[Federal Register: December 27, 2006 (Volume 71, Number 248)]
[Notices]
[Page 77823-77834]
[DOCID:fr27de06-110]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54961; File No. SR-Amex-2006-101]

Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of a Proposed Rule Change and Amendments No. 1 and 2
Thereto Relating to the Listing and Trading of Shares of Funds of the
ProShares Trust

December 18, 2006.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 24, 2006, 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 November 22, 2006, Amex submitted Amendment No. 1 to the
proposed rule change.\3\ On December 8, 2006, Amex submitted Amendment
No. 2 to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Amex proposed to list and trade the
shares of twenty-four (24) additional funds of the Trust (as defined
herein) and made certain clarifying changes with respect to the
trading of the Shares (as defined herein). Amendment No. 1 replaced
the original filing in its entirety.
    \4\ In Amendment No. 2, Amex made additional changes to clarify
certain defined terms, the creation and redemption of the Shares,
and the criteria for continued listing of the Shares. Amendment No.
2 replaced Amendment No. 1 in its entirety.
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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 the shares (the ``Shares'')
of eighty-one (81) funds of the ProShares Trust (the ``Trust'') based
on numerous underlying securities indexes. The text of the proposal is
available on Amex's Internet Web site (http://www.amex.com), at Amex's

principal

office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item IV below. The Exchange has prepared summaries, set
forth in Sections A, B, and C below, of the most significant aspects of
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    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 under the Act. Index Fund Shares are defined in Amex Rule
1000A(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.
    Recent amendments adopting Amex Rule 1000A(b)(2) now permit 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 Exchange proposes to list under amended Amex Rule 1000A the
Shares of eighty-one (81) new funds of the Trust that are designated as
Ultra Funds, Short Funds, and UltraShort Funds (the ``Funds''). Each of
the Funds will have a distinct investment objective. Each Fund will
attempt, on a daily basis, to achieve its investment objective by
corresponding to a specified multiple of the performance, or the
inverse performance, of a particular equity securities index as briefly
described below. The Funds are based on the following benchmark
indexes: \5\ (1) S&P Small Cap 600 Index, (2) S&P500/Citigroup Value
Index, (3) S&P500/Citigroup Growth Index, (4) S&P MidCap 400/Citigroup
Value Index, (5) S&P MidCap 400/Citigroup Growth Index, (6) S&P
SmallCap 600/Citigroup Value Index, (7) S&P SmallCap 600/Citigroup
Growth Index, (8) Dow Jones U.S. Basic Materials Index, (9) Dow Jones
U.S. Consumer Services Index, (10) Dow Jones U.S. Consumer Goods Index,
(11) Dow Jones U.S. Oil and Gas Index, (12) Dow Jones U.S. Financials
Index, (13) Dow Jones U.S. Health Care Index, (14) Dow Jones U.S.
Industrials Index, (15) Dow Jones U.S. Real Estate Index, (16) Dow
Jones U.S. Semiconductor Index (17) Dow Jones U.S. Technology Index,
(18) Dow Jones U.S. Utilities Index (19) Russell 2000[supreg] Index,
(20) Russell Midcap[supreg] Index, (21) Russell Midcap[supreg] Growth
Index, (22) Russell Midcap[supreg] Value Index, (23) Russell
1000[supreg] Index, (24) Russell 1000[supreg] Growth Index, (25)
Russell 1000[supreg] Value Index, (26) Russell 2000[supreg] Growth
Index, and (27) Russell 2000[supreg] Value Index (each index
individually referred to as the ``Underlying Index,'' and all
Underlying Indexes collectively referred to as the ``Underlying
Indexes'').\6\ Certain Funds (the ``Ultra Funds'' or ``Bullish Funds'')
seek daily investment results, before fees and expenses that correspond
to twice (200%) the daily performance of the Underlying Indexes. The
net asset value (``NAV'') of the Shares of each of these Ultra Funds,
if successful in meeting its objective, should increase, on a
percentage basis, approximately twice as much as the respective Fund's
Underlying Index gains when the prices of the securities in such
Underlying Index increase on a given day, and should decrease
approximately twice as much as the respective Underlying Index loses
when such prices decline on a given day.
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    \5\ A complete list of the Funds is set forth in Exhibit A to
Amendment No. 2, which is available on Amex's Internet Web site
(http://www.amex.com).

    \6\ The Statement of Additional Information (``SAI'') for the
Funds discloses that each Fund reserves the right to substitute a
different Underlying Index. Substitutions can occur if an Underlying
Index becomes unavailable, no longer serves the investment needs of
shareholders, the Fund experiences difficulty in achieving
investment results that correspond to the applicable Underlying
Index, or for any other reason determined in good faith by the Board
(as defined herein). In such instance, the substitute index will
attempt to measure the same general market as the current Underlying
Index. Shareholders will be notified (either directly or through
their intermediary) if a Fund's current Underlying Index is
replaced. In the event a Fund substitutes an Underlying Index with
another, different index, the Exchange will file with the Commission
a Form 19b-4, which the Commission would have to approve to permit
continued trading of the product based on the substitute index. See
infra note 63 and accompanying text.
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    In addition, the Exchange proposes to list and trade Shares of
certain Funds (the ``Short 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. If each of
these Short Funds is successful in meeting its objective, the NAV of
the Shares of each Short Fund should increase approximately as much, on
a percentage basis, as the respective Underlying Index loses when the
prices of the securities in the Underlying Index decline on a given
day, or should decrease approximately as much as the respective
Underlying Index gains when the prices of the securities in the
Underlying Index rise on a given day.
    Finally, the Exchange proposes to list and trade Shares of certain
Funds (the ``UltraShort 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. If each of these
UltraShort Funds is successful in meeting its objective, the NAV of the
Shares of each UltraShort 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 Underlying 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 Underlying Index rise on a given day. 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.''
    The Commission recently approved the listing and trading of certain
Ultra Funds, Short Funds, and UltraShort Funds based on the S&P 500
Index, Nasdaq-100 Index, Dow Jones Industrial Average Index, and S&P
MidCap 400 Index.\7\ Each of the existing Ultra Funds is expected to
gain, on a percentage basis, approximately twice as much as the
benchmark Underlying Index and should lose approximately twice as much
as the Underlying Index when such prices decline. Each of the existing
Short Funds is expected to achieve investment results, before fees and

expenses, that correspond to the inverse or opposite of the daily
performance (-100%) of an Underlying Index. In addition, each of the
existing UltraShort Funds is expected to achieve investment results,
before fees and expenses, that correspond to twice the inverse or
opposite of the daily performance (-200%) of an Underlying Index.
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    \7\ See Securities Exchange Act Release No. 52553 (October 3,
2005), 70 FR 59100 (October 11, 2005). See also Securities Exchange
Act Release No. 54040 (June 23, 3006), 71 FR 37629 (June 30, 2006)
(approving Amex's proposal to list and trade shares of funds of the
Trust based on certain other benchmark indexes).
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    ProShare Advisors LLC is the investment advisor (the ``Advisor'')
to each Fund. The Advisor is registered under the Investment Advisers
Act of 1940.\8\ 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.
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    \8\ The Trust, Advisor, and Distributor (``Applicants'') have
filed with the Commission an Amended 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).
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    SEI Investments Distribution Company (the ``Distributor''), a
broker-dealer registered under the Act, will act as the distributor and
principal underwriter of the Shares. JPMorgan Chase Bank, N.A. will act
as the index receipt agent (``Index Receipt Agent'') for which it will
receive fees. The Index Receipt Agent will be responsible for
transmitting the Deposit List (as defined herein) 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. 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.\9\ The Shares will be registered in book-entry
form only, and the Trust will not issue individual share certificates.
The DTC or its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on the
records of DTC or DTC participants.
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    \9\ The Trust is registered as a business trust under the
Delaware Corporate Code.
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Underlying Indexes
    The Exchange represents that the Underlying Index components comply
with the generic listing standards set forth in Commentary .02 to Amex
Rule 1000A.
    S&P SmallCap 600 Index. The S&P SmallCap 600 Index is a measure of
small-cap company U.S. stock market performance. It is a float-
adjusted, market capitalization-weighted index of 600 U.S. operating
companies. Securities are selected for inclusion in the index by a
committee of Standard & Poor's through a non-mechanical process that
factors criteria such as liquidity, price, market capitalization,
financial viability, and public float. This Underlying Index \10\ has
been approved for options trading and is also the basis for an exchange
traded fund (``ETF'').\11\
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    \10\ The shares of the iShares S&P SmallCap 600 Index Fund are
traded on the Exchange.
    \11\ See Securities Exchange Act Release No. 35532 (March 24,
1995), 60 FR 16518 (March 30, 1995).
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    S&P 500/Citigroup Value Index. The S&P 500/Citigroup Value Index is
designed to provide a comprehensive measure of large-cap U.S. equity
``value'' performance. It is an unmanaged, float-adjusted, and market
capitalization-weighted index comprised of stocks representing
approximately half the market capitalization of the S&P 500 Index that
have been identified as being on the value end of the growth-value
spectrum. This Underlying Index \12\ is the basis for an ETF.
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    \12\ 12 The shares of the iShares S&P 500 Value Index Fund are
traded on the Exchange.
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    S&P 500/Citigroup Growth Index. The S&P 500/Citigroup Growth Index
is designed to provide a comprehensive measure of large-cap U.S. equity
``growth'' performance. It is an unmanaged, float-adjusted, and market
capitalization-weighted index comprised of stocks representing
approximately half the market capitalization of the S&P 500 Index that
have been identified as being on the growth end of the growth-value
spectrum. This Underlying Index \13\ is the basis for an ETF.
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    \13\ The shares of the iShares S&P 500 Growth Index Fund are
traded on the Exchange.
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    S&P MidCap 400/Citigroup Value Index. The S&P MidCap 400/Citigroup
Value Index is designed to provide a comprehensive measure of mid-cap
U.S. equity ``value'' performance. It is an unmanaged, float-adjusted,
and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
MidCap 400 Index that have been identified as being on the value end of
the growth-value spectrum. This Underlying Index \14\ has been approved
for options trading and is also the basis for an ETF.\15\
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    \14\ The shares of the iShares S&P MidCap 400 Value Index Fund
are traded on the Exchange.
    \15\ See Securities Exchange Act Release 30290 (January 27,
1992), 57 FR 4072 (February 3, 1992).
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    S&P MidCap 400/Citigroup Growth Index. The S&P MidCap 400/Citigroup
Growth Index is designed to provide a comprehensive measure of mid-cap
U.S. equity ``growth'' performance. It is an unmanaged, float-adjusted,
and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
MidCap 400 Index that have been identified as being on the growth end
of the growth-value spectrum. This Underlying Index \16\ has been
approved for options trading and is also the basis for an ETF.\17\
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    \16\ The shares of the iShares S&P MidCap 400 Growth Index Fund
are traded on the Exchange.
    \17\ See supra note 15.
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    S&P Small Cap 600/Citigroup Value Index. The S&P SmallCap 600/
Citigroup Value Index is designed to provide a comprehensive measure of
small-cap U.S. equity ``value'' performance. It is an unmanaged, float-
adjusted, and market capitalization-weighted index comprised of stocks
representing approximately half the market capitalization of the S&P
SmallCap 600 Index that have been identified as being on the value end
of the growth-value spectrum. This Underlying Index \18\ has been
approved for options trading and is also the basis for an ETF.\19\
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    \18\ The shares of the iShares S&P SmallCap 600 Value Index Fund
are traded on the Exchange.
    \19\ See supra note 11.
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    S&P SmallCap 600/Citigroup Growth Index. The S&P SmallCap 600/
Citigroup Growth Index is designed to provide a comprehensive measure
of small-cap U.S. equity ``growth'' performance. It is an unmanaged,
float-adjusted, and market capitalization-weighted index comprised of
stocks representing approximately half the market capitalization of the
S&P SmallCap 600 Index that have been identified as being on the growth
end of the growth-value spectrum. This Underlying Index \20\has been
approved for options trading and is also the basis for an exchange-
traded fund ETF.\21\
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    \20\ The shares of the iShares S&P SmallCap 600 Growth Index
Fund are traded on the Exchange.
    \21\ See supra note 11.
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    Dow Jones U.S. Basic Materials Index. The Dow Jones U.S. Basic
Materials Index measures the performance of the basic materials
industry of the U.S. equity market. Component companies are involved in
the production of aluminum, steel, non ferrous metals, commodity
chemicals, specialty chemicals, forest products, paper products, as
well as the mining of

precious metals and coal. This Underlying Index \22\ has been approved
for options trading and is also the basis for an ETF.
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    \22\ The shares of the iShares Dow Jones U.S. Basic Materials
Sector Index Fund are traded on the Exchange.
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    Dow Jones U.S. Consumer Goods Index. The Dow Jones U.S. Consumer
Goods Index measures the performance of consumer spending in the goods
industry of the U.S. equity market. Component companies include
manufacturers of automobiles and automobile parts and tires, brewers
and distillers, farming and fishing operations, durable and non-durable
household product manufacturers, cosmetic companies, and companies
related to food and tobacco products, clothing, accessories, and
footwear. This Underlying Index \23\ is the basis for an ETF.
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    \23\ The shares of the iShares Dow Jones U.S. Consumer Goods
Sector Index Fund are traded on the Exchange.
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    Dow Jones U.S. Consumer Services Index. The Dow Jones U.S. Consumer
Services Index measures the performance of consumer spending in the
services industry of the U.S. equity market. Component companies
include airlines, broadcasting and entertainment companies, apparel and
broadline retailers, food and drug retailers, media agencies,
publishing companies, gambling companies, hotels, restaurants and bars,
and travel and tourism companies. This Underlying Index \24\ is the
basis for an ETF.
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    \24\ The shares of the iShares Dow Jones U.S. Consumer Services
Sector Index Fund are traded on the Exchange.
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    Dow Jones U.S. Financials Index. The Dow Jones U.S. Financials
Index measures the performance of the financial services industry of
the U.S. equity market. Component companies include regional banks,
major U.S. domiciled international banks, full line, life, and property
and casualty insurance companies, companies that invest, directly or
indirectly, in real estate, diversified financial companies such as
Fannie Mae, credit card issuers, check cashing companies, mortgage
lenders, and investment advisers, securities brokers and dealers,
including investment banks, merchant banks, and online brokers, and
publicly traded stock exchanges. This Underlying Index \25\ is the
basis for an ETF.
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    \25\ The shares of the iShares Dow Jones U.S. Financial Services
Index Fund are traded on the Exchange.
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    Dow Jones U.S. Health Care Index. The Dow Jones U.S. Health Care
Index measures the performance of the healthcare industry of the U.S.
equity market. Component companies include health care providers,
biotechnology companies, medical supply companies, and companies
related to advanced medical devices and pharmaceuticals. This
Underlying Index \26\ is the basis for an ETF.
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    \26\ The shares of the iShares Dow Jones U.S. Healthcare Sector
Index Fund are traded on the Exchange.
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    Dow Jones U.S. Industrials Index. The Dow Jones U.S. Industrials
Index measures the performance of the industrial industry of the U.S.
equity market. This Underlying Index includes component companies in
sectors related to building materials, heavy construction, factory
equipment, heavy machinery, industrial services, pollution control,
containers and packaging, industrial diversified, air freight, marine
transportation, railroads, trucking, land-transportation equipment,
shipbuilding, transportation services, advanced industrial equipment,
electronic components and equipment, and aerospace. This Underlying
Index \27\ is the basis for an ETF.
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    \27\ The shares of the iShares Dow Jones U.S. Industrial Sector
Index Fund are traded on the Exchange.
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    Dow Jones U.S. Oil & Gas Index. The Dow Jones U.S. Oil & Gas Index
measures the performance of the oil and gas industry of the U.S. equity
market. Component companies include oil drilling equipment and service
companies, oil companies-major, oil companies-secondary, pipeline
companies, liquid, solid, or gaseous fossil fuel producers, and related
service companies. This Underlying Index \28\ is the basis for an ETF.
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    \28\ The shares of the iShares Dow Jones U.S. Energy Sector
Index Fund are listed and traded on the Exchange.
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    Dow Jones U.S. Real Estate Index. The Dow Jones U.S. Real Estate
Index measures the performance of the real estate sector of the U.S.
equity market. Component companies include those that invest directly
or indirectly in the development, management, or ownership of shopping
malls, apartment buildings and housing developments, and real estate
investment trusts (``REITs''), which invest in apartments and office
and retail properties. REITs are passive investment vehicles that
invest primarily in income-producing real estate or real estate related
loans or interests. This Underlying Index \29\ has been approved for
options trading and is also the basis for an ETF.
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    \29\ The shares of the iShares Dow Jones U.S. Real Estate Index
Fund are listed and traded on the Exchange.
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    Dow Jones U.S. Semiconductor Index. The Dow Jones U.S.
Semiconductor Index measures the performance of the semiconductor sub-
sector of the U.S. equity market. Component companies are engaged in
the production of semiconductors and other integrated chips, as well as
other related products such as semiconductor capital equipment and
mother-boards.\30\
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    \30\ Amex represents that the Dow Jones U.S. Semiconductor Index
meets the Exchange's generic standards under Amex Rule 1000A,
Commentary .02.
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    Dow Jones U.S. Technology Index. The Dow Jones U.S. Technology
Index measures the performance of the technology industry of the U.S.
equity market. Component companies include those involved in computers
and office equipment, software, communications technology,
semiconductors, diversified technology services, and Internet services.
This Underlying Index \31\ is the basis for an ETF.
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    \31\ The shares of the iShares Dow Jones U.S. Technology Sector
Index Fund are listed and traded on the Exchange.
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    Dow Jones U.S. Utilities Index. The Dow Jones U.S. Utilities Index
measures the performance of the utilities industry of the U.S. equity
market. Component companies include electric utilities, gas utilities,
and water utilities. This Underlying Index \32\ is the basis for an
ETF.
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    \32\ The shares of the iShares Dow Jones U.S. Utilities Sector
Index Fund are traded on the Exchange.
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    Russell 2000[reg] Index. The Russell 2000[reg] Index is a measure
of small-cap U.S. stock market performance. It is an adjusted, market
capitalization-weighted index containing approximately 2,000 of the
smallest companies in the Russell 3000[reg] Index or approximately 8%
of the total market capitalization of the Russell 3000[reg] Index,
which in turn represents approximately 98% of the investable U.S.
equity market. All U.S. companies listed on the New York Stock Exchange
(``NYSE''), Amex, or The Nasdaq Stock Market meeting an initial minimum
($1) price are considered for inclusion. Reconstitution occurs
annually. Securities are not replaced if they leave the index; however,
new issue securities meeting other membership requirements may be added
on a quarterly basis. This Underlying Index \33\ has been approved for
options trading and is also the basis for an ETF.
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    \33\ The shares of the iShares Russell 2000 Index Fund are
traded on the Exchange.
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    Russell Midcap[reg] Index. The Russell Midcap[reg] Index measures
the performance of the 800 smallest companies in the Russell 1000[reg]
Index, which represent approximately 30% of the total market
capitalization of the Russell 1000[reg] Index. As of the latest
reconstitution, the average market

capitalization was approximately $5.2 billion; the median market
capitalization was approximately $3.9 billion. The largest company in
the index had an approximate market capitalization of $14.8 billion.
This Underlying Index is the basis for an ETF.\34\
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    \34\ The shares of the iShares Russell Midcap Index Fund are
traded on the Exchange.
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    Russell Midcap[reg] Growth Index. The Russell Midcap[reg] Growth
Index measures the performance of those Russell Midcap companies with
higher price-to-book ratios and higher forecasted growth values. The
stocks are also members of the Russell 1000[reg] Growth Index. This
Underlying Index \35\ is the basis for an ETF .
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    \35\ The shares of the iShares Russell Midcap Growth Index Fund
are traded on the Exchange.
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    Russell Midcap[reg] Value Index. The Russell Midcap[reg] Value
Index measures the performance of those Russell Midcap companies with
lower price-to-book ratios and lower forecasted growth values. The
stocks are also members of the Russell 1000[reg] Value Index. This
Underlying Index \36\ is the basis for an ETF .
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    \36\ The shares of the iShares Russell Midcap Value Index Fund
are traded on the Exchange.
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    Russell 1000[reg] Index. The Russell 1000[reg] Index measures the
performance of the 1,000 largest companies in the Russell 3000[reg]
Index, which represents approximately 92% of the total market
capitalization of the Russell 3000[reg] Index. As of the latest
reconstitution, the average market capitalization was approximately
$13.8 billion; the median market capitalization was approximately $4.9
billion. The smallest company in the index had an approximate market
capitalization of $1.9 billion. This Underlying Index \37\ is the basis
for an ETF .
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    \37\ The shares of the iShares Russell 1000 Index Fund are
traded on the Exchange.
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    Russell 1000[reg] Growth Index. The Russell 1000[reg] Growth Index
measures the performance of those Russell 1000 companies with higher
price-to-book ratios and higher forecasted growth values. This
Underlying Index \38\ is the basis for an ETF .
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    \38\ The shares of the iShares Russell 1000 Growth Index Fund
are traded on the Exchange.
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    Russell 1000[reg] Value Index. The Russell 1000[reg] Value Index
measures the performance of those Russell 1000 companies with lower
price-to-book ratios and lower forecasted growth values. This
Underlying Index \39\ is the basis for an ETF .
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    \39\ The shares of the iShares Russell 1000 Value Index Fund are
traded on the Exchange.
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    Russell 2000[reg] Growth Index. The Russell 2000[reg] Growth Index
measures the performance of those Russell 2000 companies with higher
price-to-book ratios and higher forecasted growth values. This
Underlying Index \40\ is the basis for an ETF .
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    \40\ The shares of the iShares Russell 2000 Growth Index Fund
are traded on the Exchange.
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    Russell 2000[reg] Value Index. The Russell 2000[reg] Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. This
Underlying Index \41\ is the basis for an ETF .
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    \41\ The shares of the iShares Russell 2000 Value Index Fund are
traded on the Exchange.
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Investment Objective of the Funds
    Each Bullish Fund will seek investment results that correspond,
before fees and expenses, to twice (200%) the daily performance of an
Underlying Index and will invest its assets based upon the same
strategies as conventional index funds. Rather than holding positions
in equity securities and certain financial instruments intended to
create exposure to 100% of the daily performance of an Underlying
Index, these Funds will hold positions in equity securities and certain
financial instruments designed to create exposure equal to twice
(200%), before fees and expenses, the daily performance of an
Underlying Index. These Bullish Funds generally will hold at least 85%
of their assets in the component equity securities of the relevant
Underlying Index. The remainder of assets will be devoted to certain
financial instruments \42\ and money market instruments \43\ that are
intended to create the additional needed exposure to such Underlying
Index necessary to pursue its investment objective.
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    \42\ 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 (the
``Financial Instruments'').
    \43\ Money market instruments include U.S. government securities
and repurchase agreements (the ``Money Market Instruments'').
Repurchase agreements held by the Funds will be consistent with Rule
2a-7 of the 1940 Act, i.e., remaining maturities of 397 days or less
and rated investment-grade.
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    The Bearish Funds will seek daily investment results, before fees
and expenses, of the inverse or opposite (-100%) of the Underlying
Index, in the case of the Short Funds, or twice the inverse or opposite
(-200%) of the daily performance of the Underlying Index, in the case
of the UltraShort Funds. Each of these Bearish Funds will not invest
directly in the component securities of the relevant Underlying Index,
but instead, will create short exposure to such Underlying Index. Each
Bearish Fund will rely on establishing positions in Financial
Instruments that provide, on a daily basis, the inverse or opposite of,
or twice the inverse or opposite of, as the case may be, the
performance of the relevant Underlying Index. Normally, 100% of the
value of the portfolios of each Bearish Fund will be devoted to
Financial Instruments and Money Market Instruments.
    While the Advisor will 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.\44\ The
Bullish Funds are expected to be highly correlated to each respective
Underlying Index and investment objective (0.95 or greater). The
Bearish Funds are expected to be highly inversely correlated to each
respective Underlying Index and investment objective (-0.95 or
greater).\45\ 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 or inverse multiple of the performance of the
relevant Underlying Index.
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    \44\ 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 Underlying 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.
    \45\ Correlation is the strength of the relationship between (1)
the change in a Fund's NAV and (2) the change in the benchmark
Underlying 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 will seek to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective based on
its ``Portfolio Investment Methodology,'' as described below. The
Exchange states that 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, 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, 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 required amount of exposure to the Underlying Index
(the ``Solution''), which will consist of equity securities, 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, 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. These trades will then be reflected in the NAV for that Fund
that is calculated as of 4 p.m. Eastern Time (``ET'') on Tuesday.
    The timeline for the Portfolio Investment Methodology is as
follows. Authorized Participants (``APs'' or ``Authorized
Participants'') \46\ 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 ten (10) minutes. The Advisor will 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
orders. At 4 p.m. ET, the Advisor will again look at the exposure to
make sure that the 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.
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    \46\ 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 who has entered into a participant
agreement with the Distributor.
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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. The Bullish Funds will hold between 85-
100% of their total assets in the equity securities contained in the
relevant Underlying Index. The remainder of assets, if any, will 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 Funds' investment objectives. The
Bearish Funds generally will not invest in equity securities related to
the applicable Underlying Index, but rather will hold only Financial
Instruments and Money Market Instruments. To the extent, applicable,
each Fund will 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 will only
purchase and sell futures contracts traded on a U.S. futures exchange
or board of trade. Each Fund will comply with the requirements of Rule
4.5 of the regulations promulgated by the Commodity Futures Trading
Commission (the ``CFTC'').\47\
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    \47\ The CFTC Rule 4.5 provides an exclusion for investment
companies registered under the 1940 Act from the definition of the
term ``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 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. 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 will adopt certain fundamental policies consistent with
the 1940 Act, and each Fund will 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'' or ``RIC'' for
purposes of the Internal Revenue Code (the ``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.\48\
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    \48\ 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 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 RICs).
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Availability of Information about the Shares and Underlying Indexes
    The Trust's Internet Web site (http://www.proshares.com), which is

and will be publicly accessible at no charge, will 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 product description, and
(d) other quantitative information, such as daily trading volume. The
prospectus and/or product description for each Fund will inform
investors that the Trust's Internet Web site has information about the
premiums and discounts at which the Fund's Shares have traded.\49 \
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    \49\ 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 .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. Furthermore, any sales
material will reference the availability of such circular and the
prospectus.
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    The Amex will disseminate for each Fund on a daily basis by means
of the Consolidated Tape Association (``CT'') and CQ High Speed Lines
information with respect to an Indicative Intra-Day Value (the ``IIV'')
(as defined and discussed herein), recent NAV, shares outstanding, and
the estimated cash amount and total cash amount per Creation Unit. The
Exchange will make available on its Internet Web site at http://www.amex.com
 daily trading volume, the closing price, the NAV, and the

final dividend amounts to be paid for each Fund.
    Each Fund's total portfolio composition will be disclosed on the
Internet Web site of the Trust (http://www.proshares.com or another

relevant Internet Web site as determined by the Trust) and/or the
Exchange (http://www.amex.com). The Trust expects that Internet 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 Financial Instruments, and the cash
equivalents and amount of cash held in the portfolio of each Fund. This
public Internet Web site disclosure of the portfolio composition of
each Fund will coincide with the disclosure by the Advisor of the ``IIV
File'' (as described below) and the portfolio composition file or
``PCF'' (as described below). Therefore, the same portfolio information
(including accrued expenses and dividends) will be provided on the
public Internet Web site as well as in the IIV File and PCF provided to
Authorized Participants. The format of the public Internet Web site
disclosure and the IIV File and PCF will differ because the public
Internet Web site will list all portfolio holdings, while the IIV File
and PCF will similarly provide the portfolio holdings, but in a format
appropriate for Authorized Participants, i.e., the exact components of
a Creation Unit.\50\ Accordingly, each investor will have access to the
current portfolio composition of each Fund through the Trust's Internet
Web site, at http://www.proshares.com, and/or at the Exchange's Internet Web site at http://www.amex.com.

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    \50\ The composition will be used to calculate the 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 Internet Web sites, such as at http://www.bloomberg.com.
 Data regarding each Underlying Index is also

available from the respective Underlying Index provider to subscribers.
Several independent data vendors also package and disseminate
Underlying 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 at least every 15 seconds throughout the trading day by
Amex or another organization authorized by the relevant Underlying
Index provider in accordance with Commentary .02(c) to Amex Rule 1000A.
Creation and Redemption of Shares
    Each Fund will issue and redeem Shares only in aggregations of at
least 50,000 (``Creation Units''). Purchasers of Creation Units will be
able to separate the Creation 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 herein) to be included in the next trading day's Creation Unit
for each Bullish Fund (the ``Deposit List''). The Trust will then add
to the Deposit List the cash information effective as of the close of
business on that business day and create a PCF for each Fund, which it
will transmit 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.\51\ 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 and other available information for market participants to
calculate a Fund's IIV and effectively arbitrage such Fund.
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    \51\ The Trust or the Advisor will post the IIV File to a
password-protected Internet 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 Internet Web site
containing the IIV File. The Funds, however, will disclose each
business day to the public identical information, but in a format
appropriate to public investors, at the same time the Funds disclose
the IIV File and PCF, 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 Financial
Instruments such as swaps and futures contracts and a Bearish Fund
holding swaps and futures contracts: (A) The total value of the equity
securities held by the Bullish Fund, (B) the notional value of the
swaps held by such Funds (together with an indication of the Underlying
Index on which such swap is based and whether the Funds' position is
long or short), (C) the most

recent valuation of the swaps held by the Funds, (D) the notional value
of any futures contracts (together with an indication of the Underlying
Index on which such contract is based, whether the Funds' position is
long or short and the contract's expiration date) held by the Funds,
(E) the number of futures contracts held by the Funds (together with an
indication of the Underlying Index on which such contract is based,
whether the Funds' position is long or short and the contract's
expiration date), (F) the most recent valuation of the futures
contracts held by the Funds, (G) the total assets and total shares
outstanding of each Fund, and (H) a ``net other assets'' figure
reflecting expenses and income of the Funds to be accrued during and
through the following business day and accumulated gains or losses on
the Funds' Financial Instruments through the end of the business day
immediately preceding the publication of the IIV File. To the extent
that any Bullish or Bearish Fund holds cash or cash equivalents about
which information is not available in a PCF, information regarding such
Fund's cash and cash equivalent positions will be disclosed in the IIV
File for such Fund.
    The information in the IIV File will 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, will be
sufficient for calculation of the IIV for Bullish Funds, during such
next business day. 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.
    Under normal circumstances, the Bullish Funds will be created and
redeemed either entirely for cash and/or for a deposit basket of equity
securities (``Deposit Securities''), plus a Balancing Amount (as
defined herein), as described below. Under normal circumstances, the
Bearish Funds will be created and redeemed entirely for cash. The IIV
File published before the open of business on a business day will,
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 will be paid upon redemption of a Creation
Unit, for each Bearish Fund for that business day.
    For the Bullish Funds, the PCF will be prepared by the Trust after
4 p.m. ET and transmitted by the Index Receipt Agent to the NSCC by
6:30 p.m. ET. All Authorized Participants and the Exchange will have
access to the Internet Web site containing the IIV File. The IIV File
will reflect the trades made on behalf of a Bullish Fund that business
day and the creation/redemption orders for that business day.
Accordingly, by 6:30 p.m. ET, Authorized Participants will know the
composition of the Bullish Fund's portfolio for the next trading day.
    Creation of the Bullish Funds. Typically, persons \52\ purchasing
Creation Units from a Bullish Fund must make an in-kind deposit of a
basket of 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
(the ``Balancing Amount''), plus the applicable transaction fee (the
``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. 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.\53\
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    \52\ Authorized Participants are the only persons who 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 and who are participants in DTC. See supra
note 46.
    \53\ While not typical, if the market value of the Deposit
Securities is greater than the NAV of a Creation Unit, then the
Balancing Amount will be a negative number, in which case the
Balancing Amount will be paid by the Bullish Fund to the purchaser,
rather than vice-versa.
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    The Balancing Amount will 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 Funds 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 is valued
at $5 million for a Bullish Fund, if the market increases 10%, such
basket of Deposit Securities would be equal to $5.5 million at 4 p.m.
ET. The value of the Bullish Fund shares would increase by 20% or $1
million to equal $6 million total. With such basket of Deposit
Securities valued at $5.5 million, the Balancing Amount would be
$500,000. The values of the next day's basket of Deposit Securities and
Balancing Amount are announced between 5:30 p.m. ET and 6 p.m. ET each
business day.
    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 Bullish Funds, if any, is
included in the Balancing Amount. The Transaction Fee is a fee imposed
by the Bullish Funds on investors purchasing (or redeeming) Creation
Units.
    The Trust will make available through the DTC or the Distributor on
each business day, prior to the opening of trading on the Exchange, the
Deposit List indicating the Deposit Securities to be included in the
Creation Deposit for each Bullish Fund.\54\ The Trust also will make
available on a daily basis information about the previous day's
Balancing Amount.
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    \54\ 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.
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    The Bullish Funds reserve 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.\55\
Substitutions 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. Orders to create or
redeem Shares of the Bullish Funds must be placed through an Authorized
Participant.
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    \55\ In certain limited instances, a Bullish 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.
---------------------------------------------------------------------------

    As noted below, the Exchange will disseminate through the
facilities of the CT, at least every 15 seconds during the Exchange's
regular trading hours, the IIV on a per Fund Share basis. The Exchange
states that the Funds will not be involved in, or responsible for, the
calculation or dissemination of any such amount and will make no
warranty as to its accuracy.

    Redemption of the Bullish Funds. Bullish Fund Shares in Creation
Unit-size aggregations will be redeemable on any day on which the NYSE
is open in exchange for a basket of securities (``Redemption
Securities''). As it does for Deposit Securities, the Trust will 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 will be the same as the Deposit
Securities required of investors purchasing Creation Units on the same
day.\56\ 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 will either receive from or pay to the Bullish Fund
a cash amount equal to the difference (the ``Redemption Balancing
Amount''). In the typical situation where the Redemption Securities are
the same as the Deposit Securities, this cash amount will be equal to
the Balancing Amount described above in the creation process involving
Deposit Securities. The redeeming investor also must pay to the Bullish
Fund a transaction fee (``Redemption Transaction Fee'') to cover
transaction costs.\57\
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    \56\ There may be circumstances, however, where the Deposit
Securities and Redemption Securities could differ. For example, if
ABC stock were replacing XYZ stock in a Fund's Underlying Index at
the close of a day's trading session, the day's prescribed Deposit
Securities might include ABC, but not XYZ, while the day's
prescribed Redemption Securities might include XYZ but not ABC.
    \57\ Redemptions in which cash is substituted for one or more
Redemption Securities may be assessed a higher Redemption
Transaction Fee to offset the transaction cost to the Fund of
selling those particular Redemption Securities. This Redemption
Transaction Fee is expected to be between $500 and $1,000.
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    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 at the time
of tender, and the Redemption Balancing Amount. The Adviser currently
contemplates that Creation Units of each Bullish Fund will be redeemed
principally in kind with respect to the Redemption Securities and the
Redemption Balancing Amount in cash largely resulting from the value of
the Financial Instruments included in the Bullish Fund.
    In order to facilitate delivery of Redemption Securities, each
redeeming Authorized Participant, acting on behalf of a 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 Bullish Fund may, in its discretion, redeem the
Bullish Fund Shares for cash.
    Creation and Redemption of the Bearish Funds. 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 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.\58\
---------------------------------------------------------------------------

    \58\ In their 1940 Act Application, the Applicants stated that
they do not believe that All-Cash Payments will affect arbitrage
efficiency. This is because the 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 basket of Deposit Securities. 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.
---------------------------------------------------------------------------

    Placement of Creation Unit Purchases and Redemption Orders.
Creation Unit aggregations of the Funds will be purchased at NAV, plus
a Transaction Fee. For the Bearish Funds, the purchaser will 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). For the Bullish Funds, the
purchaser will 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). Purchasers of either Fund in Creation Unit
aggregations must satisfy certain creditworthiness criteria established
by the Advisor and approved by the Board, as provided in the
participation agreement (``Participation Agreement'') between the Trust
and Authorized Participants.
    Creation Unit aggregations of the Bullish Funds will be redeemable
either in-kind or all in cash equal to the NAV, less the Redemption
Transaction Fee. Creation Unit aggregations of the Bearish Funds will
be redeemable for an All-Cash Payment equal to the NAV, less the
Redemption 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.\59\
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    \59\ The Exchange states that, 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's Participation 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.
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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 DTC 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.

The SAI will 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 will 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 will 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 will be
an expense borne by the individual Beneficial Owners participating in
reinvestment through such service.
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 CT: (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 Indicative Intra-Day Value or ``IIV'' \60\ as
calculated by the Exchange (the ``IIV Calculator''). \61\ 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.
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    \60\ The IIV is also referred to by other issuers 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 for
different exchange-traded funds.
    \61\ The Exchange will calculate the IIV for each Fund.
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    The IIV Calculator (the Exchange) will 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 will be disseminated by 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
will not precisely reflect the value of the Fund portfolio.
    IIV Calculation for the Bullish Funds. The IIV Calculator (the
Exchange) will disseminate the IIV throughout the trading day for the
Bullish Funds holding equity securities and Financial Instruments, if
any. The IIV Calculator (the Exchange) 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 Securities indicated on 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 current IIV.
    IIV Calculation for the Bearish Funds. The IIV Calculator (the
Exchange) will disseminate the IIV throughout the trading day for the
Bearish Funds. The IIV Calculator (the Exchange) 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 under Amex Rule 1002A. A minimum of two
Creation Units (at least 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. 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 Amex 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 will be calculated daily and made
available to all market participants at the same time.
    The continued listing criteria provides for the delisting or
removal from listing of the Shares under any of the following
circumstances:
     If, following the initial twelve-month period after
commencement of trading on the Exchange of a series of Index Fund
Shares, there are fewer than 50 beneficial holders of the series of
Index Fund Shares for 30 or more consecutive trading days; or
     If the value of the applicable Underlying Index or
portfolio is no longer calculated or available on at least a 15-second
delayed basis through one or more major market data vendors during the
time the Shares trade on the Exchange; or
     The IIV is no longer made available on at least a 15-
second delayed basis;\62\ or
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    \62\ In the event an IIV is no longer calculated or disseminated
by one or more major market data vendors, the Exchange will
immediately contact the Commission.
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     If such other event shall occur or condition exists which,
in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
    Additionally, the Exchange will file a proposed rule change
pursuant to Rule

19b-4 under the Act seeking approval to continue trading the Shares of
a Fund and, unless approved, the Exchange will commence delisting the
Shares of such Fund if:
     The Underlying Index provider substantially changes either
the Underlying Index component selection methodology or the weighting
methodology; or
     A successor or substitute index is used in connection with
the Shares.\63 \
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    \63\ If the Trust uses a successor or substitute index, the
Exchange's filing will address, among other things, the listing and
trading characteristics of the successor or substitute index and the
Exchange's surveillance procedures applicable thereto.
---------------------------------------------------------------------------

    Furthermore, Amex Rule 1002A(b)(ii) establishes that, if the IIV or
the Underling 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 Exchange represents the Trust is required to comply with Rule
10A-3 under the Act for the initial and continued listing of the
Shares.
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.
Amex Trading Rules
    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 (Amex
Rule 411). \64\
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    \64\ Telephone conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, Nyieri Nazarian, Assistant General Counsel,
Amex, and Edward Cho, Special Counsel, Division of Market
Regulation, Commission, on December 14, 2006 (clarifying Amex
trading rules applicable to the Shares).
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    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 Amex 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.\65\
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    \65\ 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 Amex Rule 154, Commentary .04(c).
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    Amex Rule 190. Amex 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 of the application of Commentary .03
of Amex Rule 1000A to the Funds. The 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.\66 \
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    \66\ See supra note 49 and accompanying text.
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Trading Halts
    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 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 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. Notification from
the Advisor will 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 will also be halted if the circuit
breaker parameters under Amex Rule 117 have been reached.
    As noted above, 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 will halt trading no
later than the beginning of the trading day following the interruption.
Suitability and Information Circular
    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 (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.
Purchases and Redemptions in Creation Unit Size
    In the Information Circular referenced above, Amex members and
member organizations will be informed that 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 will rely on its existing surveillance procedures governing Index
Fund Shares, which have been deemed adequate under the 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 Exchange until 4:15 p.m. ET each
business day. Shares will trade with a minimum price variation of $.01.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\67\ in general, and furthers the
objectives of Section 6(b)(5),\68\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transaction in securities, and, in general, to protect investors and
the public interest.
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    \67\ 15 U.S.C. 78f(b).
    \68\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change, as amended, will
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 did not receive any written comments on the proposed
rule change, as amended.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which Amex consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule
change should be disapproved.
    The Commission is considering granting accelerated approval of the
proposed rule change, as amended, at the end of a 15-day comment
period.\69\
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    \69\ Amex has requested accelerated approval of this proposed
rule change, as amended, prior to the 30th day after the date of
publication of the notice of the filing thereof, following the
conclusion of a 15-day comment period.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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-2006-101 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-2006-101. 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 the
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Amex-2006-101 and should be submitted on or before
January 11, 2007.
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    \70\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\70\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-22093 Filed 12-26-06; 8:45 am]

BILLING CODE 8011-01-P