[Federal Register: October 26, 2006 (Volume 71, Number 207)]
[Notices]
[Page 62634-62636]
[DOCID:fr26oc06-78]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54628; File No. SR-NYSEArca-2006-74]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Order Granting Accelerated Approval of Proposed Rule Change
Relating to the Vanguard Emerging Markets Stock Index Fund

 October 19, 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 10, 2006, NYSE Arca, Inc. (``Exchange''), through its wholly
owned subsidiary NYSE Arca Equities, Inc. (``NYSE Arca Equities'' or
the ``Corporation''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and is approving the
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is proposing to substitute the index tracked by a
class of exchange-traded securities (formerly referred to as Vanguard
Emerging Market VIPERs, the ``ETF Shares'') issued by the Vanguard
Emerging Markets Stock Index Fund (``Fund'').\3\
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    \3\ In addition to the ETF Shares, the Fund offers a class of
shares that are not exchange-traded, which are referred to as
``Investor Shares.''
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    On August 8, 2005, the Commission approved the Exchange's filing
proposing to trade the ETF Shares pursuant to unlisted trading
privileges (``UTP'').\4\ The Commission had previously approved the
original listing and trading of the ETF Shares by the American Stock
Exchange LLC (``Amex'').\5\ The Exchange is filing this proposal to
obtain the Commission's approval of the substitution of the index
tracked by the ETF Shares issued by the

Fund. The Amex has recently filed a similar proposal.\6\
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    \4\ See Securities Exchange Act Release No. 34-52221 (August 8,
2005), 70 FR 48222 (August 16, 2005) (SR-PCX-2005-74) (the
``Approval Order''). The Exchange expanded the hours during which
the ETF Shares are eligible to trade on the NYSE Arca Marketplace
(f/k/a the Archipelago Exchange) in December 2005. See Securities
Exchange Act Release No. 34-52927 (December 8, 2005), 70 FR 74397
(December 15, 2005) (SR-PCX-2005-128).
    \5\ See Securities Exchange Act Release No. 50189 (August 12,
2004), 69 FR 51723 (August 20, 2004) (SR-Amex-2005-04) (the ``Amex
Approval Order'').
    \6\ See SR-Amex-2006-95 (September 29, 2006) (the ``Amex
Proposal'').
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    The ETF Shares originally sought to track, as closely as possible,
the performance of the Select Emerging Markets Index (``Select
Index''), a regional index compiled by Morgan Stanley Capital
International (MSCI[supreg]) \7\ (``MSCI''). Pursuant to the Fund's
prospectus for the ETF Shares and the Amex Approval Order, the Fund has
the right to substitute a different index for the Select Index,
provided, that the reason for the substitution is determined in good
faith, the substitute index measures the same general market as the
Select Index and investors are notified of the index substitution. The
Vanguard Group, Inc., as investment adviser to the Fund (``Vanguard''),
recently decided to substitute the Select Index with the
Vanguard[supreg] Emerging Markets Index (``Emerging Markets Index'')
and issued a press release announcing such substitution.\8\
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    \7\ MSCI[supreg] is a service mark of Morgan Stanley & Co.
Incorporated.
    \8\ See http://onlinepressroom.net/vanguard/.

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    According to the Amex Proposal, the Select Index \9\ is modeled on
the more expansive Emerging Markets Index with certain adjustments
designed to reduce risk including the exclusion of countries because of
concerns about illiquidity, repatriation of capital, or entry barriers
to those markets. As of June 13, 2006, Colombia, Egypt, Jordan,
Malaysia, Morocco, Pakistan, Russia, Sri Lanka, and Venezuela were
excluded from the Select Index due to the above noted concerns. Because
emerging markets, such as Russia and Malaysia, have become more liquid
and accessible, Vanguard believes that additional emerging market
countries now warrant inclusion in the Fund. The addition of these
emerging markets to the Select Index would result in a benchmark that
is effectively the same as the Emerging Markets Index. As a result, it
is proposed that the Emerging Markets Index be substituted for the
Select Index.
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    \9\ The Select Index includes approximately 668 common stocks of
companies located in Argentina, Brazil, Chile, China, Czech
Republic, Hungary, India, Indonesia, Israel, Korea, Mexico, Peru,
Philippines, Poland, South Africa, Taiwan, Thailand and Turkey.
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    The Emerging Markets Index provides exposure to 25 emerging market
countries whereas the Select Index only provides exposure to 18
emerging market countries. As of August 24, 2006, the Emerging Markets
Index was comprised of 848 constituents with the top five constituents
representing the following weights: 4.07%, 2.84%, 2.1%, 1.84% and
1.77%. Countries represented in the Emerging Markets Index include
Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Egypt,
Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco,
Pakistan, Peru, the Philippines, Poland, Russia, South Africa, South
Korea, Taiwan, Thailand, and Turkey. MSCI periodically adjusts the list
of included countries to keep pace with the evolution in world markets
(such adjustments are made on a forward-looking basis, so past
performance of the Emerging Markets Index always reflects actual
country representation during the relevant period).
    MSCI (http://www.msci.com) administers the Emerging Markets Index

exclusively. Similar to the Select Index, the Emerging Markets Index is
a capitalization-weighted index whose component securities are adjusted
for available float and must meet objective criteria for inclusion in
the Index. The Emerging Markets Index aims to capture 85% of the
publicly available total market capitalization in each emerging market
included in the Emerging Markets Index. The Emerging Markets Index is
rebalanced quarterly, calculated in U.S. Dollars on a real time basis,
and disseminated every 60 seconds during market trading hours.
    The Fund's investment objectives, policies and methodology, MSCI's
index maintenance procedures and standards and the dissemination of
Index information as described in the Approval Order and the Amex
Approval Order will not be affected by the index substitution. For
example, the Fund will continue to employ a ``representative sampling''
methodology to track the Emerging Markets Index, which means that the
Fund invests in a representative sample of securities in the Index that
have a similar investment profile as the Index.\10\ The Exchange
believes that the Fund's investment policies will continue to prevent
the Fund from being excessively weighted in any single security or
small group of securities and significantly reduce concerns that
trading in the ETF Shares could become a surrogate for trading in
unregistered securities. It is also expected that the expense ratios of
the ETF Shares will remain at 0.30% and the Fund will not generate any
capital gains as a result of the substitution.
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    \10\ As of August 24, 2006, the Fund was comprised of 851
constituents, according to the Amex Proposal. The aggregate
percentage weighting of the top 5, 10, and 20 constituents in the
Fund were 11.07%, 18.17% and 28.09%, respectively.
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    The Exchange has reviewed the Emerging Markets Index and believes
that sufficient mechanisms exist that would provide the Exchange with
adequate surveillance and regulatory information with respect to the
Index. Specifically, the Exchange represents that it will rely on
existing surveillance procedures governing derivative products trading
on the Exchange. In addition, the Exchange, Vanguard, and MSCI have a
general policy prohibiting the distribution of material, non-public
information by their employees. Due to MSCI's role as a broker-dealer
that maintains the Index, MSCI has represented that a functional
separation, such as a firewall, exists between its trading desk and the
research persons responsible for maintaining the Index.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6(b) \11\ of the Act, in general, and furthers the
objectives of Section 6(b)(5) \12\ 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 facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    In addition, the proposed rule change is consistent with Rule 12f-5
\13\ under the Act because it deems the Shares to be equity securities,
thus rendering the Shares subject to the Exchange's rules governing the
trading of equity securities.
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    \13\ 17 CFR 240.12f-5.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    No written comments on the proposed rule change were solicited or
received.

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-NYSEArca-2006-74 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2006-74. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,

all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal offices 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-NYSEArca-2006-74 and should be submitted on or before
November 16, 2006.

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

    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.\14\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\15\ 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.
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    \14\ In approving this 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).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving this proposed rule
change before the thirtieth day after the publication of notice thereof
in the Federal Register. As noted above, the Commission previously
found that the trading of these ETF Shares on the Exchange is
consistent with the Act.\16\ Substituting the Emerging Markets Index
for the Select Index does not change the Commission's analysis, and the
Commission believes accelerating approval of this proposed rule change
is appropriate.
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    \16\ See Approval Order, supra note 4.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEArca-2006-74), is hereby approved
on an accelerated basis.\17\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-17989 Filed 10-25-06; 8:45 am]

BILLING CODE 8011-01-P