[Federal Register: December 27, 2007 (Volume 72, Number 247)]
[Notices]
[Page 73404-73415]
[DOCID:fr27de07-111]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56998; File No. SR-Amex-2007-104]

Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, To List and Trade
Shares of Eleven Funds of the ProShares Trust

December 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 September 18, 2007, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been substantially prepared by the
Exchange. On December 18, 2007, Amex filed Amendment No. 1 to the
proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 1, 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 list and trade shares (``Shares'') of 11
funds (``Funds'') of the ProShares Trust (``Trust'') based on a
domestic stock index and several fixed income indexes.
    The text of the proposed rule change is available at http://www.amex.com
, at 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, Amex 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. Amex 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose

    The Exchange proposes to list under amended Rule 1000A-AEMI, shares
of 10 new funds of the Trust that are designated as Short Funds or
UltraShort Funds, and one new fund designated as an Ultra Fund. Amex
Rules 1000A-AEMI and Rule 1001A through 1005A 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 Act. Index Fund Shares are defined in
Rule 1000A-AEMI(b)(1) 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.
    Rule 1000A-AEMI(b)(2) permits the Exchange to list and trade Index
Fund Shares that seek to provide investment results that exceed the
performance of an underlying securities index by a specified multiple,
or that seek to provide investment results that correspond to a
specified multiple of the inverse or opposite of the index's
performance. The Commission has recently approved the listing and
trading of certain Ultra Funds, Short Funds and UltraShort Funds based
on a variety of underlying indexes.\3\
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    \3\ See Securities Exchange Act Release No. 52553 (October 3,
2005), 70 FR 59100 (October 11, 2005) (SR-Amex-2004-62)(''Original
Order''); see also Securities Exchange Act Release Nos. 54040 (June
23, 2006), 71 FR 37669 (June 30, 2006) (SR-Amex 2006-41); 55117
(January 17, 2007), 72 FR 3442 (January 25, 2007) (SR-Amex-2006-
101).

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    Each of the Funds will have a distinct investment objective.\4\
Each Fund will attempt, on a daily basis, to achieve its investment
objective by corresponding to a specified multiple of the performance,
the inverse performance, or an inverse multiple of the performance of a
particular fixed income or equity securities index (individually
referred to as the ``Underlying Index'' and collectively referred to as
the ``Underlying Indexes'') as briefly described below. The Funds will
be based on the following benchmark indexes:
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    \4\ The Funds are as follows: (1) Short Lehman Brothers 7-10
Year U.S. Treasury ProShares; (2) Short Lehman Brothers 20+ Year
U.S. Treasury ProShares; (3) Short iBoxx $ Liquid Investment Grade
ProShares; (4) Short iBoxx $ Liquid High Yield ProShares; (5) Short
Dow Jones Select Telecommunications ProShares; (6) UltraShort Lehman
Brothers 7-10 Year U.S. Treasury ProShares; (7) UltraShort Lehman
Brothers 20+ Year U.S. Treasury ProShares; (8) UltraShort iBoxx $
Liquid Investment Grade ProShares; (9) UltraShort iBoxx $ Liquid
High Yield ProShares; (10) UltraShort Dow Jones Select
Telecommunications ProShares; and (11) Ultra Dow Jones Select
Telecommunications ProShares.
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     Lehman Brothers 7-10 Year U.S. Treasury Index;
     Lehman Brothers 20+ Year U.S. Treasury Index;
     iBoxx $ Liquid Investment Grade Index;
     iBoxx $ Liquid High Yield Index; and
     Dow Jones U.S. Select Telecommunications Index (together,
the ``Underlying Indexes'').\5\
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    \5\ 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 of Trustees of the Trust. In such instance, the
substitute index would attempt to measure the same general market as
the current index. Consistent with applicable law, shareholders will
be notified (either directly or through their intermediary) in the
event a Fund's current index is replaced.
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    Short Funds:
    The Exchange proposes to list and trade shares of the 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 each of these Funds is
successful in meeting its objective, the net asset value (``NAV'') 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, before fees
and expenses.
    UltraShort Funds:
    The Exchange also proposes to list and trade shares of the 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 each of these Funds is
successful in meeting its objective, the NAV of shares of each Fund
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 the prices
of the securities in the index rise on a given day, before fees and
expenses.
    The Short Funds and UltraShort Funds each have investment
objectives that seek investment results corresponding to an inverse
performance of the Underlying Indexes and are collectively referred to
as the ``Bearish Funds.''
    Ultra Fund:
    Finally, the Exchange proposes to list and trade shares of one Fund
\6\ that seeks daily investment results, before fees and expenses, that
corresponds to twice (200%) the daily performance of the Underlying
Index (``Ultra Fund'' or ``Bullish Fund''). This Fund, if successful in
meeting its investment objective, should gain, on a percentage basis,
approximately twice as much as the Fund's Underlying Index when the
price 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.
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    \6\ The Ultra Fund will be based on the Dow Jones U.S. Select
Telecommunications Index.
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Underlying Indexes

    According to Rule 1000A-AEMI(b)(2), the Exchange may not list and
trade Index Fund Shares under its generic listing standards adopted
pursuant to Rule 19b-4(e) if the Index Fund Shares are leveraged, that
is, they seek to provide investment results that either exceed or
correspond to the inverse of the performance of a specified foreign or
domestic stock index by a specified multiple.\7\ While the Exchange is
proposing to list and trade the Funds pursuant to section 19(b)(1) of
the Act, the Exchange represents that the indexes and their respective
components (as described below) comply with the generic listing
standards set forth in Commentary .02 and Commentary .03 to Amex Rule
1000A-AEMI.\8\
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    \7\ See Rule 1000A-AEMI(b)(2)(iii) and Commentary .02 thereto.
    \8\ The Exchange represents that Shares based on the Underlying
Indexes would meet the criteria set forth in Commentary .04 through
.06, .08 and .09 to Amex Rule 1000A-AEMI.
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Lehman Brothers 7-10 Year U.S. Treasury Index
    The index is market capitalization weighted and includes all
publicly issued U.S. Treasury Securities that have a remaining maturity
of between 7 and 10 years and have more than $250 million par
outstanding. The index value is calculated and published daily by 10:00
p.m. Eastern Time (``ET''). The Commission has previously approved the
listing and trading on the Amex of an exchange-traded fund based on the
iShares Lehman 7-10 Year Treasury Index.\9\
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    \9\ See Securities Exchange Act Release No. 46252 (July 24,
2002), 67 FR 49715 (July 31, 2002) (SR-Amex-2001-35). The iShares
Lehman Brothers 7-10 Year Treasury Bond ETF (IEF) is listed and
traded on the Exchange.
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Lehman Brothers 20+ Year U.S. Treasury Index

    The index is market capitalization weighted and includes all
publicly issued U.S. Treasury Securities that have a remaining maturity
greater than 20 years and have more than $150 million par outstanding.
The index value is calculated and published daily by 10:00 p.m. ET. The
Commission has previously approved the listing and trading on the Amex
of an exchange-traded fund based on the Lehman Brothers 20+ Year U.S.
Treasury Index.\10\
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    \10\ See id. The iShares Lehman Brothers 20+ Year Treasury Bond
ETF (TLT) is listed and traded on the Exchange.
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iBoxx $ Liquid Investment Grade Index

    The index is a rules-based index consisting of up to 100 highly
liquid, investment grade, U.S. dollar-denominated corporate bonds with
a minimum amount outstanding of $500 million that seeks to maximize
liquidity while maintaining representation of the broader investment
grade corporate bond market. The index consists of issuers domiciled in
the U.S., Bermuda, Cayman Islands, Canada, Japan or Western Europe. The
index is equally priced weighted and is re-balanced monthly. The index
value is calculated and published daily by 4:30 p.m. ET. The Commission
has previously approved the listing and trading on the Amex of an
exchange-traded fund based

on the iBoxx $ Liquid Investment Grade Index.\11\
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    \11\ See id. The iShares iBoxx $ Investment Grade Corporate Bond
Fund (LQD) (formerly the GS $ InvesTop Index) is listed and traded
on the Exchange.
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iBoxx $ Liquid High Yield Index

    The index is a rules-based index consisting of up to 50 of the most
liquid, high yield, U.S. dollar-denominated corporate bonds with a
minimum amount outstanding of $200 million that seeks to maximize
liquidity while maintaining representation of the broader high yield
corporate bond market. The index consists of issuers domiciled in the
U.S., Bermuda, Cayman Islands, Canada, Japan, or Western Europe. The
index is equally priced weighted and is re-balanced monthly. The index
value is calculated and published daily by 4:30 p.m. ET. An exchange-
traded fund based on the iBoxx $ Liquid High Yield Index is listed and
trade on the Exchange.\12\
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    \12\ The iBoxx High Yield Corporate Bond Fund (HYG) is listed
and traded on the Exchange pursuant to the Exchange's generic
listing standards. See Commentary .03 to Rule 1000A-AEMI (setting
forth standards for indexes based on fixed income securities).
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Dow Jones U.S. Select Telecommunications Index

    The Dow Jones U.S. Select Telecommunications Index is a float-
adjusted market capitalization weighted index designed to measure the
performance of the telecommunications economic sector of the U.S.
equity market. Component companies include fixed line and mobile
telecommunications companies. Component weights are capped for
diversification. The universe for the index includes all common stocks
of companies in the Dow Jones U.S. Select Telecommunications Index that
are categorized as belonging to the telecommunications sector, based on
Industry Classification Benchmark (ICB) definitions. The company at the
90% cumulative market capitalization of the index must have a float
adjusted market capitalization of at least $75 million. The Index value
is calculated and disseminated every 15 seconds during Amex's trading
hours.
    The Exchange represents that the Dow Jones U.S. Select
Telecommunications Index meets the Exchange's generic listing standards
for Index Fund Shares.\13\
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    \13\ See Commentary .02 to Rule 1000A-AEMI.
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The Funds

    ProShare Advisors LLC is the investment advisor (``Advisor'') to
each Fund. The Advisor is registered under the Investment Advisers Act
of 1940.\14\ While the Advisor will manage each Fund, the Trust's Board
of Trustees (``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.
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    \14\ The Trust, Advisor and Distributor (``Applicants'') have
filed with the Commission an Application to amend the 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. 812-13382).
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    SEI Investments Distribution Company (``Distributor''), a broker-
dealer registered under the Act, would act as the distributor and
principal underwriter of the Shares. JPMorgan Chase Bank, N.A. would
act as the index receipt agent (``Index Receipt Agent'') for the
Bullish Fund for which it will receive fees. The Index Receipt Agent
would be responsible for transmitting a list of names and the required
number of shares of each deposit basket of equity securities (``Deposit
Securities'') to be included in the Creation Deposit for the Bullish
Fund (``Deposit List'') to the National Securities Clearing Corporation
(``NSCC'') and for the processing, clearance and settlement of purchase
and redemption orders through the facilities of the Depository Trust
Company (``DTC'') and NSCC on behalf of the Trust. When applicable, the
Index Receipt Agent will also be responsible for the coordination and
transmission of files and purchase and redemption orders between the
Distributor and the NSCC.
    Shares of the Funds issued by the Trust will be a class of
exchange-traded securities that represent an interest in the portfolio
of a particular Fund.\15\ Shares would be registered in book-entry form
only and the Trust would not issue individual share certificates. The
DTC or its nominee would be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares would be shown on
the records of DTC or DTC Participants.
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    \15\ The Trust is also registered as a business trust under the
Delaware Corporate Code.
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Investment Objective of the Funds

    The Bearish Funds would seek daily investment results, before fees
and expenses, of the inverse or opposite (-100%) of the Underlying
Index while the UltraShort funds would seek daily investment results,
before fees and expenses, of twice the inverse or opposite (-200%) of
the daily performance of the Underlying Index. The Bearish Funds would
not invest directly in the component securities of the relevant
Underlying Index, but instead, would create short exposure to such
Index. Each Bearish Fund would rely on establishing positions in
financial instruments (as defined below) that provide, on a daily
basis, the inverse or opposite of, or twice the inverse or opposite of,
the performance of the relevant Underlying Index. Normally 100% of the
value of the portfolios of each Fund would be devoted to such financial
instruments and money market instruments.
    The Bullish Fund would seek investment results that corresponds,
before fees and expenses, to twice (200%) the daily performance of the
Underlying Index and would invest its assets based upon the same
strategies as conventional index funds. Rather than holding positions
in equity securities and financial instruments intended to create
exposure to 100% of the daily performance of an underlying index, the
Bullish Fund would hold equity securities and financial instruments
positions designed to create exposure equal to twice (200%), before
fees and expenses, the daily performance of the Underlying Index. The
Bullish Fund generally would hold 85% to 100% of its assets in the
component equity securities of the Underlying Index. The remainder of
assets would be devoted to Financial Instruments and Money Market
Instruments (as defined below) that are intended to create the
additional needed exposure to such Underlying Index necessary to pursue
its investment objective.
    The financial instruments to be held by any of the Funds may
include stock index futures contracts, options on futures contracts,
options on securities and indices, equity caps, collars and floors as
well as swap agreements, forward contracts, repurchase agreements and
reverse repurchase agreements (``Financial Instruments''). Money market
instruments include U.S. government securities and repurchase
agreements \16\ (``Money Market Instruments'').
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    \16\ Repurchase agreements held by the Funds will be consistent
with Rule 2a-7 under the 1940 Act.
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    While the Advisor would attempt to minimize any ``tracking error''
between the investment results of a particular Fund and the performance
(and specified multiple thereof) or the 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 Bullish Fund is expected to be
highly correlated to the Underlying Index and investment objective (.95
or greater). The Bearish Funds are expected to be highly inversely
correlated to each Underlying Index and investment objective (-.95 or
greater).\18\ In each case, the Funds are expected to have a daily
tracking error of less than 5% (500 basis points) relative to the
specified multiple, inverse, or inverse multiple of the performance of
the relevant Underlying Index.
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    \17\ Several factors may cause a Fund to vary from the relevant
Underlying Index and investment objective including: (1) A Fund's
expenses, including brokerage fees (which may be increased by high
portfolio turnover) and the cost of the investment techniques
employed by that Fund; (2) less than all of the securities in the
benchmark index being held by a Fund and securities not included in
the benchmark index being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund,
such as futures contracts, and the performance of the underlying
securities in the cash market; (4) bid-ask spreads (the effect of
which may be increased by portfolio turnover); (5) holding
instruments traded in a market that has become illiquid or
disrupted; (6) a Fund's share prices being rounded to the nearest
cent; (7) changes to the benchmark index that are not disseminated
in advance; (8) the need to conform a Fund's portfolio holdings to
comply with investment restrictions or policies or regulatory or tax
law requirements; and (9) early and unanticipated closings of the
markets on which the holdings of a Fund trade, resulting in the
inability of the Fund to execute intended portfolio transactions.
    \18\ Correlation is the strength of the relationship between (1)
the change in a Fund's NAV and (2) the change in the benchmark index
(investment objective). The statistical measure of correlation is
known as the ``correlation coefficient.'' A correlation coefficient
of +1 indicates a perfect positive correlation while a value of -1
indicates a perfect negative (inverse) correlation. A value of zero
would mean that there is no correlation between the two variables.
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The Portfolio Investment Methodology

    The Advisor would seek to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective based upon
its Portfolio Investment Methodology. The Portfolio Investment
Methodology is a mathematical model based on well-established
principles of finance that are widely used by investment practitioners,
including conventional index fund managers.
    As set forth in the Application, the Portfolio Investment
Methodology was designed to determine for each Fund the portfolio
investments needed to achieve its stated investment objectives. The
Portfolio Investment Methodology takes into account a variety of
specified criteria and data (``Inputs''), the most important of which
are: (1) Net assets (taking into account creations and redemptions) in
each Fund's portfolio at the end of each trading day, (2) the amount of
required exposure to the Underlying Index, and (3) the positions in
equity securities (if applicable), Financial Instruments and/or Money
Market Instruments at the beginning of each trading day. The Advisor,
pursuant to the methodology, would then mathematically determine the
end-of-day positions to establish the required amount of exposure to
the Underlying Index (``Solution''), which would consist of equity
securities (if applicable), Financial Instruments and/or 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
(if applicable), Financial Instruments and/or Money Market Instruments
that must be bought or sold for the day. The Solution represents the
required exposure and, when necessary, is converted into an order or
orders 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 trade is made. Therefore, the NAV calculated for a Fund on a
given day should reflect 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. For the Bearish Funds described herein, these trades would
then be reflected in the NAV for that Fund that is generally calculated
as of 3 p.m. ET on Tuesday (or earlier as necessary).\19\
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    \19\ The Bearish Funds are based on the following fixed income
indexes: (1) The Lehman Brothers 7-10 Year U.S. Treasury Index; (2)
the Lehman Brothers 20+ Year U.S. Treasury Index; (3) the iBoxx $
Liquid Investment Grade Index; and (4) the iBoxx $ Liquid High Yield
Index.
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    The timeline for the Methodology is as follows: Authorized
Participants (``APs'' or ``Authorized Participant'') have a 2 p.m. ET
cut-off (or earlier as necessary) for orders submitted by telephone,
facsimile and other electronic means of communication and a 4 p.m. ET
cut-off for orders received via mail.\20\ AP orders by mail are
exceedingly rare. Orders are received by the Distributor and relayed to
the Advisor within 10 minutes. The Advisor would know by 2:10 p.m. ET
the number of creation/redemption orders by APs for that day.
Subsequently, the Advisor generally puts orders into the market between
2:30 p.m. and 2:55 p.m. ET in order to obtain requisite portfolio
exposure consistent with the Solution. At 3 p.m. ET, the Advisor would
again look at the exposure to make sure that the orders placed are
consistent with the Solution, and as described above, the Advisor would
execute any other transactions in Financial Instruments to assure that
the Fund's exposure is consistent with the Solution.
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    \20\ An Authorized Participant is either (1) A broker-dealer or
other participant in the continuous net settlement system of the
NSCC or (2) A DTC participant, and which has entered into a
participant agreement with the Distributor. Orders for the ten Short
Funds and UltraShort Funds described herein may not be placed on
days where the equity markets are open, but the fixed income markets
are closed.
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    For the Bullish Fund,\21\ portfolio trades effected pursuant to the
Solution are reflected in the NAV on the first business day (T+1) after
the date the relevant trade is made. Therefore, the NAV calculated for
a Fund on a given day should reflect 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 would then be reflected in the NAV
for that Fund that is calculated as of 4 p.m. ET on Tuesday.
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    \21\ This fund is based on the Dow Jones U.S. Select
Telecommunications Index.
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    The timeline for the Methodology is as follows: Authorized
Participants have a 3 p.m. ET cut-off for orders submitted by
telephone, facsimile and other electronic means of communication and a
4 p.m. ET 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 10 minutes. The Advisor would know by 3:10 p.m. ET
the number of creation/redemption orders by APs for that day. Orders
are then placed at approximately 3:40 p.m. ET as market-on-close (MOC)
orders. At 4 p.m. ET, the Advisor would again look at the exposure to
make sure that the orders placed are consistent with the Solution, and
as described above, the Advisor would execute any other transactions in
Financial Instruments to assure that the Fund's exposure is consistent
with the Solution.

Description of Investment Techniques

    In attempting to achieve its individual investment objectives, a
Fund may invest its assets in equity securities, Financial Instruments
and Money Market Instruments (collectively, ``Portfolio Investments'').
The Bullish Fund would hold between 85-100% of its total assets in the
equity securities contained in the relevant Underlying Index. The
remainder of assets, if any, would be devoted to Financial Instruments
and Money Market Instruments that are intended to create additional
needed exposure to such

Underlying Index necessary to pursue the Bullish Fund's investment
objectives. The Bearish Funds generally would not invest in equity
securities but rather would hold only Financial Instruments and Money
Market Instruments. To the extent applicable, each Fund would comply
with the requirements of the 1940 Act with respect to ``cover'' for
Financial Instruments and thus may hold a significant portion of its
assets in liquid instruments in segregated accounts.
    Each Fund may engage in transactions in futures contracts on
designated contract markets where such contracts trade, and would only
purchase and sell futures contracts traded on a U.S. futures exchange
or board of trade. Each Fund would comply with the requirements of Rule
4.5 of the regulations promulgated by the Commodity Futures Trading
Commission (``CFTC'').\22\
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    \22\ The CFTC Rule 4.5 provides an exclusion for investment
companies registered under the 1940 Act from the definition of a
``commodity pool operator'' upon the filing of a notice of
eligibility with the National Futures Association.
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    Each Fund may enter into swap agreements and/or forward contracts
for the purposes of attempting to gain exposure to the equity
securities of its Underlying Index without actually transacting such
securities. The counterparties to the swap agreements and/or forward
contracts would 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 or its designee.
Each Fund may also enter into repurchase and reverse repurchase
agreements with terms of less than one year, and would 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. Each Fund may also invest in Money Market Instruments, in
pursuit of its investment objectives, as ``cover'' for Financial
Instruments, as described above, or to earn interest.
    The Trust would adopt certain fundamental policies consistent with
the 1940 Act and each Fund would be classified as ``non-diversified''
under the 1940 Act. Each Fund, however, intends to maintain the
required level of diversification and otherwise conduct its operations
so as to qualify as a ``regulated investment company'' (``RIC'') for
purposes of the Internal Revenue Code (``Code''), in order to relieve
the Trust and the Funds of any liability for Federal income tax to the
extent that its earnings are distributed to shareholders.\23\
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    \23\ In order for a fund to qualify for tax treatment as a RIC,
it must meet several requirements under the Code. Among these is the
requirement that, at the close of each quarter of the Fund's taxable
year, (i) at least 50% of the market value of the Fund's total
assets must be represented by cash items, U.S. government
securities, securities of other RICs, and other securities, with
such other securities limited for purposes of this calculation in
respect of any one issuer to an amount not greater than 5% of the
value of the Fund's assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets may be invested in the
securities of any one issuer, or two or more issuers that are
controlled by the Fund (within the meaning of Section 851(b)(4)(B)
of the Internal Revenue Code and that are engaged in the same or
similar trades or businesses or related trades or businesses other
than U.S. government securities or the securities of other regulated
investment companies.
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Availability of Information about the Shares and Underlying Indexes

    The Trust's Web site, which is and would be publicly accessible at
no charge, would contain the following information for each Fund's
Shares: (a) 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; (b) 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 daily closing price and the closing NAV,
and the magnitude of such premiums and discounts; (c) its Prospectus
and/or Product Description; and (d) 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.\24\
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    \24\ 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, if a product description is being provided in lieu of
a prospectus, Commentary .06 of Amex Rule 1000A-AEMI 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. Furthermore, any sales
material will reference the availability of such circular and the
prospectus.
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    The Amex would disseminate for each Fund on a daily basis every 15
seconds by means of the Consolidated Tape Association (``CTA'') and CQ
High Speed Lines information with respect to an Intra-Day Indicative
Value (``IIV'') (as defined and discussed below under ``Dissemination
of Intra-Day Indicative Value (IIV)''), recent NAV, shares outstanding,
estimated cash amount and total cash amount per Creation Unit.\25\ The
Exchange would make available on its Web site daily trading volume,
closing price, the NAV and final dividend amounts to be paid for each
Fund.
---------------------------------------------------------------------------

    \25\ Quotations and last-sale information for the Funds' Shares
are disseminated over the Consolidated Tape.
---------------------------------------------------------------------------

    Each Fund's total portfolio composition would be disclosed on the
Web site of the Trust (http://www.proshares.com) or another relevant Web site as determined by the Trust and/or the Exchange (http://

http://www.amex.com). Web site disclosure of portfolio holdings would be made

by the Trust on a daily basis and would include, as applicable, the
names and number of shares held of each equity security (if
applicable), 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 would coincide
with the disclosure by the Advisor of the ``IIV File'' (described
below) and the ``PCF File,'' when applicable (described below).
Therefore, the same portfolio information (including accrued expenses
and dividends) would be provided on the public Web site as well as in
the IIV File and PCF File (when applicable) provided to ``Authorized
Participants'' (defined below). The format of the public Web site
disclosure and the IIV File and PCF File (when applicable) would differ
because the public Web site would list all portfolio holdings while the
IIV File and PCF File (when applicable) would similarly provide the
portfolio holdings but in a format appropriate for Authorized
Participants, i.e., the exact components of a Creation Unit.\26\
Accordingly, each investor would have access to the current portfolio
composition of each Fund through the Trust's Web site, at http://www.proshares.com, and/or at the Exchange's Web site at http://

http://www.amex.com.

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    \26\ The composition will be used to calculate the NAV later
that day.
---------------------------------------------------------------------------

    Beneficial owners of Shares (``Beneficial Owners'') would receive
all of the statements, notices, and reports required under the 1940 Act
and other applicable laws. They would 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 would be provided to Beneficial Owners by their
brokers, while others would 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 would be publicly
available on various websites by independent market data vendors, e.g.,
http://www.bloomberg.com. Data regarding each Underlying Index is also

available from the respective index provider to subscribers. With
respect to the Lehman Brothers 7-10 Year U.S. Treasury Index, the
Lehman Brothers 20+ Year U.S. Treasury Index, the iBoxx $ Liquid
Investment Grade Index and the iBoxx $ Liquid High Yield Index, as
noted above, the index value would be calculated once daily. With
respect to the Dow Jones U.S. Select Telecommunications Index, the
value would be updated intra-day on a real time basis as its individual
component securities change in price. This intra-day value of this
index would be disseminated at least 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 would issue and redeem Shares only in initial
aggregations of at least 75,000 (``Creation Units''). Purchasers of
Creation Units would be able to separate the Units into individual
Shares. Once the number of Shares in a Creation Unit is determined, it
would not change thereafter (except in the event of a stock split or
similar revaluation). The initial value of a Share for each Fund is
expected to be in the range of $50-$250.
    At the end of each business day, the Trust would prepare the list
of names and the required number of shares of each Deposit Security to
be included in the next trading day's Creation Unit for the Bullish
Fund. The Trust would then add to the Deposit List, the cash
information effective as of the close of business on that business day
and create a portfolio composition file (``PCF'') for the Fund, which
it would transmit to NSCC before the open of business the next business
day. The information in the PCF would 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 would use to disclose the Funds'
holdings of Financial Instruments.\27\ The IIV File would contain, for
the Bullish Fund (to the extent that it holds Financial Instruments)
and Bearish Funds, 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.
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    \27\ 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 Authorized Participants and the Exchange will
have access to a password and the Web site containing the IIV File.
However, the Fund will disclose each business day 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, as applicable, to industry participants.
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    For example, the following information would be provided in the IIV
File for a Bullish Fund holding equity securities and a Bearish Fund
holding swaps and futures contracts (and a Bullish Fund to the extent
it holds such Financial Instruments): (A) The total value of the equity
securities held by such Fund (Bullish Fund only), (B) the notional
value of the swaps held by such Fund (together with an indication of
the index on which such swap is based and whether the Fund's position
is long or short), (C) the most recent valuation of the swaps held by
the Fund, (D) the notional value of any futures contracts (together
with an indication of the index on which such contract is based,
whether the Fund's position is long or short and the contract's
expiration date), (E) the number of futures contracts held by the Fund
(together with an indication of the index on which such contract is
based, whether the Fund's position is long or short and the contract's
expiration date), (F) the most recent valuation of the futures
contracts held by the Fund, (G) the Fund's total assets and total
shares outstanding, and (H) a ``net other assets'' figure reflecting
expenses and income of the Fund to be accrued during and through the
following business day and accumulated gains or losses on the Fund's
Financial Instruments through the end of the business day immediately
preceding the publication of the IIV File. To the extent that the
Bullish or any Bearish Fund holds cash or cash equivalents about which
information is not available in a PCF File, information regarding such
Fund's cash and cash equivalent positions would be disclosed in the IIV
File for such Fund.
    The information in the IIV File would be sufficient for
participants in the NSCC system to calculate the IIV for Bearish Funds
and, together with the information on equity securities contained in
the PCF, would be sufficient for calculation of IIV for the Bullish
Fund, during the next business day. The IIV File, together with the
applicable information in the PCF in the case of the Bullish Fund,
would also be the basis for the next business day's NAV calculation.
    Under normal circumstances, the Bullish Fund would be created and
redeemed either entirely for cash and/or for Deposit Securities, plus a
Balancing Amount, as described below. Under normal circumstances, the
Bearish Funds would be created and redeemed entirely for cash. The IIV
File published before the open of business on a business day would,
however, permit NSCC participants to calculate (by means of calculating
the IIV) the amount of cash required to create a Creation Unit, and the
amount of cash that would be paid upon redemption of a Creation Unit,
for each Bearish Fund for that business day.
    For the Bullish Fund, the PCF File would be prepared by the Trust
after 4 p.m. ET and transmitted by the Index Receipt Agent to NSCC by
6:30 p.m. ET. All Authorized Participants who are NSCC participants,
and the Exchange would have access to the Web site containing the IIV
File. The IIV File would 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. ET, Authorized Participants would know
the composition of the Fund's portfolio for the next trading day.
    The Balancing Amount would also be determined shortly after 4 p.m.
ET each business day. Although the Balancing Amount for most exchange-
traded funds is a small amount reflecting accrued dividends and other
distributions, for the Bullish Fund it is expected to be larger due to
changes in the value of the Financial Instruments, i.e., daily mark-to-
market. For example, assuming a basket of deposit securities (``Deposit
Basket'') of $5 million for a Bullish Fund, if the market increases
10%, the deposit basket would now be equal to $5.5 million at 4 p.m.
ET. The Fund shares would increase in value by 20% or $1 million to
equal $6 million total. With the Deposit Basket at $5.5 million, the
Cash Balancing Amount would be $500,000. The next day's Deposit Basket
and cash balancing amount is announced generally by 6:30 p.m. ET each
business day.

Creation of the Bullish Fund \28\
---------------------------------------------------------------------------

    \28\ This is the Bullish Fund based on the Dow Jones U.S.
Telecommunications Index.
---------------------------------------------------------------------------

    Typically, persons \29\ purchasing Creation Units from a Bullish
Fund must make an in-kind deposit of a basket of securities (``Deposit
Securities'') consisting of the securities selected by the Advisor from
among those securities contained in the Fund's portfolio, together with
an amount of cash specified by the Advisor (``Balancing Amount''), plus
the applicable transaction fee (``Transaction Fee''). The Deposit
Securities and the Balancing Amount collectively are referred to as the
``Creation Deposit.'' The Balancing Amount is a cash payment designed
to ensure that the value of a Creation Deposit is identical to the
value of the Creation Unit it is used to purchase. The Balancing Amount
is an amount equal to the difference between the NAV of a Creation Unit
and the market value of the Deposit Securities.\30\ The Balancing
Amount may, at times, represent a significant portion of the aggregate
purchase price (or in the case of redemptions, the redemption
proceeds). This may occur because the mark-to-market value of the
Financial Instruments held by the Funds is included in the Balancing
Amount. The Transaction Fee is a fee imposed by the Funds on investors
purchasing (or redeeming) Creation Units.
---------------------------------------------------------------------------

    \29\ Authorized Participants are the only persons that may place
orders to create and redeem Creation Units. Authorized Participants
must be registered broker-dealers or other securities market
participants (such as banks and other financial institutions that
are exempt from registration as broker-dealers to engage in
securities transactions) who are participants in DTC.
    \30\ While not typical, if the market value of the Deposit
Securities is greater than the NAV of a Creation Unit, then the
Balancing Amount would be a negative number, in which case the
Balancing Amount would be paid by the Bullish Fund to the purchaser,
rather than vice-versa.
---------------------------------------------------------------------------

    The Trust would make available through the DTC or the Distributor
on each business day, prior to the opening of trading on the Exchange,
a list of names and the required number of shares of each Deposit
Security to be included in the Creation Deposit for each Bullish Fund
(``Deposit List'').\31\ The Trust also would make available on a daily
basis information about the previous day's Balancing Amount.
---------------------------------------------------------------------------

    \31\ In accordance with the Advisor's Code of Ethics, personnel
of the Advisor with knowledge about the composition of a Creation
Deposit will be prohibited from disclosing such information to any
other person, except as authorized in the course of their
employment, until such information is made public.
---------------------------------------------------------------------------

    The Bullish Fund reserves the right to permit or require an
Authorized Participant to substitute an amount of cash and/or a
different security to replace any prescribed Deposit Security.\32\
Substitution might be permitted or required, for example, because one
or more Deposit Securities may be unavailable, or may not be available
in the quantity needed to make a Creation Deposit. Brokerage
commissions incurred by a Fund to acquire any Deposit Security not part
of a Creation Deposit are expected to be immaterial, and in any event
the Adviser may adjust the relevant transaction fee to ensure that the
Fund collects the extra expense from the purchaser.
---------------------------------------------------------------------------

    \32\ In certain limited instances, a Fund may require a
purchasing investor to purchase a Creation Unit entirely for cash.
For example, on days when a substantial rebalancing of a Fund's
portfolio is required, the Advisor might prefer to receive cash
rather than in-kind stocks so that it has liquid resources on hand
to make the necessary purchases.
---------------------------------------------------------------------------

    Orders to create or redeem Shares of the Bullish Fund must be
placed through an Authorized Participant, which is either (1) A broker-
dealer or other participant in the continuous net settlement system of
the NSCC or (2) a DTC participant, and which has entered into a
participant agreement with the Distributor.
    As noted below in ``Dissemination of Intra-Day Indicative Value
(IIV),'' the Exchange would disseminate through the facilities of the
CTA, at least in 15 second intervals during the Exchange's regular
trading hours, the IIV on a per Share basis. The Funds would not be
involved in, or responsible for, the calculation or dissemination of
any such amount and would make no warranty as to its accuracy.

Redemption of the Bullish Fund

    Bullish Fund Shares in Creation Unit aggregations would be
redeemable on any day on which the New York Stock Exchange (``NYSE'')
is open in exchange for a basket of securities (``Redemption
Securities''). As it does for Deposit Securities, the Trust would make
available to Authorized Participants on each business day prior to the
opening of trading a list of the names and number of shares of
Redemption Securities for each Fund. The Redemption Securities given to
redeeming investors in most cases would be the same as the Deposit
Securities required of investors purchasing Creation Units on the same
day.\33\ Depending on whether the NAV of a Creation Unit is higher or
lower than the market value of the Redemption Securities, the redeemer
of a Creation Unit would either receive from or pay to the Fund a cash
amount equal to the difference (``Redemption Balancing Amount'').\34\
The redeeming investor also must pay to the Fund a transaction fee to
cover transaction costs.\35\
---------------------------------------------------------------------------

    \33\ There may be circumstances, however, where the Deposit and
Redemption Securities could differ. For example, if ABC stock were
replacing XYZ stock in a Fund's Underlying Index at the close of
today's trading session, today's prescribed Deposit Securities might
include ABC but not XYZ, while today's prescribed Redemption
Securities might include XYZ but not ABC.
    \34\ In the typical situation where the Redemption Securities
are the same as the Deposit Securities, this cash amount would be
equal to the Balancing Amount described above in the creation
process.
    \35\ Redemptions in which cash is substituted for one or more
Redemption Securities may be assessed a higher transaction fee to
offset the transaction cost to the Fund of selling those particular
Redemption Securities. This fee is expected to be between $100 and
$1,000.
---------------------------------------------------------------------------

    A Fund has the right to make redemption payments in cash, in kind,
or a combination of each, provided that the value of its redemption
payments equals the NAV of the Shares tendered at the time of tender,
and the Redemption Balancing Amount. The Adviser currently contemplates
that Creation Units of the Bullish Fund would be redeemed principally
in kind with respect to the Redemption Securities and a Balancing
Amount in cash largely resulting from the value of the Financial
Instruments included in the Fund.
    In order to facilitate delivery of Redemption Securities, each
redeeming Authorized Participant, acting on behalf of such Beneficial
Owner or a DTC Participant, must have arrangements with a broker-
dealer, bank, or other custody provider in each jurisdiction in which
any of the Redemption Securities are customarily traded. If neither the
redeeming Beneficial Owner nor the Authorized Participant has such
arrangements, and it is not otherwise possible to make other
arrangements, the Fund may in its discretion redeem the Shares for
cash.

Creation and Redemption of the Bearish Funds

    The Bearish Funds would 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 Shares would 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.\36\
---------------------------------------------------------------------------

    \36\ 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 Financial Instruments.
---------------------------------------------------------------------------

Creation Unit Aggregation Purchase and Redemption Orders

    Creation Unit aggregations of the Funds would be purchased at NAV
plus a transaction fee. For the Bearish Funds, the purchaser would make
a cash payment by 12 p.m. ET on the third business day following the
date on which the request was made (T+3) or earlier. For the Bullish
Fund, the purchaser would make an in-kind payment and/or all cash
payment generally on the third business day following the date on which
the request was made (T+3) or earlier. Purchasers of the Funds in
Creation Unit aggregations must satisfy certain creditworthiness
criteria established by the Advisor and approved by the Board, as
provided in the Authorized Participant Agreement between the Trust and
Authorized Participants.
    Creation Unit aggregations of the Bullish Fund would be redeemable
either in-kind or all in cash equal to the NAV less the transaction
fee. Creation Unit aggregations of the Bearish Funds would be
redeemable for an All-Cash Payment equal to the NAV less the
transaction fee. A Bullish Fund has the right to make redemption
payments in cash, in kind, or a combination of each, provided that the
value of its redemption payments equals the NAV of the Shares tendered
for redemption at the time of tender.\37\
---------------------------------------------------------------------------

    \37\ In the event an Authorized Participant has submitted a
redemption request in good order and is unable to transfer all or
part of a Creation Unit aggregation for redemption, a Fund may
nonetheless accept the redemption request in reliance on the
Authorized Participant's undertaking to deliver the missing Fund
Shares as soon as possible, which undertaking shall be secured by
the Authorized Participant's delivery and maintenance of collateral.
The Authorized Participant Agreement will permit the Fund to buy the
missing Shares at any time and will subject the Authorized
Participant to liability for any shortfall between the cost to the
Fund of purchasing the Shares and the value of the collateral.
---------------------------------------------------------------------------

Dividends

    Dividends, if any, from net investment income would 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 would be declared and paid at least
once a year.
    Dividends and other distributions on the Shares of each Fund would
be distributed, on a pro rata basis to Beneficial Owners of such
Shares. Dividend payments would be made through the Depository and the
DTC Participants to Beneficial Owners then of record with proceeds
received from each Fund.
    The Trust would not make the DTC book-entry Dividend Reinvestment
Service (``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. The SAI would inform investors of this fact and
direct interested investors to contact such investor's broker to
ascertain the availability and a description of such a service through
such broker. The SAI would also caution interested Beneficial Owners
that they should note that each broker may require investors to adhere
to specific procedures and timetables in order to participate in the
service and such investors should ascertain from their broker such
necessary details. Shares acquired pursuant to such service would be
held by the Beneficial Owners in the same manner, and subject to the
same terms and conditions, as for original ownership of Shares.
Brokerage commissions charges and other costs, if any, incurred in
purchasing Shares in the secondary market with the cash from the
distributions generally would be an expense borne by the individual
beneficial owners participating in reinvestment through such service.

Dissemination of Intra-Day Indicative 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 would disseminate through the facilities of
the CTA: (i) Continuously throughout the trading day, the market value
of a Share, and (ii) at least every 15 seconds throughout the trading
day, a calculation of the IIV \38\ as calculated by the Exchange (``IIV
Calculator'').\39\ 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.
    The IIV Calculator would calculate an IIV for each Fund 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 does not necessarily reflect the precise
composition of the current portfolio 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 would 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 held by a Fund may diverge
from the IIV during any trading day. In such case, the IIV would not
precisely reflect the value of the Fund portfolio.
---------------------------------------------------------------------------

    \38\ The intra-day indicative value or IIV is referred to by
other issuers for different exchange-traded funds as an ``Estimated
NAV,'' ``Underlying Trading Value,'' ``Indicative Optimized
Portfolio Value (IOPV),'' and ``Intraday Value'' in various places
such as the prospectus and marketing materials.
    \39\ The Exchange will calculate the IIV for each Fund.
---------------------------------------------------------------------------

Calculation of the IIV for the Bullish Fund

    The IIV Calculator would disseminate the IIV throughout the trading
day for the Fund holding equity securities and Financial Instruments.
The IIV Calculator would determine such IIV by: (i) Calculating the
estimated current value of equity securities held by the Fund (if
applicable) 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 the Fund (which previous day's notional
value would 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 would 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 current IIV.

Calculation of the IIV for the Bearish Funds

    The IIV Calculator would disseminate the IIV throughout the trading
day for the Bearish Funds. The IIV Calculator would 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 would 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 would 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. A minimum of two Creation
Units (at least 150,000 Shares) would be required to be outstanding at
the start of trading. This minimum number of Shares required to be
outstanding at the start of trading would be comparable to requirements
that have been applied to previously listed series of Index Fund
Shares. The Exchange believes that the proposed minimum number of
Shares outstanding at the start of trading is sufficient to provide
market liquidity.
    The Exchange, pursuant to Rule 1002A(a)(ii), will obtain a
representation from the Trust (for each Fund), prior to listing, that
the NAV per share for each Fund would be calculated daily and made
available to all market participants at the same time. The Exchange
represents the Trust is required to comply with Rule 10A-3 under the
Act \40\ for the initial and continued listing of the Shares.
---------------------------------------------------------------------------

    \40\ 17 CFR 240.10A-3 (setting forth listing standards relating
to audit committees).
---------------------------------------------------------------------------

    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
would be based upon the year-end aggregate number of outstanding Shares
in all Funds of the Trust listed on the Exchange.

Amex Trading Rules and Trading Halts

    The Shares are equity securities subject to Amex rules governing
the trading of equity securities, including, among others, rules
governing priority, parity and precedence of orders, specialist
responsibilities, and account opening and customer suitability. The
Funds would trade on the Amex until 4:15 p.m. ET each business day.
Shares would trade with a minimum price variation of $.01. In addition,
Amex Rule 154-AEMI(c)(ii) \41\ and Commentary .04 to Amex Rule 190 \42\
apply to Index Fund Shares listed on the Exchange, including the
Shares.
---------------------------------------------------------------------------

    \41\ Amex Rule 154-AEMI(c)(ii) provides that stop and stop limit
orders to buy or sell a security (other than an option, which is
covered by Amex Rule 950(f) and Amex Rule 950-ANTE(f) and Commentary
thereto), the price of which is derivatively priced based upon
another security or index of securities, may be elected by a
quotation. The Exchange has designated Index Fund Shares, including
the Shares, as eligible for this treatment.
    \42\ Commentary .04 states that nothing in Amex 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.
---------------------------------------------------------------------------

    In addition to other factors that may be relevant, the Exchange may
consider factors such as those set forth in Amex 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, (1) The
extent to which trading is not occurring in securities comprising an
Underlying Index and/or the Financial Instruments of a Fund; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In the case of
the Financial Instruments held by a Fund, the Exchange represents that
a notification procedure would 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.
Notification from the Advisor would be made by phone, facsimile or e-
mail. 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 would also be halted if
the circuit breaker parameters under Amex Rule 117 have been reached.
    Amex Rule 1002A(b)(ii) sets forth the trading halt parameters with
respect to Index Fund Shares. If the IIV or the Underlying Index value
applicable to that series of Index Fund Shares is not being
disseminated as required, the Exchange may halt trading during the day
in which the interruption to the dissemination of the IIV or the
Underlying Index value occurs. If the interruption to the dissemination
of the IIV or the Underlying Index value persists past the trading day
in which it occurred, the Exchange would halt trading no later than the
beginning of the trading day following the interruption.

Information Circular

    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 .06 to Amex Rule 1000A-AEMI to 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.\43\
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    \43\ The Exchange states that the product description used in
reliance on Section 24(d) of the 1940 Act (15 U.S.C. 80a-24(d)) will
comply with all representations and conditions set forth in the
Application. See supra note 24.
---------------------------------------------------------------------------

    The Information Circular will also provide guidance with regard to
member firm compliance responsibilities when effecting transactions in
the Shares and highlighting the special risks and characteristics of
the Funds and Shares as well as applicable Exchange rules. In
particular, the 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 (1) 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 (2) 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: (a) The
customer's financial status; (b) the customer's tax status; (c) the
customer's investment objectives; and (d) such other information used
or considered to be reasonable by such member or registered
representative in making recommendations to the customer. In addition,
the Information Circular will disclose that the procedures for
purchases and redemptions of Shares in Creation Units are described in
each Fund's prospectus and SAI, and that Shares are not individually
redeemable, but are redeemable only in Creation Unit aggregations or
multiples thereof.

Surveillance

    The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares. Specifically,
Amex would rely on its existing surveillance procedures governing Index
Fund Shares. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the
Act,\44\ in general, and furthers the objectives of section
6(b)(5),\45\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78f(b).
    \45\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange states that the proposed rule change would impose no
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 states that no written comments were solicited or
received by the Exchange on this 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_ADDRESS>Please

include File Number SR-Amex-2007-104 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-Amex-2007-104. 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 Section, 100 F Street,
NE., Washington, DC 20549. 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-2007-104 and should be
submitted on or before January 17, 2008.

IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change

    After careful consideration, 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.\46\ In particular, the Commission finds that the proposed
rule change is consistent with section 6(b)(5) of the Act,\47\ 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 notes that it previously approved the original
listing and trading of certain inverse leveraged fund shares based on a
variety of indexes.\48\ The Commission also notes that it has
previously approved the listing and trading of exchange-traded funds
based on three of the Underlying Indexes.\49\ The Commission notes that
the Exchange has represented that the two remaining Underlying Indexes
meet the Exchange's criteria for indexes underlying Index Fund Shares
that may be approved for listing and trading under Amex's generic
listing standards adopted pursuant to Rule 19b-4(e) under the Act.\50\
---------------------------------------------------------------------------

    \46\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
    \47\ 15 U.S.C. 78f(b)(5).
    \48\ See Securities Exchange Act Release Nos. 56592 (October 1,
2007), 72 FR 57364 (October 9, 2007) (SR-Amex-2007-60) (approving
the listing and trading of eight funds of ProShares Trust based on
international equity indexes; see also supra note 3.
    \49\ See supra notes 9 to 11.
    \50\ See supra notes 12 and 13 and accompanying text.
---------------------------------------------------------------------------

    The Commission further believes that the proposal is consistent
with section 11A(a)(1)(C)(iii) of the Act,\51\ 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. The Exchange has represented that quotations and last-sale
information for the Shares will be disseminated over the Consolidated
Tape. In addition, the Exchange will disseminate by means of the CTA
and CQ High Speed lines, the IIV at least every 15 seconds on a daily
basis

throughout Amex's trading day, the most recent NAV for each Fund, the
number of Shares outstanding for each Fund, and the estimated cash
amount and total cash amount per Creation Unit. The Exchange will also
make available on its Web site daily trading volume, the closing
prices, the NAV, and the final dividend amounts to be paid for each
Fund.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    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 websites by independent market data vendors. Data
regarding each Underlying Index is also available from the respective
index provider to subscribers. For the Funds based on indexes based on
fixed income securities, the index value would be calculated once
daily.\52\ With respect to the Dow Jones U.S. Select Telecommunications
Index, the value would be updated intra-day on a real time basis as its
individual component securities change in price and would be
disseminated at least every 15 seconds throughout the trading day by
the Amex or another organization authorized by the relevant Underlying
Index provider.
---------------------------------------------------------------------------

    \52\ The value for the Underlying Indexes consisting of Fixed
Income Securities (i.e., the Bearish Funds) are calculated once
daily.
---------------------------------------------------------------------------

    The Trust's Web site will contain a variety of other quantitative
information for the Shares of each Fund. Finally, each Fund's total
portfolio composition will be disclosed on the Web site of the Trust or
another relevant Web site as determined by the Trust and/or the
Exchange. Web site disclosure of portfolio holdings will be made by the
Trust on a daily basis and will include, as applicable, the specific
types of Financial Instruments and characteristics of such instruments,
the cash equivalents and amount of cash held in the portfolio of each
Fund.
    Furthermore, the Commission believes that the proposal to list and
trade the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the Trust (for each Fund), prior to listing, that
the NAV per Share for each Fund will be calculated daily and made
available to all market participants at the same time.\53\ In addition,
the Exchange represents that the Web site disclosure of the portfolio
composition of each Fund and the disclosure by the Advisor of the IIV
File and the PCF will occur at the same time. Commentaries .02(b)(i)
and .03(b)(i) to Amex Rule 1000A-AEMI provides for ``fire wall''
procedures with respect to personnel who have access to information
concerning changes and adjustments to the Underlying Index, among other
things. Commentary .09 to Amex Rule 1000A-AEMI restricts members or
persons associated with members who have knowledge of all material
terms and conditions of an order being facilitated or orders being
crossed to enter, based on such knowledge, an order to buy or sell a
Share that is the subject of the order, an order to buy or sell the
overlying option class, or an order to buy or sell any related
instrument \54\ until all the terms of the order are disclosed to the
trading crowd or the trade is no longer imminent in view of the passage
of time since the order was received.
---------------------------------------------------------------------------

    \53\ See Amex Rule 1002A(a)(ii).
    \54\ For purposes of Commentary .09, an order to buy or sell a
``related instrument'' means an order to buy or sell securities
comprising ten percent or more of the component securities in the
Underlying Index or an order to buy or sell a futures contract on
any economically equivalent index. See Commentary .09 to Amex Rule
1000A-AEMI.
---------------------------------------------------------------------------

    The Commission also believes that the Exchange's trading halt rules
are reasonably designed to prevent trading in the Shares when
transparency is impaired. Amex Rule 1002A(b)(ii) provides that the
Exchange will halt trading in the Shares if the circuit breaker
parameters of Amex Rule 117 have been reached. In exercising its
discretion to halt or suspend trading in the Shares, the Exchange may
consider factors such as those set forth in Amex Rule 918C(b) and other
relevant factors. In addition, Amex Rule 1002A(b)(ii) provides that, if
the IIV or the Underlying Index value applicable to that series of
Index Fund Shares is not being disseminated as required, the Exchange
may halt trading during the day in which the interruption to the
dissemination of the IIV or the Underlying Index value occurs. If the
interruption to the dissemination of the IIV or the Underlying Index
value persists past the trading day in which it occurred, the Exchange
will halt trading no later than the beginning of the trading day
following the interruption.
    The Commission further believes that the trading rules and
procedures to which the Shares will be subject pursuant to this
proposal are consistent with the Act. The Exchange has represented that
the Shares are equity securities subject to Amex's rules governing the
trading of equity securities.
    In support of this proposal, the Exchange has made the following
representations:
    1. The Exchange's surveillance procedures are adequate to properly
monitor the trading of the Shares. Specifically, Amex will rely on its
existing surveillance procedures governing Index Fund Shares.
    2. Prior to the commencement of trading, the Exchange will inform
its members and member organizations in an Information Circular
regarding the application of Commentary .06 to Amex Rule 1000A-AEMI to
the Funds and the prospectus and/or product description delivery
requirements that apply to the Funds. The Information Circular will
also provide guidance with regard to member firm compliance
responsibilities when effecting transactions in the Shares and
highlighting the special risks and characteristics of the Funds and
Shares, as well as applicable Exchange rules. In addition, the
Information Circular will disclose that the procedures for purchases
and redemptions of Shares in Creation Units are described in each
Fund's prospectus, and that Shares are not individually redeemable, but
are redeemable only in Creation Unit aggregations or multiples thereof.
    3. The Exchange represents that the Trust is required to comply
with Rule 10A-3 under the Act \55\ for the initial and continued
listing of the Shares.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    4. This Order is conditioned on Amex's adherence to the foregoing
representations.
    The Commission finds good cause to approve the proposed rule
change, prior to the thirtieth day after publication for comment in the
Federal Register pursuant to section 19(b)(2) of the Act.\56\ The
Commission does not believes that the proposed rule change, as modified
by Amendment No. 1, raises any novel regulatory issues. Accelerating
approval will allow the Shares to trade on the Exchange without undue
delay and should generate additional competition in the market for such
products.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the
Act,\57\ that the proposed rule change (SR-Amex-2007-104), as modified
by Amendment No. 1, be and it hereby is, approved on an accelerated
basis.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b)(2).

---------------------------------------------------------------------------

    For the Commission, by the Division of Trade and Markets,
pursuant to delegated authority.\58\
---------------------------------------------------------------------------

    \58\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24997 Filed 12-26-07; 8:45 am]

BILLING CODE 8011-01-P


Richard Kinch/DC/USEPA/US

06/17/2008 03:18 PM

To

paul cassidy, Craig Dufficy/DC/USEPA/US@EPA

cc

Vernon Myers/DC/USEPA/US@EPA

Subject

112/129 Meeting with Industry 6/17/2008

Paul/Craig,

Pull this together for entry into the docket, including the attached
industry approach.

On June 17, 2008 at 3:30 pm EPA met with industry representatives to
discuss 112/129 issues involving the definition of solid waste.  In
attendance were:

Vernon Myers		EPA

Richard Kinch		EPA

Betsy Devlin		EPA

Matt Hale		EPA

Lana Coppolino		EPA

Brian Shrager		EPA

Susmita Dubey		EPA

Jim Eddinger		EPA

Penny Lassiter		EPA

Tracey Norberg	RMA

Andy O'Hare		PCA

Amy Schaffer		AF&PA

Tim Hunt		AF&PA

Rich Wasserstrom	AF&PA

Doug Green		USWAG

The main thrust of the meeting involved industry presenting their
proposal (see attachment) to EPA on a regulatory structure for defining
fuels which are not  solid wastes.  Most of the conversation centered
around gaining an understanding of industry's proposal.  Of particular
note were the following points:

EPA noted that industry's proposal does not address discard or
contaminants .

PCA took the position that contaminants are adequately addressed by the
112 standards.  An AF&PA representative indicated scraps of treated wood
at the manufacturer that are sent to the boiler are not solid waste
because they have not been discarded.

Industry mentioned that there is some consideration of tires being
biomass because 40% of the rubber in passenger tires and 60% in truck
tires is natural rubber.

EPA noted that we are moving ahead to meet the September 2008 deadline
for the cement kiln proposal.

At the end of the meeting, EPA indicated we would reflect on their
proposal, but would not be getting back to them (our conclusions would
be part of the internal deliberation process associated with
rulemaking).