\ APs are the only persons that may place orders to create
and redeem Creation Units. APs must be registered broker-dealers or
other securities market participants, such as banks and other
financial institutions, which are exempt from registration as
broker-dealers to engage in securities transactions, who are
participants in DTC.
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Creation and Redemption of the Bearish Funds

    As stated, the Bearish Funds will be purchased and redeemed
entirely for cash (``All-Cash Payments''). The use of an All-Cash
Payment for the purchase and redemption of Creation Unit Aggregations
of the Bearish Funds is due to the limited transferability of Financial
Instruments.
    The Exchange believes that Bearish Fund Shares will not trade at a
material discount or premium to the underlying securities held by a
Fund based on potential arbitrage opportunities. The arbitrage process,
which provides the opportunity to profit from differences in prices of
the same or similar securities, increases the efficiency of the markets
and serves to prevent potentially manipulative efforts. If the price of
a Share deviates enough from the Creation Unit, on a per share basis,
to create a material discount or premium, an arbitrage opportunity is
created allowing the arbitrageur to either buy Shares at a discount,
immediately cancel them in exchange for the Creation Unit and sell the
underlying securities in the cash market at a profit, or sell Shares
short at a premium and buy the Creation Unit in exchange for the Shares
to deliver against the short position. In both instances the
arbitrageur locks in a profit and the markets move back into line.\27\
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    \27\ In their 1940 Act Application, the Applicants stated that
they do not believe that All-Cash Payments will affect arbitrage
efficiency. This is because Applicants believe it makes little
difference to an arbitrageur whether Creation Unit Aggregations are
purchased in exchange for a basket of securities or cash. The
important function of the arbitrageur is to bid the share price of
any Fund up or down until it converges with the NAV. Applicants note
that this can occur regardless of whether the arbitrageur is allowed
to create in cash or with a Deposit Basket. In either case, the
arbitrageur can effectively hedge a position in a Fund in a variety
of ways, including the use of market-on-close contracts to buy or
sell the underlying Equity Securities and/or Financial Instruments.
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Placement of Creation Unit Aggregation Purchase and Redemption Orders

    Payment with respect to Creation Unit Aggregations of the Bullish
Funds placed through the Distributor generally will be made by In-Kind
Payments and cash, while All-Cash Payments will be accepted in the case
of the Bearish Funds and certain other cases. Placement of Creation
Unit Aggregation Purchase and Redemption Orders is described in more
detail in the Notice and is generally done on a T+3 basis.

Dividends

    Dividends, if any, from net investment income will be declared and
paid at least annually by each Fund in the same manner as by other
open-end investment companies. Certain Funds may pay dividends on a
semi-annual or more frequent basis. Distributions of realized
securities gains, if any, generally will be declared and paid once a
year.
    Dividends and other distributions on the Shares of each Fund will
be distributed, on a pro rata basis, to Beneficial Owners of such
Shares. Dividend payments will be made through the Depository and the
DTC Participants to Beneficial Owners then of record with proceeds
received from each Fund.
    The Trust will not make the DTC book-entry Dividend Reinvestment
Service (the ``Dividend Reinvestment Service'') available for use by
Beneficial Owners for reinvestment of their cash proceeds but certain
individual brokers may make a Dividend Reinvestment Service available
to Beneficial Owners. Additional information about this service is
provided in the Notice.

Dissemination of Indicative Intra-Day Value (IIV)

    In order to provide updated information relating to each Fund for
use by investors, professionals, and persons wishing to create or
redeem Shares, the Exchange will disseminate through the facilities of
the CTA: (i) Continuously throughout the trading day, the market value
of a Share; and (ii) every 15 seconds throughout the trading day, a
calculation of the Indicative Intra-Day Value or ``IIV'' \28\ as
calculated by a third party calculator (the ``IIV Calculator'')
currently expected to be the Exchange.\29\ Comparing these two figures
helps an investor to determine whether, and to what extent, the Shares
may be selling at a premium or a discount to NAV.
---------------------------------------------------------------------------

    \28\ The IIV is also referred to by other issuers as an
``Underlying Trading Value,'' ``Indicative Optimized Portfolio Value
(IOPV),'' and ``Intra-day Value'' in various places such as the
prospectus and marketing materials for different exchange-traded
funds.
    \29\ Telephone Conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, on July 12, 2005.
---------------------------------------------------------------------------

    The IIV Calculator will calculate an IIV for each Fund, including
those Funds that do not hold Equity Securities, in the manner discussed
below. The IIV is designed to provide investors with a reference value
that can be used in connection with other related market information.
The IIV may not reflect the value of all securities included in the
Underlying Index. In addition, the IIV does not necessarily reflect the
precise composition of the current portfolio of securities held by each
Fund at a particular point in time. Therefore, the IIV on a per Share
basis disseminated during Amex trading hours, should not be viewed as a
real time update of the NAV of a particular Fund, which is calculated
only once a day. While the IIV that will be disseminated by the Amex is
expected to be close to the most recently calculated Fund NAV on a per
share basis, it is possible that the value of the portfolio of
securities held by a Fund may diverge from the value of the Deposit
Securities during any trading day. In such case, the IIV will not
precisely reflect the value of the Fund portfolio.
    IIV Calculation For the Bullish Funds holding Equity Securities and
Financial Instruments. The IIV Calculator will disseminate the IIV
throughout the trading day for Funds holding Equity Securities and
Financial Instruments. The IIV Calculator will determine such IIV by:
(i) Calculating the estimated current value of Equity Securities held
by such Fund by (a) calculating the percentage change in the value of
the Deposit List (as provided by the Trust) and applying that
percentage value to the total value of the Equity Securities in the
Fund as of the close of trading on the prior trading day (as provided
by the Trust) or (b) calculating the current value of all of the Equity
Securities held by the Fund (as provided by the Trust); (ii)
calculating the mark-to-market gains or losses from the Fund's total
return equity swap exposure based on the percentage change to the
Underlying Index and the previous day's notional values of the swap
contracts, if any, held by such Fund (which previous day's notional
value will be provided by the Trust); (iii) calculating the mark-to-
market gains or losses from futures, options, and other Financial
Instrument positions by taking the difference between the current value
of those positions held by the Fund, if any (as provided by the Trust),
and the previous day's value of such positions; (iv) adding the values
from (i), (ii), and (iii) above to an estimated cash amount provided by
the Trust (which cash amount will include the swap costs) to arrive at
a value; and (v) dividing that value by the total shares outstanding
(as provided by the Trust) to obtain the current IIV.
    IIV Calculation for the Bearish Funds. The IIV Calculator will
disseminate the IIV throughout the trading day for the Bearish Funds.
The IIV Calculator will determine such IIV by: (i) Calculating the
mark-to-market gains or losses from the Fund's total return equity swap
exposure based on the percentage change to the Underlying Index and the
previous day's notional values of the swap contracts, if any, held by
such Fund (which previous day's notional value will be provided by the
Trust); (ii) calculating the mark-to-market gains or losses from
futures, options, and other Financial Instrument positions by taking
the difference between the current value of those positions held by the
Fund, if any (as provided by the Trust), and the previous day's value
of such positions; (iii) adding the values from (i) and (ii) above to
an estimated cash amount provided by the Trust (which cash amount will
include the swap costs), to arrive at a value; and (iv) dividing that
value by the total shares outstanding (as provided by the Trust) to
obtain current IIV.

Criteria for Initial and Continued Listing

    The Shares are subject to the criteria for initial and continued
listing of Index Fund Shares in Rule 1002A. It is anticipated that a
minimum of two Creation Units (100,000 Shares) will be required to be
outstanding at the start of trading. This minimum number of Shares
required to be outstanding at the start of trading will be comparable
to requirements that have been applied to previously listed series of
Portfolio Depositary Receipts and Index Fund Shares. As stated, the
initial price of a Share is expected to be in the range of $50-$250.
    The Exchange believes that the proposed minimum number of Shares
outstanding at the start of trading is sufficient to provide market
liquidity.

Original and Annual Listing Fees

    The Amex original listing fee applicable to the listing of the
Funds is $5,000 for each Fund. In addition, the annual listing fee
applicable to the Funds under Section 141 of the Amex Company Guide
will be based upon the year-end aggregate number of outstanding shares
in all Funds of the Trust listed on the Exchange.

Stop and Stop Limit Orders

    Amex Rule 154, Commentary .04(c) provides that stop and stop limit
orders to buy or sell a security (other than an option, which is
covered by Rule 950(f) and Commentary thereto) the price of which is
derivatively priced based upon another security or index of securities,
may with the prior approval of a Floor Official, be elected by a
quotation, as set forth in Commentary .04(c) (i-v). The Exchange has
designated Index Fund

Shares, including the Shares, as eligible for this treatment.\30\
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 29063 (April 10,
1991), 56 FR 15652 (April 17, 1991) at note 9, regarding the
Exchange's designation of equity derivative securities as eligible
for such treatment under Rule 154, Commentary .04(c).
---------------------------------------------------------------------------

Rule 190

    Rule 190, Commentary .04 applies to Index Fund Shares listed on the
Exchange, including the Shares. Commentary .04 states that nothing in
Rule 190(a) should be construed to restrict a specialist registered in
a security issued by an investment company from purchasing and
redeeming the listed security, or securities that can be subdivided or
converted into the listed security, from the issuer as appropriate to
facilitate the maintenance of a fair and orderly market.

Prospectus Delivery

    The Exchange, in an Information Circular to Exchange members and
member organizations, prior to the commencement of trading, will inform
members and member organizations, regarding the application of
Commentary .03 to Rule 1000A the Funds. The Information Circular will
further inform members and member organizations of the prospectus and/
or Product Description delivery requirements that apply to the Funds.
The Application included a request that the exemptive order also grant
relief from Section 24(d) of the 1940 Act. Any Product Description used
in reliance on Section 24(d) exemptive relief will comply with all
representations and conditions set forth in the Application.

Trading Halts

    In addition to other factors that may be relevant, the Exchange may
consider factors such as those set forth in Rule 918C(b) in exercising
its discretion to halt or suspend trading in Index Fund Shares. These
factors would include, but are not limited to, (i) the extent to which
trading is not occurring in securities comprising an Underlying Index
and/or the Financial Instruments of a Fund, or (ii) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present. (See Amex Rule 918C). In the case
of any Financial Instruments held by a Fund, the Exchange represents
that a notification procedure will be implemented so that timely notice
from the Advisor is received by the Exchange when a particular
Financial Instrument is in default or shortly to be in default. This
notification from the Advisor will be through phone, e-mail and/or fax.
The Exchange would then determine on a case-by-case basis whether a
default of a particular Financial Instrument justifies a trading halt
of the Shares. Trading in shares of the Funds will also be halted if
the circuit breaker parameters under Amex Rule 117 have been reached.

Suitability

    Prior to commencement of trading, the Exchange will issue an
Information Circular to its members and member organizations providing
guidance with regard to member firm compliance responsibilities
(including suitability obligations) when effecting transactions in the
Shares and highlighting the special risks and characteristics of the
Funds and Shares as well as applicable Exchange rules. This Information
Circular will set forth the requirements relating to Commentary .05 to
Amex Rule 411 (Duty to Know and Approve Customers). Specifically, the
Information Circular will remind members of their obligations in
recommending transactions in the Shares so that members have a
reasonable basis to believe that (i) the recommendation is suitable for
a customer given reasonable inquiry concerning the customer's
investment objectives, financial situation, needs, and any other
information known by such member, and (ii) that the customer can
evaluate the special characteristics, and is able to bear the financial
risks, of such investment. In connection with the suitability
obligation, the Information Circular will also provide that members
make reasonable efforts to obtain the following information: (i) The
customer's financial status; (ii) the customer's tax status; (iii) the
customer's investment objectives; and (iv) such other information used
or considered to be reasonable by such member or registered
representative in making recommendations to the customer.

Purchases and Redemptions in Creation Unit Size

    In the Information Circular referenced above, members and member
organizations will be informed that procedures for purchases and
redemptions of Shares in Creation Unit Size are described in each
Fund's prospectus and Statement of Additional Information, and that
Shares are not individually redeemable but are redeemable only in
Creation Unit Size aggregations or multiples thereof.

Surveillance

    The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares. Specifically,
the Amex will rely on its existing surveillance procedures governing
Index Fund Shares, which have been deemed adequate under the Exchange
Act. In addition, the Exchange also has a general policy prohibiting
the distribution of material, non-public information by its employees.

Hours of Trading/Minimum Price Variation

    The Funds will trade on the Amex until 4:15 p.m. (New York time)
each business day. Shares will trade with a minimum price variation of
$.01.

III. Commission's Findings

    After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with Section 6 of the Act,\31\
and the rules and regulations thereunder, applicable to a national
securities exchange.\32\ The Commission believes that the Exchange's
proposed listing standards, trading rules, suitability and disclosure
rules for the Funds are consistent with the Act.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b).
    \32\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
---------------------------------------------------------------------------

A. Surveillance

    The Commission believes that because the Underlying Indexes are
broad-based and are composed of securities having significant trading
volumes and market capitalization, improper trading practices in the
Shares and the ability to use the Shares to manipulate the underlying
securities will be limited. Moreover, the issuers of the securities
comprising the Underlying Indexes are subject to reporting requirements
under the Act, and all of the component stocks are either listed or
traded on, or traded through the facilities of, U.S. securities
markets, and thus subject to real-time transaction reporting, which
should further deter manipulation.

B. Dissemination of Information About the Shares

    In approving the Funds for trading on the Amex, the Commission
notes that the Underlying Indexes are broad-based, widely-disseminated
indexes, which underlie numerous listed products. These index values
are widely-disseminated on a real-time basis at least every 15 seconds
throughout the trading day during the period in which

the Shares will trade on Amex. Additionally, the Commission notes that
the Exchange will disseminate through the facilities of CTA at least
every 15 seconds a calculation of the IIV, along with an updated market
value of the Shares. Comparing these two figures will help investors to
determine whether, and to what extent, the Shares may be selling at a
premium or discount to NAV and thus will facilitate arbitrage of the
Shares in relation to the Index component securities.
    The Commission also notes that the Trust's or Advisor's Web site
and/or that of the Exchange, which is and will be publicly accessible
at no charge, will contain the Shares' prior business day NAV, the
reported closing price, and a calculation of the premium or discount of
such price in relation to the closing NAV.
    The Funds' total portfolio composition will be disclosed to all
market participants at the same time on the Web site of the Trust
(http://www.profunds.com) and/or the Exchange (http://www.amex.com).
The Commission believes that such disclosure is reasonably designed to
facilitate a functional arbitrage mechanism and mitigate the risks of
improper market activity that could arise from inconsistent disclosure
of information.

C. Listing and Trading

    The Commission finds that the Exchange's proposed rules and
procedures for the listing and trading of the Shares are consistent
with the Act. Shares will trade as equity securities subject to Amex
rules including, among others, rules governing trading halts,
specialist activities, stop and stop limit orders, prospectus delivery,
and customer suitability requirements. In addition, the Shares will be
subject to Amex listing and delisting/suspension rules and procedures
governing the trading of Index Fund Shares on the Exchange. The
Commission believes that listing and delisting criteria for the Shares
should help to maintain a minimum level of liquidity and therefore
minimize the potential for manipulation of the Shares. Finally, the
Commission believes that the information circular the Exchange will
distribute will inform members and member organizations about the
terms, characteristics, and risks in trading the Shares.

IV. Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving the proposed
Amendment No. 4 before the thirtieth day of publication of notice of
filing thereof in the Federal Register. The Amex filed Amendment No. 4
to clarify the proposed rule text. Specifically, Amendment No. 4 makes
clear that, as part of the creation and redemption process, APs will
deposit or receive only stocks and/or cash. The Commission believes
that Amex's proposed changes in Amendment No. 4 clarify the proposed
rule change, raise no new regulatory issues and are consistent with the
Act. Based on the above, the Commission finds good cause for
accelerating approval of Amendment No. 4.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 4, including whether the amendment
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_ADDRESS>Please include

File Number SR-Amex-2004-62 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Amex-2004-62. 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 the Amex. 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-Amex-2004-62 and should be submitted on or before
November 1, 2005.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\33\ that the proposed rule change, as amended, (SR-Amex-2004-62)
is approved, and that Amendment No. 4 to the proposed rule change be,
and hereby is, approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).
    \34\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-5563 Filed 10-7-05; 8:45 am]

BILLING CODE 8010-01-P


Comment Info: =================

General Comment:Dear Mr. Zeller:

I am writing as an individual consumer to request an extension of the comment period for the Food and Drug Administration's ("FDA") Proposed Rule Deeming Tobacco Products to be Subject to the Federal Food, Drug, and Cosmetic Act, as amended by the Family Smoking and Prevention and Tobacco Control Act (the "Proposed Rule") published at 79 Fed. Reg. 23,142 and Federal Register No. 2014-09491. On behalf of my friends who use e-cigarettes, I am requesting that the comment period for the Proposed Rule be extended by the FDA for an additional 105 days, from its current 75-day period, to 180 days.

The Proposed Rule raises a number of significant issues and questions that are important and relevant to my friends, as a consumer of products that are proposed for regulation under the Proposed Rule. The Proposed Rule asks about a hundred different questions to respond to which I may want to respond. I want to provide my thoughts and comments on many of these issues, but my time to devote to researching and providing thoughtful comments on these important questions is limited. I have already spent many hours researching and dissecting these issues, but they take time. I know that the FDA took many years to even come up with the Proposed Rule, so I do not think it is at all unreasonable to allow the public a mere six months to comment on it. This is our only opportunity, as consumers, to provide our feedback.

I feel very strongly about e-cigarettes as an alternative to combustible cigarettes. Quite simply, I firmly believe that they saved the lives of people about whom I care. I wish to provide you with their personal stories, as well as science- and evidence-based responses to your questions so that you can take these comment into account. I realize that the FDA has the authority under 21 CFR 10.40 to extend this time frame and that the FDA has exercised this authority on numerous occasions in the past. I would therefore ask that you do so here, so that all stakeholders have the opportunity to provide their comments on this proposed regulation.

I appreciate your consideration of my request and am happy to discuss this issue with you further.