Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment Nos. 3 and 5, Relating to the Listing and Trading of Shares of Reality Shares DIVS ETF under NYSE Arca Equities Rule 8.600, 55859-55864 [2014-22163]
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Federal Register / Vol. 79, No. 180 / Wednesday, September 17, 2014 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–22114 Filed 9–16–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73081; File No. SR–
NYSEArca–2014–20]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change, as Modified by
Amendment Nos. 3 and 5, Relating to
the Listing and Trading of Shares of
Reality Shares DIVS ETF under NYSE
Arca Equities Rule 8.600
September 11, 2014.
I. Introduction
On February 25, 2014, NYSE Arca,
Inc. (‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares (‘‘Shares’’) of
Reality Shares DIVS ETF (‘‘Fund’’)
under NYSE Arca Equities Rule 8.600.
On March 7, 2014, the Exchange filed
Amendment No. 2 to the proposed rule
change, which amended and replaced
the proposed rule change in its
entirety.3 The proposed rule change, as
modified by Amendment No. 2, was
published for comment in the Federal
Register on March 17, 2014.4 The
Commission received no comments on
the proposal. On April 23, 2014,
pursuant to Section 19(b)(2) of the Act,5
the Commission designated a longer
period within which to either approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.6
39 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 was filed on March 6, 2014
and withdrawn on March 7, 2014.
4 See Securities Exchange Act Release No. 71686
(March 11, 2014), 79 FR 14761.
5 15 U.S.C. 78s(b)(2).
6 Securities Exchange Act Release No. 72000
(April 23, 2014), 79 FR 24032 (April 29, 2014). The
Commission determined that it was appropriate to
designate a longer period within which to take
action on the proposed rule change so that it has
sufficient time to consider the proposed rule
change. Accordingly, the Commission designated
June 13, 2014 as the date by which it should
approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule
change.
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On May 27, 2014, the Exchange
submitted Amendment No. 3 to the
proposed rule change.7 On June 5, 2014,
the Exchange filed Amendment No. 5 to
the proposed rule change.8 On June 9,
2014, the Commission published notice
of Amendment Nos. 3 and 5 and
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment Nos. 3 and 5.9 The
Commission received no comments on
the proposal, as modified by
Amendment Nos. 3 and 5. This order
grants approval of the proposed rule
change, as modified by Amendment
Nos. 3 and 5.
II. Description of the Proposed Rule
Change
The Exchange has made the following
representations and statements in
describing the Fund and its investment
strategies, including other portfolio
holdings and investment restrictions.10
General
The Fund will be an actively-managed
exchange-traded fund (‘‘ETF’’). The
Shares of the Fund will be offered by
the Reality Shares ETF Trust (formerly,
the ERNY Financial ETF Trust)
(‘‘Trust’’). The Trust will be registered
with the Commission as an open-end
management investment company.11
7 Amendment No. 3 replaced SR–NYSEArca–
2014–20, as previously amended by Amendment
No. 2, and superseded such filing in its entirety.
8 Amendment No. 5 was technical in nature and
changed the name of the Fund, and all related
references in the filing, from ‘‘Reality Shares
Isolated Dividend Growth ETF’’ to ‘‘Reality Shares
DIVS ETF.’’ Amendment No. 4 was filed by the
Exchange on June 4, 2014 and withdrawn on June
5, 2014.
9 See Securities Exchange Act Release No. 72347,
79 FR 33964 (June 13, 2014) (‘‘Notice and Order’’).
10 The Commission notes that additional
information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks, net
asset value (‘‘NAV’’) calculation, creation and
redemption procedures, fees, portfolio holdings
disclosure policies, distributions, and taxes, among
other information, is included in the Notice and the
Registration Statement, as applicable. See Notice
and Order and Registration Statement, supra note
9 and infra note 11, respectively.
11 The Trust will be registered under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’). According to the Exchange, on
November 12, 2013, the Trust filed a registration
statement on Form N–1A under the Securities Act
of 1933 (‘‘1933 Act’’) (15 U.S.C. 77a), and under the
1940 Act relating to the Fund, as amended by PreEffective Amendment Number 1, filed with the
Commission on February 6, 2014 (File Nos. 333–
192288 and 811–22911) and Pre-Effective
Amendment Number 2, filed with the Commission
on May 1, 2014 (File Nos. 333–192288 and 811–
22911) (‘‘Registration Statement’’). According to the
Exchange, the Commission has issued an order
granting certain exemptive relief to the Trust under
the 1940 Act. Investment Company Act Release No.
30552 (June 10, 2013) (‘‘Exemptive Order’’).
According to the Exchange, the Trust filed an
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55859
Reality Shares Advisors, LLC (formerly,
ERNY Financial Advisors, LLC) will
serve as the investment adviser to the
Fund (‘‘Adviser’’).12 ALPS Distributors,
Inc. will be the principal underwriter
and distributor of the Fund’s Shares.
The Bank of New York Mellon will
serve as administrator, custodian, and
transfer agent for the Fund.
Investment Strategies
The Fund is actively managed by the
Adviser and seeks long-term capital
appreciation by using proprietary
trading strategies designed to isolate and
capture the growth in the level of
dividends expected to be paid on a
portfolio of large-capitalization equity
securities listed for trading in the U.S.,
Europe, and Japan,13 while attempting
to minimize the Fund’s exposure to the
price fluctuations associated with such
securities.14 The Adviser believes that,
over time, the level of expected
dividends reflected in the Fund’s
portfolio will be highly correlated to the
level of actual dividends paid on such
large capitalization securities.
Under normal market conditions,15
and as further described below, the
Application for an Order under Section 6(c) of the
1940 Act for exemptions from various provisions of
the 1940 Act and rules thereunder (File No. 812–
14146), on April 5, 2013, as amended on May 10,
2013 (‘‘Exemptive Application’’). The Exchange
represents that investments made by the Fund will
comply with the conditions set forth in the
Exemptive Application and the Exemptive Order.
12 The Exchange states that the Adviser is not
registered as a broker-dealer and is not affiliated
with any broker-dealers. In addition, the Exchange
states that in the event (a) the Adviser or any subadviser becomes registered as a broker-dealer or
newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer
or becomes affiliated with a broker-dealer, such
adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or brokerdealer affiliate regarding access to information
concerning the composition and changes to the
portfolio, and such adviser or sub-adviser will be
subject to procedures designed to prevent the use
and dissemination of material non-public
information regarding the portfolio.
13 The Exchange states that the Adviser considers
U.S. large capitalization companies to be those with
market capitalizations within the range of market
capitalizations of the companies included in the
S&P 500 Index. The Adviser considers European
large capitalization companies to be those with
market capitalizations within the range of market
capitalizations of the companies included in the
Euro Stoxx 50 Index. The Adviser considers
Japanese large capitalization companies to be those
with market capitalizations within the range of
market capitalizations of the companies included in
the Nikkei 225 Index.
14 The Exchange states that there is no guarantee
that either the level of overall dividends paid by
such companies will grow over time, or that the
Fund’s investment strategies will capture such
growth. The Exchange represents that the Fund will
include appropriate risk disclosure in its offering
documents disclosing both of these risks.
15 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
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Fund will invest substantially all of its
assets in (i) a combination of exchangelisted options contracts on large
capitalization equity indexes and
exchange-listed options contracts on
exchange traded funds (‘‘ETFs’’) 16
designed to track the performance of
large capitalization equity securities
listed for trading in the U.S., Europe, or
Japan, as well as (ii) derivatives,
including swaps, exchange-listed
futures contracts, and forward contracts,
designed to capture the growth of the
level of dividends expected to be paid
on large capitalization equity securities
listed for trading in the U.S., Europe,
and Japan. In addition to the
investments described above, the Fund
may also buy and sell over-the counter
(‘‘OTC’’) options on indexes of largecapitalization U.S., European, and
Japanese equity securities listed for
trading in the U.S., Europe, and Japan,
such as the S&P 500 Index, the Euro
Stoxx 50 Index, and the Nikkei 225
Index, and listed and OTC options on
the securities, or any group of securities,
issued by large capitalization U.S.,
European, and Japanese companies.17
The Fund will buy (i.e., hold a ‘‘long’’
position in) and sell (i.e., hold a ‘‘short’’
position in) put and call options.18 The
Fund will invest in a combination of put
and call options designed to allow the
Fund to isolate its exposure to the
growth of the level of dividends
expected to be paid on a portfolio of
securities issued by large capitalization
companies listed for trading in the
United States, Europe, and Japan, while
minimizing the Fund’s exposure to
changes in the trading price of such
extreme volatility or trading halts in the equity
markets or the financial markets generally;
operational issues causing dissemination of
inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar
intervening circumstance.
16 For purposes of this proposed rule change,
ETFs include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3)),
Portfolio Depositary Receipts as described in NYSE
Arca Equities Rule 8.100, and Managed Fund
Shares (as described in NYSE Arca Equities Rule
8.600). The ETFs all will be listed and traded in the
U.S. on registered exchanges. While the Fund may
invest in inverse ETFs, it may not invest in
leveraged or inverse leveraged (e.g., 2X, –2X, 3X or
–3X) ETFs.
17 The Fund will transact only with OTC options
dealers that have in place an International Swaps
and Derivatives Association (‘‘ISDA’’) agreement
with the Fund.
18 A put option gives the purchaser of the option
the right to sell, and the issuer of the option the
obligation to buy, the underlying security or
instrument on a specified date or during a specified
period of time. A call option on a security gives the
purchaser of the option the right to buy, and the
writer of the option the obligation to sell, the
underlying security or instrument on a specified
date or during a specified period of time.
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securities. The Fund may invest up to
80% of its assets through options
transactions.
The prices of index and ETF options
reflect the market trading prices of the
securities included in the applicable
index or securities held by the
applicable ETF, as well as market
expectations regarding the level of
dividends to be paid on such indexes or
ETFs during the term of the option. A
significant portion of the Fund’s
portfolio holdings will consist of
multiple corresponding near-term and
long-term put and call option
combinations on the same reference
assets (e.g., options on the S&P 500
Index or options on S&P 500 ETFs) with
the same strike price. Because option
prices reflect both stock price and
dividend expectations, they can be used
in combination to isolate either price
exposure or dividend expectations. The
use of near-term and long-term put and
call option combinations on the same
reference asset with the same strike
price, but with different maturities, is
designed to gain exposure to the level of
dividends expected to be paid on a
portfolio of large-capitalization equity
securities listed for trading in the U.S.,
Europe, and Japan, while attempting to
minimize the Fund’s exposure to the
price fluctuations associated with these
securities.
Once established, this portfolio
construction of option combinations
will accomplish two goals. First, the use
of corresponding buy or sell positions
on near and long-term options at the
same strike price is designed to
neutralize underlying stock price
movements. In other words, the
corresponding ‘‘buy’’ and ‘‘sell’’
positions on the same reference asset are
designed to net against each other and
eliminate the impact that changes to the
stock price of the reference asset would
otherwise have on the value of the Fund
Shares. Second, by minimizing the
impact of price fluctuations through the
construct of the near- and long-term
contract combinations, the strategy is
designed to isolate market expectations
for dividends implied between
expiration dates of the near-term and
long-term option contracts.
The Fund may invest in exchangelisted futures contracts and forward
contracts based on indexes of largecapitalization U.S., European, and
Japanese equity securities listed for
trading in the U.S., Europe, or Japan,
such as the S&P 500 Index, the Euro
Stoxx 50 Index, and the Nikkei 225
Index, and the securities, or any group
of securities, issued by large
capitalization U.S., European, and
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Sfmt 4703
Japanese companies.19 The Fund’s use
of listed futures contracts and forward
contracts will be designed to allow the
Fund to isolate its exposure to the
growth of the level of the dividends
expected to be paid on a portfolio of
securities of large capitalization U.S.,
European, and Japanese companies,
while minimizing the Fund’s exposure
to changes in the trading price of such
securities. As with option contracts, the
prices of equity index futures contracts
and forward contracts reflect the market
trading prices of the securities included
in the applicable index, as well as
market expectations regarding the level
of dividends to be paid on such indexes
during the term of such futures or
forward contract. Therefore, as with
option contracts, long and short
positions in near-dated and far-dated
futures and forward contracts can be
used in combination to isolate either
price exposure or dividend
expectations. For example, as with
option contracts, the use of long and
short positions in near-dated and fardated futures and forward contracts can
be used to gain exposure to the level of
dividends expected to be paid on a
portfolio of securities, while attempting
to minimize the Fund’s exposure to the
price fluctuations associated with such
securities. In addition, the Fund may
invest in listed dividend futures
contracts. Listed dividend futures
contracts are available for certain
indices (such as EURO STOXX 50 Index
Dividend Futures and Nikkei 225
Dividend Index Futures). These futures
contracts provide direct exposure to the
level of implied dividends in the
designated index, without exposure to
the price of the securities included in
the index. The Fund also may invest in
Eurodollar futures contracts to manage
or hedge exposure to interest rate
fluctuations. The Fund may invest up to
80% of its assets through futures
contracts and forward transactions.
The Fund may enter into dividend
and total return swap transactions
(including equity swap transactions)
based on indexes of large-capitalization
U.S., European, and Japanese equity
securities listed for trading in the U.S.,
Europe, and Japan, such as the S & P 500
Index, the Euro Stoxx 50 Index, and the
Nikkei 225 Index, and securities, or any
group of securities, issued by large
19 A listed futures contract is a standardized
contract traded on a recognized exchange in which
two parties agree to exchange either a specified
financial asset or the cash equivalent of said asset
at a specified future date and price. A forward
contract involves the obligation to purchase or sell
either a specified financial asset or the cash
equivalent of said asset at a future date at a price
set at the time of the contract.
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capitalization U.S., European, and
Japanese companies.20 In a typical swap
transaction, one party agrees to make
periodic payments to another party
(‘‘counterparty’’) based on the change in
market value or level of a specified rate,
index, or asset. In return, the
counterparty agrees to make periodic
payments to the first party based on the
return of a different specified rate,
index, or asset. Swap transactions are
usually done on a net basis, the Fund
receiving or paying only the net amount
of the two payments. In a typical
dividend swap transaction, the Fund
would pay the swap counterparty a
premium and would be entitled to
receive the value of the actual dividends
paid on the subject index during the
term of the swap contract. In a typical
total return swap, the Fund might
exchange long or short exposures to the
return of the underlying securities or an
underlying index to isolate the value of
the dividends paid on the underlying
securities or index constituents. The
Fund also may engage in interest rate
swap transactions. In a typical interest
rate swap transaction one stream of
future interest payments is exchanged
for another. Such transactions often take
the form of an exchange of a fixed
payment for a variable payment based
on a future interest rate. The Fund
intends to use interest rate swap
transactions to manage or hedge
exposure to interest rate fluctuations.
The Fund may invest up to 80% of its
assets through swap transactions.21
The Fund will attempt to limit
counterparty risk by entering into noncleared swap, forward, and option
contracts only with counterparties the
Adviser believes are creditworthy and
by limiting the Fund’s exposure to each
counterparty. The Adviser will monitor
the creditworthiness of each
counterparty and the Fund’s exposure to
each counterparty on an ongoing
basis.22
20 The Fund will transact only with swap dealers
that have in place an ISDA agreement with the
Fund.
21 Where practicable, the Fund intends to invest
in swaps cleared through a central clearing house
(‘‘Cleared Swaps’’). Currently, only certain of the
interest rate swaps in which the Fund intends to
invest are Cleared Swaps, while the dividend and
total return swaps (including equity swaps) in
which the Fund may invest are currently not
Cleared Swaps.
22 The Fund will seek, where possible, to use
counterparties, as applicable, whose financial status
is such that the risk of default is reduced; however,
the risk of losses resulting from default is still
possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser will evaluate each approved
counterparty using various methods of analysis,
such as, for example, the counterparty’s liquidity in
the event of default, the counterparty’s reputation,
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The Fund’s investments in swaps,
futures contracts, forward contracts, and
options will be consistent with the
Fund’s investment objective and with
the requirements of the 1940 Act.23
Other Investments and Investment
Restrictions
In addition to the investments
described above, the Fund may invest
up to 20% of its net assets in highquality, short-term debt securities and
money market instruments.24 Debt
securities and money market
instruments include shares of fixed
income or money market mutual funds,
commercial paper, certificates of
deposit, bankers’ acceptances, U.S.
Government securities (including
securities issued or guaranteed by the
U.S. government or its authorities,
agencies, or instrumentalities),
repurchase agreements25 and bonds that
are rated BBB or higher.
The Fund will not purchase the
securities of issuers conducting their
principal business activity in the same
industry if, immediately after the
purchase and as a result thereof, the
value of the Fund’s investments in that
industry would equal or exceed 25% of
the current value of the Fund’s total
assets, provided that this restriction
does not limit the Fund’s: (i)
Investments in securities of other
investment companies, (ii) investments
in securities issued or guaranteed by the
U.S. government, its agencies or
the Adviser’s past experience with the
counterparty, and the counterparty’s share of
market participation.
23 To limit the potential risk associated with such
transactions, the Fund will segregate or ‘‘earmark’’
assets determined to be liquid by the Adviser in
accordance with procedures established by the
Trust’s Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to
cover its obligations arising from such transactions.
These procedures have been adopted consistent
with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Fund will
include appropriate risk disclosure in its offering
documents, including leveraging risk. Leveraging
risk is the risk that certain transactions of the Fund,
including the Fund’s use of derivatives, may give
rise to leverage, causing the Fund to be more
volatile than if it had not been leveraged. To
mitigate leveraging risk, the Adviser will segregate
or ‘‘earmark’’ liquid assets or otherwise cover the
transactions that may give rise to such risk.
24 The Fund may invest in shares of money
market mutual funds to the extent permitted by the
1940 Act.
25 The Fund may enter into repurchase
agreements with banks and broker-dealers. A
repurchase agreement is an agreement under which
securities are acquired by a fund from a securities
dealer or bank subject to resale at an agreed upon
price on a later date. The acquiring fund bears a risk
of loss in the event that the other party to a
repurchase agreement defaults on its obligations
and the fund is delayed or prevented from
exercising its rights to dispose of the collateral
securities.
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55861
instrumentalities, or (iii) investments in
repurchase agreements collateralized by
U.S. Government securities.
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including Rule 144A
securities deemed illiquid by the
Adviser, consistent with Commission
guidance.26 The Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund may buy and sell
individual large-capitalization equity
securities listed for trading in the U.S.,
Europe, and Japan.
The Fund may invest in the securities
of other investment companies
(including money market funds) to the
extent permitted under the 1940 Act.
The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns. The Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).27
The Trust’s Exemptive Order does not
place any limit on the amount of
derivatives in which the Fund can
invest (other than adherence to the
requirements of the 1940 Act and the
rules thereunder).
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment Nos. 3 and 5,
26 In reaching liquidity decisions, the Adviser
may consider the following factors: The frequency
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
the number of other potential purchasers; dealer
undertakings to make a market in the security; and
the nature of the security and the nature of the
marketplace in which it trades (e.g., the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
27 The Fund’s broad-based securities benchmark
index will be identified in a future amendment to
the Registration Statement following the Fund’s
first full calendar year of performance.
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is consistent with the requirements of
Section 6 of the Act 28 and the rules and
regulations thereunder applicable to a
national securities exchange.29 In
particular, the Commission finds that
the proposal is consistent with Section
6(b)(5) of the Act,30 which requires,
among other things, that the Exchange’s
rules be designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission notes
that the Fund and the Shares must
comply with the initial and continued
listing requirements of NYSE Arca
Equities Rule 8.600 to be listed and
traded on the Exchange.
The Commission finds that the
proposal to list and trade the Shares on
the Exchange is consistent with Section
11A(a)(1)(C)(iii) of the Act,31 which sets
forth Congress’ finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last sale information for the Shares
will be available via the Consolidated
Tape Association (‘‘CTA’’) high-speed
line. In addition, the Portfolio Indicative
Value (‘‘PIV’’), as defined in NYSE Arca
Equities Rule 8.600(c)(3), will be widely
disseminated at least every 15 seconds
during the Core Trading Session by one
or more major market data vendors.32
On each business day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Fund will disclose on its
Web site the Disclosed Portfolio (as such
term is defined in NYSE Arca Equities
Rule 8.600(c)(2)) that will form the basis
for the Fund’s calculation of NAV at the
end of the business day.33 In addition,
28 15
U.S.C. 78f.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
30 15 U.S.C. 78f(b)(5).
31 15 U.S.C. 78k–1(a)(1)(C)(iii).
32 According to the Exchange, several major
market data vendors display or make widely
available Portfolio Indicative Values published on
CTA or other data feeds.
33 On a daily basis, the Fund will disclose on the
Fund’s Web site the following information
regarding each portfolio holding, as applicable to
the type of holding: Ticker symbol, CUSIP number
or other identifier, if any; a description of the
holding (including the type of holding, such as the
type of swap); the identity of the security,
commodity, index or other asset or instrument
underlying the holding, if any; for options, the
option strike price; quantity held (as measured by,
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29 In
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a portfolio composition file, which
includes the security names and share
quantities required to be delivered in
exchange for a Creation Unit of the
Fund, together with estimates and
actual cash components, will be
publicly disseminated daily prior to the
opening of the New York Stock
Exchange, LLC (‘‘NYSE’’) via the
National Securities Clearing
Corporation. The NAV of the Fund will
be calculated once each business day as
of the regularly scheduled close of
trading on the NYSE (normally, 4:00
p.m., Eastern Time).34 Information
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. The intra-day, closing,
and settlement prices of the portfolio
for example, par value, notional value or number
of shares, contracts or units); maturity date, if any;
coupon rate, if any; effective date, if any; market
value of the holding; and the percentage weighting
of the holding in the Fund’s portfolio. The Web site
information will be publicly available at no charge.
34 The Fund will calculate its NAV by: (i) Taking
the current market value of its total assets; (ii)
subtracting any liabilities; and (iii) dividing that
amount by the total number of Shares outstanding.
According to the Exchange, the Trust will generally
value exchange-listed equity securities (which
include common stocks and ETFs) and exchangelisted options on such securities at market closing
prices. Market closing price is generally determined
on the basis of last reported sales prices, or if no
sales are reported, based on the midpoint between
the last reported bid and ask. The Trust will
generally value listed futures at the settlement price
determined by the applicable exchange. Nonexchange-traded derivatives, such as forwards, OTC
options, and swap transactions, will normally be
valued on the basis of quotations or equivalent
indication of value supplied by an independent
pricing service or major market makers or dealers.
Investment company securities (other than ETFs)
will be valued at NAV. Debt securities and money
market instruments generally will be valued based
on prices provided by independent pricing services,
which may use valuation models or matrix pricing
to determine current value. The Trust generally will
use amortized cost to value debt securities and
money market instruments that have a remaining
maturity of 60 days or less. In the event that current
market valuations are not readily available or the
Trust or Adviser believes such valuations do not
reflect current market value, the Trust’s procedures
require that a security’s fair value be determined.
In determining such value the Trust or the Adviser
may consider, among other things, (i) price
comparisons among multiple sources, (ii) a review
of corporate actions and news events, and (iii) a
review of relevant financial indicators (e.g.,
movement in interest rates, market indices, and
prices from the Fund’s index providers). In these
cases, the Fund’s NAV may reflect certain portfolio
securities’ fair values rather than their market
prices. Fair value pricing involves subjective
judgments and it is possible that the fair value
determination for a security is materially different
than the value that could be realized upon the sale
of the security.
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
securities and other Fund investments,
including ETFs, futures, and exchangetraded equities and options, will be
readily available from the national
securities exchanges trading such
securities, automated quotation systems,
published or other public sources, and,
with respect to OTC options, swaps, and
forwards, from third party pricing
sources, or on-line information services
such as Bloomberg or Reuters. Price
information regarding investment
company securities other than ETFs will
be available from on-line information
services and from the Web site for the
applicable investment company
security. The intra-day, closing, and
settlement prices of debt securities and
money market instruments will be
readily available from published and
other public sources or on-line
information services. The Fund’s Web
site will include a form of the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Exchange will obtain a representation
from the issuer of the Shares that the
NAV per Share will be calculated daily
and that the NAV and the Disclosed
Portfolio will be made available to all
market participants at the same time.
Trading in Shares of a Fund will be
halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have
been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable,35 and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth additional circumstances under
which trading in the Shares of a Fund
may be halted. The Exchange states that
it has a general policy prohibiting the
distribution of material, non-public
information by its employees.
Consistent with NYSE Arca Equities
Rule 8.600(d)(2)(B)(ii), the Reporting
Authority must implement and
maintain, or be subject to, procedures
35 These reasons may include: (1) The extent to
which trading is not occurring in the securities and/
or the financial instruments composing the
Disclosed Portfolio of the Fund; or (2) whether
other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly
market are present. With respect to trading halts,
the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading
in the Shares of the Fund.
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mstockstill on DSK4VPTVN1PROD with NOTICES
designed to prevent the use and
dissemination of material, non-public
information regarding the actual
components of the Fund’s portfolio. In
addition, the Exchange states that the
Adviser is not registered as a brokerdealer and is not affiliated with a
broker-dealer.36 The Exchange
represents that trading in the Shares
will be subject to the existing trading
surveillances, administered by the
Financial Industry Regulatory Authority
(‘‘FINRA’’) on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and applicable federal
securities laws.37 The Exchange further
represents that these procedures are
adequate to properly monitor Exchangetrading of the Shares in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange. Moreover, prior to the
commencement of trading, the Exchange
states that it will inform its Equity
Trading Permit Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares.
The Exchange represents that the
Shares are deemed to be equity
securities, thus rendering trading in the
Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. In support of this
proposal, the Exchange has made
representations, including the
following:
(1) The Shares will conform to the
initial and continued listing criteria
36 See supra note 12. The Exchange states that an
investment adviser to an open-end fund is required
to be registered under the Investment Advisers Act
of 1940 (‘‘Advisers Act’’). As a result, the Adviser
and its related personnel are subject to the
provisions of Rule 204A–1 under the Advisers Act
relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that
reflects the fiduciary nature of the relationship to
clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed
to prevent the communication and misuse of nonpublic information by an investment adviser must
be consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
37 The Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement and that the Exchange is
responsible for FINRA’s performance under this
regulatory services agreement.
VerDate Sep<11>2014
18:24 Sep 16, 2014
Jkt 232001
under NYSE Arca Equities Rule 8.600,
which governs Managed Fund Shares.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares, exchange-listed
equity securities, ETFs, futures
contracts, and exchange-traded options
contracts with other markets and other
entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’),
and FINRA, on behalf of the Exchange,
may obtain trading information
regarding trading in the Shares,
exchange-listed equity securities, ETFs,
futures contracts, and exchange-traded
options contracts from such markets and
other entities. In addition, the Exchange
may obtain information regarding
trading in the Shares, exchange-listed
equity securities, ETFs, futures
contracts, and exchange-traded options
contracts from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. FINRA, on behalf of the
Exchange, will be able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’).
(4) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Bulletin of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Bulletin
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in creation unit
aggregations (and that Shares are not
individually redeemable); (b) NYSE
Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its
ETP Holders to learn the essential facts
relating to every customer prior to
trading the Shares; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated PIV will not be
calculated or publicly disseminated (d)
how information regarding the PIV is
disseminated; (e) the requirement that
ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information.
(5) For initial and continued listing,
the Fund will be in compliance with
Rule 10A–3 under the Act,38 as
38 17
PO 00000
CFR 240.10A–3.
Frm 00120
Fmt 4703
Sfmt 4703
55863
provided by NYSE Arca Equities Rule
5.3.
(6) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including Rule
144A securities deemed illiquid by the
Adviser, consistent with Commission
guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets.
(7) Not more than 10% of the assets
of the Fund in the aggregate invested in
exchange-traded equity securities shall
consist of equity securities whose
principal market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement. In
addition, not more than 10% of the net
assets of the Fund in the aggregate
invested in futures contracts or
exchange-traded options shall consist of
futures contracts or options whose
principal market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement.
(8) Where practicable, the Fund
intends to invest in Cleared Swaps.
(9) The Fund will attempt to limit
counterparty risk by entering into noncleared swap, forward, and option
contracts only with counterparties the
Adviser believes are creditworthy and
by limiting the Fund’s exposure to each
counterparty. The Adviser will monitor
the creditworthiness of each
counterparty and the Fund’s exposure to
each counterparty on an ongoing basis.
The Fund will seek, where possible, to
use counterparties, as applicable, whose
financial status is such that the risk of
default is reduced; however, the risk of
losses resulting from default is still
possible. The Adviser will evaluate the
creditworthiness of counterparties on an
ongoing basis. In addition to
information provided by credit agencies,
the Adviser will evaluate each approved
counterparty using various methods of
analysis, such as, for example, the
counterparty’s liquidity in the event of
default, the counterparty’s reputation,
the Adviser’s past experience with the
counterparty, and the counterparty’s
share of market participation.
(10) The Fund’s investments in
swaps, futures contracts, forward
contracts, and options will be consistent
with the Fund’s investment objective
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Federal Register / Vol. 79, No. 180 / Wednesday, September 17, 2014 / Notices
and with the requirements of the 1940
Act. To limit the potential risk
associated with such transactions, the
Fund will segregate or ‘‘earmark’’ assets
determined to be liquid by the Adviser
in accordance with procedures
established by the Trust’s Board of
Trustees and in accordance with the
1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting
positions) to cover its obligations arising
from such transactions. These
procedures have been adopted
consistent with Section 18 of the 1940
Act and related Commission guidance.
In addition, the Fund will include
appropriate risk disclosure in its
offering documents, including
leveraging risk. Leveraging risk is the
risk that certain transactions of the
Fund, including the Fund’s use of
derivatives, may give rise to leverage,
causing the Fund to be more volatile
than if it had not been leveraged. To
mitigate leveraging risk, the Adviser
will segregate or ‘‘earmark’’ liquid assets
or otherwise cover the transactions that
may give rise to such risk.
(11) The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns. The Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).
(12) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice and Order, and the
Exchange’s description of the Fund.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 3 and 5, is consistent with Section
6(b)(5) of the Act 39 and the rules and
regulations thereunder applicable to a
national securities exchange.
mstockstill on DSK4VPTVN1PROD with NOTICES
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,40 that the
proposed rule change (SR–NYSEArca2014–20), as modified by Amendment
Nos. 3 and 5, be, and it hereby is,
approved.
39 15
40 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
VerDate Sep<11>2014
18:24 Sep 16, 2014
Jkt 232001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–22163 Filed 9–16–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73080; File No. SR–BATS–
2014–039]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Related to Fees for Use
of BATS Exchange, Inc.
September 11, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
28, 2014, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) 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
prepared by the Exchange. The
Exchange has designated the proposed
rule change as one establishing or
changing a member due, fee, or other
charge imposed by the Exchange under
Section 19(b)(3)(A)(ii) of the Act 3 and
Rule 19b–4(f)(2) thereunder,4 which
renders the proposed rule change
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange filed a proposal to
amend the fee schedule applicable to
Members 5 and non-members of the
Exchange pursuant to BATS Rules
15.1(a) and (c). Changes to the fee
schedule pursuant to this proposal are
effective upon filing.
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
41 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
5 A Member is defined as ‘‘any registered broker
or dealer that has been admitted to membership in
the Exchange.’’ See Exchange Rule 1.5(n).
1 15
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
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 IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to modify its
fee schedule applicable to use of the
Exchange’s equities trading platform
(‘‘BATS Equities’’) in order to: (i) Add
two additional ‘‘Cross-Asset Step-Up
Tiers’’ for purposes of tiered pricing
applicable to BATS Equities; and (ii)
modify fees applicable to orders routed
to and executed at the New York Stock
Exchange LLC (‘‘NYSE’’).
Additional Step-Up Tiers
Currently, with respect to BATS
Equities, the Exchange determines the
liquidity adding rebate that it will
provide to Members using the
Exchange’s tiered pricing structure,
which is based on the Member meeting
certain volume tiers based on their
ADAV 6 as a percentage of TCV 7 or
ADV 8 as a percentage of TCV. Under
6 As provided in the fee schedule, for purposes of
BATS Equities pricing, ‘‘ADAV’’ means average
daily added volume calculated as the number of
shares added per day on a monthly basis; the
Exchange excludes from the ADAV calculation
routed shares as well as shares added on any day
that the Exchange’s system experiences a disruption
that lasts for more than 60 minutes during regular
trading hours (‘‘Exchange System Disruption’’), on
any day with a scheduled early market close and
on the last Friday in June (the ‘‘Russell
Reconstitution Day’’).
7 As provided in the fee schedule, for purposes of
BATS Equities pricing, ‘‘TCV’’ means total
consolidated volume calculated as the volume
reported by all exchanges and trade reporting
facilities to a consolidated transaction reporting
plan for the month for which the fees apply,
excluding volume on any day that the Exchange
experiences an Exchange System Disruption, on any
with a scheduled early market close and the Russell
Reconstitution Day.
8 As provided in the fee schedule, for purposes of
BATS Equities pricing, ‘‘ADV’’ means average daily
volume calculated as the number of shares added
or removed, combined, per day on a monthly basis;
the Exchange excludes from the ADV calculation
routed shares, and shares added on any day that the
Exchange’s system experiences an Exchange System
E:\FR\FM\17SEN1.SGM
17SEN1
]]>Agencies
[Federal Register Volume 79, Number 180 (Wednesday, September 17, 2014)]
[Notices]
[Pages 55859-55864]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22163]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73081; File No. SR-NYSEArca-2014-20]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment Nos. 3 and
5, Relating to the Listing and Trading of Shares of Reality Shares DIVS
ETF under NYSE Arca Equities Rule 8.600
September 11, 2014.
I. Introduction
On February 25, 2014, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade
shares (``Shares'') of Reality Shares DIVS ETF (``Fund'') under NYSE
Arca Equities Rule 8.600. On March 7, 2014, the Exchange filed
Amendment No. 2 to the proposed rule change, which amended and replaced
the proposed rule change in its entirety.\3\ The proposed rule change,
as modified by Amendment No. 2, was published for comment in the
Federal Register on March 17, 2014.\4\ The Commission received no
comments on the proposal. On April 23, 2014, pursuant to Section
19(b)(2) of the Act,\5\ the Commission designated a longer period
within which to either approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\6\ On May 27, 2014, the Exchange
submitted Amendment No. 3 to the proposed rule change.\7\ On June 5,
2014, the Exchange filed Amendment No. 5 to the proposed rule
change.\8\ On June 9, 2014, the Commission published notice of
Amendment Nos. 3 and 5 and instituted proceedings to determine whether
to approve or disapprove the proposed rule change, as modified by
Amendment Nos. 3 and 5.\9\ The Commission received no comments on the
proposal, as modified by Amendment Nos. 3 and 5. This order grants
approval of the proposed rule change, as modified by Amendment Nos. 3
and 5.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 was filed on March 6, 2014 and withdrawn on
March 7, 2014.
\4\ See Securities Exchange Act Release No. 71686 (March 11,
2014), 79 FR 14761.
\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 72000 (April 23, 2014),
79 FR 24032 (April 29, 2014). The Commission determined that it was
appropriate to designate a longer period within which to take action
on the proposed rule change so that it has sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated June 13, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\7\ Amendment No. 3 replaced SR-NYSEArca-2014-20, as previously
amended by Amendment No. 2, and superseded such filing in its
entirety.
\8\ Amendment No. 5 was technical in nature and changed the name
of the Fund, and all related references in the filing, from
``Reality Shares Isolated Dividend Growth ETF'' to ``Reality Shares
DIVS ETF.'' Amendment No. 4 was filed by the Exchange on June 4,
2014 and withdrawn on June 5, 2014.
\9\ See Securities Exchange Act Release No. 72347, 79 FR 33964
(June 13, 2014) (``Notice and Order'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange has made the following representations and statements
in describing the Fund and its investment strategies, including other
portfolio holdings and investment restrictions.\10\
---------------------------------------------------------------------------
\10\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, portfolio holdings disclosure
policies, distributions, and taxes, among other information, is
included in the Notice and the Registration Statement, as
applicable. See Notice and Order and Registration Statement, supra
note 9 and infra note 11, respectively.
---------------------------------------------------------------------------
General
The Fund will be an actively-managed exchange-traded fund
(``ETF''). The Shares of the Fund will be offered by the Reality Shares
ETF Trust (formerly, the ERNY Financial ETF Trust) (``Trust''). The
Trust will be registered with the Commission as an open-end management
investment company.\11\ Reality Shares Advisors, LLC (formerly, ERNY
Financial Advisors, LLC) will serve as the investment adviser to the
Fund (``Adviser'').\12\ ALPS Distributors, Inc. will be the principal
underwriter and distributor of the Fund's Shares. The Bank of New York
Mellon will serve as administrator, custodian, and transfer agent for
the Fund.
---------------------------------------------------------------------------
\11\ The Trust will be registered under the Investment Company
Act of 1940 (15 U.S.C. 80a-1) (``1940 Act''). According to the
Exchange, on November 12, 2013, the Trust filed a registration
statement on Form N-1A under the Securities Act of 1933 (``1933
Act'') (15 U.S.C. 77a), and under the 1940 Act relating to the Fund,
as amended by Pre-Effective Amendment Number 1, filed with the
Commission on February 6, 2014 (File Nos. 333-192288 and 811-22911)
and Pre-Effective Amendment Number 2, filed with the Commission on
May 1, 2014 (File Nos. 333-192288 and 811-22911) (``Registration
Statement''). According to the Exchange, the Commission has issued
an order granting certain exemptive relief to the Trust under the
1940 Act. Investment Company Act Release No. 30552 (June 10, 2013)
(``Exemptive Order''). According to the Exchange, the Trust filed an
Application for an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14146), on April 5, 2013, as amended on May
10, 2013 (``Exemptive Application''). The Exchange represents that
investments made by the Fund will comply with the conditions set
forth in the Exemptive Application and the Exemptive Order.
\12\ The Exchange states that the Adviser is not registered as a
broker-dealer and is not affiliated with any broker-dealers. In
addition, the Exchange states that in the event (a) the Adviser or
any sub-adviser becomes registered as a broker-dealer or newly
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, such adviser or sub-adviser will implement a fire
wall with respect to its relevant personnel or broker-dealer
affiliate regarding access to information concerning the composition
and changes to the portfolio, and such adviser or sub-adviser will
be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding the
portfolio.
---------------------------------------------------------------------------
Investment Strategies
The Fund is actively managed by the Adviser and seeks long-term
capital appreciation by using proprietary trading strategies designed
to isolate and capture the growth in the level of dividends expected to
be paid on a portfolio of large-capitalization equity securities listed
for trading in the U.S., Europe, and Japan,\13\ while attempting to
minimize the Fund's exposure to the price fluctuations associated with
such securities.\14\ The Adviser believes that, over time, the level of
expected dividends reflected in the Fund's portfolio will be highly
correlated to the level of actual dividends paid on such large
capitalization securities.
---------------------------------------------------------------------------
\13\ The Exchange states that the Adviser considers U.S. large
capitalization companies to be those with market capitalizations
within the range of market capitalizations of the companies included
in the S&P 500 Index. The Adviser considers European large
capitalization companies to be those with market capitalizations
within the range of market capitalizations of the companies included
in the Euro Stoxx 50 Index. The Adviser considers Japanese large
capitalization companies to be those with market capitalizations
within the range of market capitalizations of the companies included
in the Nikkei 225 Index.
\14\ The Exchange states that there is no guarantee that either
the level of overall dividends paid by such companies will grow over
time, or that the Fund's investment strategies will capture such
growth. The Exchange represents that the Fund will include
appropriate risk disclosure in its offering documents disclosing
both of these risks.
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Under normal market conditions,\15\ and as further described below,
the
[[Page 55860]]
Fund will invest substantially all of its assets in (i) a combination
of exchange-listed options contracts on large capitalization equity
indexes and exchange-listed options contracts on exchange traded funds
(``ETFs'') \16\ designed to track the performance of large
capitalization equity securities listed for trading in the U.S.,
Europe, or Japan, as well as (ii) derivatives, including swaps,
exchange-listed futures contracts, and forward contracts, designed to
capture the growth of the level of dividends expected to be paid on
large capitalization equity securities listed for trading in the U.S.,
Europe, and Japan. In addition to the investments described above, the
Fund may also buy and sell over-the counter (``OTC'') options on
indexes of large-capitalization U.S., European, and Japanese equity
securities listed for trading in the U.S., Europe, and Japan, such as
the S&P 500 Index, the Euro Stoxx 50 Index, and the Nikkei 225 Index,
and listed and OTC options on the securities, or any group of
securities, issued by large capitalization U.S., European, and Japanese
companies.\17\
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\15\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
\16\ For purposes of this proposed rule change, ETFs include
Investment Company Units (as described in NYSE Arca Equities Rule
5.2(j)(3)), Portfolio Depositary Receipts as described in NYSE Arca
Equities Rule 8.100, and Managed Fund Shares (as described in NYSE
Arca Equities Rule 8.600). The ETFs all will be listed and traded in
the U.S. on registered exchanges. While the Fund may invest in
inverse ETFs, it may not invest in leveraged or inverse leveraged
(e.g., 2X, -2X, 3X or -3X) ETFs.
\17\ The Fund will transact only with OTC options dealers that
have in place an International Swaps and Derivatives Association
(``ISDA'') agreement with the Fund.
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The Fund will buy (i.e., hold a ``long'' position in) and sell
(i.e., hold a ``short'' position in) put and call options.\18\ The Fund
will invest in a combination of put and call options designed to allow
the Fund to isolate its exposure to the growth of the level of
dividends expected to be paid on a portfolio of securities issued by
large capitalization companies listed for trading in the United States,
Europe, and Japan, while minimizing the Fund's exposure to changes in
the trading price of such securities. The Fund may invest up to 80% of
its assets through options transactions.
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\18\ A put option gives the purchaser of the option the right to
sell, and the issuer of the option the obligation to buy, the
underlying security or instrument on a specified date or during a
specified period of time. A call option on a security gives the
purchaser of the option the right to buy, and the writer of the
option the obligation to sell, the underlying security or instrument
on a specified date or during a specified period of time.
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The prices of index and ETF options reflect the market trading
prices of the securities included in the applicable index or securities
held by the applicable ETF, as well as market expectations regarding
the level of dividends to be paid on such indexes or ETFs during the
term of the option. A significant portion of the Fund's portfolio
holdings will consist of multiple corresponding near-term and long-term
put and call option combinations on the same reference assets (e.g.,
options on the S&P 500 Index or options on S&P 500 ETFs) with the same
strike price. Because option prices reflect both stock price and
dividend expectations, they can be used in combination to isolate
either price exposure or dividend expectations. The use of near-term
and long-term put and call option combinations on the same reference
asset with the same strike price, but with different maturities, is
designed to gain exposure to the level of dividends expected to be paid
on a portfolio of large-capitalization equity securities listed for
trading in the U.S., Europe, and Japan, while attempting to minimize
the Fund's exposure to the price fluctuations associated with these
securities.
Once established, this portfolio construction of option
combinations will accomplish two goals. First, the use of corresponding
buy or sell positions on near and long-term options at the same strike
price is designed to neutralize underlying stock price movements. In
other words, the corresponding ``buy'' and ``sell'' positions on the
same reference asset are designed to net against each other and
eliminate the impact that changes to the stock price of the reference
asset would otherwise have on the value of the Fund Shares. Second, by
minimizing the impact of price fluctuations through the construct of
the near- and long-term contract combinations, the strategy is designed
to isolate market expectations for dividends implied between expiration
dates of the near-term and long-term option contracts.
The Fund may invest in exchange-listed futures contracts and
forward contracts based on indexes of large-capitalization U.S.,
European, and Japanese equity securities listed for trading in the
U.S., Europe, or Japan, such as the S&P 500 Index, the Euro Stoxx 50
Index, and the Nikkei 225 Index, and the securities, or any group of
securities, issued by large capitalization U.S., European, and Japanese
companies.\19\ The Fund's use of listed futures contracts and forward
contracts will be designed to allow the Fund to isolate its exposure to
the growth of the level of the dividends expected to be paid on a
portfolio of securities of large capitalization U.S., European, and
Japanese companies, while minimizing the Fund's exposure to changes in
the trading price of such securities. As with option contracts, the
prices of equity index futures contracts and forward contracts reflect
the market trading prices of the securities included in the applicable
index, as well as market expectations regarding the level of dividends
to be paid on such indexes during the term of such futures or forward
contract. Therefore, as with option contracts, long and short positions
in near-dated and far-dated futures and forward contracts can be used
in combination to isolate either price exposure or dividend
expectations. For example, as with option contracts, the use of long
and short positions in near-dated and far-dated futures and forward
contracts can be used to gain exposure to the level of dividends
expected to be paid on a portfolio of securities, while attempting to
minimize the Fund's exposure to the price fluctuations associated with
such securities. In addition, the Fund may invest in listed dividend
futures contracts. Listed dividend futures contracts are available for
certain indices (such as EURO STOXX 50 Index Dividend Futures and
Nikkei 225 Dividend Index Futures). These futures contracts provide
direct exposure to the level of implied dividends in the designated
index, without exposure to the price of the securities included in the
index. The Fund also may invest in Eurodollar futures contracts to
manage or hedge exposure to interest rate fluctuations. The Fund may
invest up to 80% of its assets through futures contracts and forward
transactions.
---------------------------------------------------------------------------
\19\ A listed futures contract is a standardized contract traded
on a recognized exchange in which two parties agree to exchange
either a specified financial asset or the cash equivalent of said
asset at a specified future date and price. A forward contract
involves the obligation to purchase or sell either a specified
financial asset or the cash equivalent of said asset at a future
date at a price set at the time of the contract.
---------------------------------------------------------------------------
The Fund may enter into dividend and total return swap transactions
(including equity swap transactions) based on indexes of large-
capitalization U.S., European, and Japanese equity securities listed
for trading in the U.S., Europe, and Japan, such as the S & P 500
Index, the Euro Stoxx 50 Index, and the Nikkei 225 Index, and
securities, or any group of securities, issued by large
[[Page 55861]]
capitalization U.S., European, and Japanese companies.\20\ In a typical
swap transaction, one party agrees to make periodic payments to another
party (``counterparty'') based on the change in market value or level
of a specified rate, index, or asset. In return, the counterparty
agrees to make periodic payments to the first party based on the return
of a different specified rate, index, or asset. Swap transactions are
usually done on a net basis, the Fund receiving or paying only the net
amount of the two payments. In a typical dividend swap transaction, the
Fund would pay the swap counterparty a premium and would be entitled to
receive the value of the actual dividends paid on the subject index
during the term of the swap contract. In a typical total return swap,
the Fund might exchange long or short exposures to the return of the
underlying securities or an underlying index to isolate the value of
the dividends paid on the underlying securities or index constituents.
The Fund also may engage in interest rate swap transactions. In a
typical interest rate swap transaction one stream of future interest
payments is exchanged for another. Such transactions often take the
form of an exchange of a fixed payment for a variable payment based on
a future interest rate. The Fund intends to use interest rate swap
transactions to manage or hedge exposure to interest rate fluctuations.
The Fund may invest up to 80% of its assets through swap
transactions.\21\
---------------------------------------------------------------------------
\20\ The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund.
\21\ Where practicable, the Fund intends to invest in swaps
cleared through a central clearing house (``Cleared Swaps'').
Currently, only certain of the interest rate swaps in which the Fund
intends to invest are Cleared Swaps, while the dividend and total
return swaps (including equity swaps) in which the Fund may invest
are currently not Cleared Swaps.
---------------------------------------------------------------------------
The Fund will attempt to limit counterparty risk by entering into
non-cleared swap, forward, and option contracts only with
counterparties the Adviser believes are creditworthy and by limiting
the Fund's exposure to each counterparty. The Adviser will monitor the
creditworthiness of each counterparty and the Fund's exposure to each
counterparty on an ongoing basis.\22\
---------------------------------------------------------------------------
\22\ The Fund will seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser will
evaluate each approved counterparty using various methods of
analysis, such as, for example, the counterparty's liquidity in the
event of default, the counterparty's reputation, the Adviser's past
experience with the counterparty, and the counterparty's share of
market participation.
---------------------------------------------------------------------------
The Fund's investments in swaps, futures contracts, forward
contracts, and options will be consistent with the Fund's investment
objective and with the requirements of the 1940 Act.\23\
---------------------------------------------------------------------------
\23\ To limit the potential risk associated with such
transactions, the Fund will segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Trust's Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations arising from
such transactions. These procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, the Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of the Fund, including the Fund's
use of derivatives, may give rise to leverage, causing the Fund to
be more volatile than if it had not been leveraged. To mitigate
leveraging risk, the Adviser will segregate or ``earmark'' liquid
assets or otherwise cover the transactions that may give rise to
such risk.
---------------------------------------------------------------------------
Other Investments and Investment Restrictions
In addition to the investments described above, the Fund may invest
up to 20% of its net assets in high-quality, short-term debt securities
and money market instruments.\24\ Debt securities and money market
instruments include shares of fixed income or money market mutual
funds, commercial paper, certificates of deposit, bankers' acceptances,
U.S. Government securities (including securities issued or guaranteed
by the U.S. government or its authorities, agencies, or
instrumentalities), repurchase agreements\25\ and bonds that are rated
BBB or higher.
---------------------------------------------------------------------------
\24\ The Fund may invest in shares of money market mutual funds
to the extent permitted by the 1940 Act.
\25\ The Fund may enter into repurchase agreements with banks
and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by a fund from a securities dealer or
bank subject to resale at an agreed upon price on a later date. The
acquiring fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the
fund is delayed or prevented from exercising its rights to dispose
of the collateral securities.
---------------------------------------------------------------------------
The Fund will not purchase the securities of issuers conducting
their principal business activity in the same industry if, immediately
after the purchase and as a result thereof, the value of the Fund's
investments in that industry would equal or exceed 25% of the current
value of the Fund's total assets, provided that this restriction does
not limit the Fund's: (i) Investments in securities of other investment
companies, (ii) investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or (iii)
investments in repurchase agreements collateralized by U.S. Government
securities.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance.\26\ The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
---------------------------------------------------------------------------
\26\ In reaching liquidity decisions, the Adviser may consider
the following factors: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
---------------------------------------------------------------------------
The Fund may buy and sell individual large-capitalization equity
securities listed for trading in the U.S., Europe, and Japan.
The Fund may invest in the securities of other investment companies
(including money market funds) to the extent permitted under the 1940
Act.
The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).\27\
---------------------------------------------------------------------------
\27\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------
The Trust's Exemptive Order does not place any limit on the amount
of derivatives in which the Fund can invest (other than adherence to
the requirements of the 1940 Act and the rules thereunder).
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 3 and 5,
[[Page 55862]]
is consistent with the requirements of Section 6 of the Act \28\ and
the rules and regulations thereunder applicable to a national
securities exchange.\29\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\30\ which
requires, among other things, that the Exchange's rules be designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Commission notes that the Fund and the Shares must comply
with the initial and continued listing requirements of NYSE Arca
Equities Rule 8.600 to be listed and traded on the Exchange.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f.
\29\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\31\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last
sale information for the Shares will be available via the Consolidated
Tape Association (``CTA'') high-speed line. In addition, the Portfolio
Indicative Value (``PIV''), as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated at least every 15 seconds
during the Core Trading Session by one or more major market data
vendors.\32\ On each business day, before commencement of trading in
Shares in the Core Trading Session on the Exchange, the Fund will
disclose on its Web site the Disclosed Portfolio (as such term is
defined in NYSE Arca Equities Rule 8.600(c)(2)) that will form the
basis for the Fund's calculation of NAV at the end of the business
day.\33\ In addition, a portfolio composition file, which includes the
security names and share quantities required to be delivered in
exchange for a Creation Unit of the Fund, together with estimates and
actual cash components, will be publicly disseminated daily prior to
the opening of the New York Stock Exchange, LLC (``NYSE'') via the
National Securities Clearing Corporation. The NAV of the Fund will be
calculated once each business day as of the regularly scheduled close
of trading on the NYSE (normally, 4:00 p.m., Eastern Time).\34\
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. The intra-day, closing, and settlement prices of
the portfolio securities and other Fund investments, including ETFs,
futures, and exchange-traded equities and options, will be readily
available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, and, with respect to OTC options, swaps, and forwards, from
third party pricing sources, or on-line information services such as
Bloomberg or Reuters. Price information regarding investment company
securities other than ETFs will be available from on-line information
services and from the Web site for the applicable investment company
security. The intra-day, closing, and settlement prices of debt
securities and money market instruments will be readily available from
published and other public sources or on-line information services. The
Fund's Web site will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\32\ According to the Exchange, several major market data
vendors display or make widely available Portfolio Indicative Values
published on CTA or other data feeds.
\33\ On a daily basis, the Fund will disclose on the Fund's Web
site the following information regarding each portfolio holding, as
applicable to the type of holding: Ticker symbol, CUSIP number or
other identifier, if any; a description of the holding (including
the type of holding, such as the type of swap); the identity of the
security, commodity, index or other asset or instrument underlying
the holding, if any; for options, the option strike price; quantity
held (as measured by, for example, par value, notional value or
number of shares, contracts or units); maturity date, if any; coupon
rate, if any; effective date, if any; market value of the holding;
and the percentage weighting of the holding in the Fund's portfolio.
The Web site information will be publicly available at no charge.
\34\ The Fund will calculate its NAV by: (i) Taking the current
market value of its total assets; (ii) subtracting any liabilities;
and (iii) dividing that amount by the total number of Shares
outstanding. According to the Exchange, the Trust will generally
value exchange-listed equity securities (which include common stocks
and ETFs) and exchange-listed options on such securities at market
closing prices. Market closing price is generally determined on the
basis of last reported sales prices, or if no sales are reported,
based on the midpoint between the last reported bid and ask. The
Trust will generally value listed futures at the settlement price
determined by the applicable exchange. Non-exchange-traded
derivatives, such as forwards, OTC options, and swap transactions,
will normally be valued on the basis of quotations or equivalent
indication of value supplied by an independent pricing service or
major market makers or dealers. Investment company securities (other
than ETFs) will be valued at NAV. Debt securities and money market
instruments generally will be valued based on prices provided by
independent pricing services, which may use valuation models or
matrix pricing to determine current value. The Trust generally will
use amortized cost to value debt securities and money market
instruments that have a remaining maturity of 60 days or less. In
the event that current market valuations are not readily available
or the Trust or Adviser believes such valuations do not reflect
current market value, the Trust's procedures require that a
security's fair value be determined. In determining such value the
Trust or the Adviser may consider, among other things, (i) price
comparisons among multiple sources, (ii) a review of corporate
actions and news events, and (iii) a review of relevant financial
indicators (e.g., movement in interest rates, market indices, and
prices from the Fund's index providers). In these cases, the Fund's
NAV may reflect certain portfolio securities' fair values rather
than their market prices. Fair value pricing involves subjective
judgments and it is possible that the fair value determination for a
security is materially different than the value that could be
realized upon the sale of the security.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the
NAV and the Disclosed Portfolio will be made available to all market
participants at the same time. Trading in Shares of a Fund will be
halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached or because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable,\35\ and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances
under which trading in the Shares of a Fund may be halted. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. Consistent with NYSE
Arca Equities Rule 8.600(d)(2)(B)(ii), the Reporting Authority must
implement and maintain, or be subject to, procedures
[[Page 55863]]
designed to prevent the use and dissemination of material, non-public
information regarding the actual components of the Fund's portfolio. In
addition, the Exchange states that the Adviser is not registered as a
broker-dealer and is not affiliated with a broker-dealer.\36\ The
Exchange represents that trading in the Shares will be subject to the
existing trading surveillances, administered by the Financial Industry
Regulatory Authority (``FINRA'') on behalf of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws.\37\ The Exchange further represents that these
procedures are adequate to properly monitor Exchange-trading of the
Shares in all trading sessions and to deter and detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange. Moreover, prior to the commencement of trading, the Exchange
states that it will inform its Equity Trading Permit Holders in an
Information Bulletin of the special characteristics and risks
associated with trading the Shares.
---------------------------------------------------------------------------
\35\ These reasons may include: (1) The extent to which trading
is not occurring in the securities and/or the financial instruments
composing the Disclosed Portfolio of the Fund; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance
of a fair and orderly market are present. With respect to trading
halts, the Exchange may consider all relevant factors in exercising
its discretion to halt or suspend trading in the Shares of the Fund.
\36\ See supra note 12. The Exchange states that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and its related personnel are subject to the provisions of
Rule 204A-1 under the Advisers Act relating to codes of ethics. This
Rule requires investment advisers to adopt a code of ethics that
reflects the fiduciary nature of the relationship to clients as well
as compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
\37\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
---------------------------------------------------------------------------
The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including the following:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600, which governs Managed
Fund Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts, and exchange-traded options contracts with
other markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares, exchange-
listed equity securities, ETFs, futures contracts, and exchange-traded
options contracts from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares,
exchange-listed equity securities, ETFs, futures contracts, and
exchange-traded options contracts from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. FINRA, on behalf of the
Exchange, will be able to access, as needed, trade information for
certain fixed income securities held by the Fund reported to FINRA's
Trade Reporting and Compliance Engine (``TRACE'').
(4) Prior to the commencement of trading, the Exchange will inform
its members in an Information Bulletin of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Bulletin will discuss the following: (a) The procedures for
purchases and redemptions of Shares in creation unit aggregations (and
that Shares are not individually redeemable); (b) NYSE Arca Equities
Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders
to learn the essential facts relating to every customer prior to
trading the Shares; (c) the risks involved in trading the Shares during
the Opening and Late Trading Sessions when an updated PIV will not be
calculated or publicly disseminated (d) how information regarding the
PIV is disseminated; (e) the requirement that ETP Holders deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and continued listing, the Fund will be in
compliance with Rule 10A-3 under the Act,\38\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(6) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets.
(7) Not more than 10% of the assets of the Fund in the aggregate
invested in exchange-traded equity securities shall consist of equity
securities whose principal market is not a member of ISG or is a market
with which the Exchange does not have a comprehensive surveillance
sharing agreement. In addition, not more than 10% of the net assets of
the Fund in the aggregate invested in futures contracts or exchange-
traded options shall consist of futures contracts or options whose
principal market is not a member of ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
(8) Where practicable, the Fund intends to invest in Cleared Swaps.
(9) The Fund will attempt to limit counterparty risk by entering
into non-cleared swap, forward, and option contracts only with
counterparties the Adviser believes are creditworthy and by limiting
the Fund's exposure to each counterparty. The Adviser will monitor the
creditworthiness of each counterparty and the Fund's exposure to each
counterparty on an ongoing basis. The Fund will seek, where possible,
to use counterparties, as applicable, whose financial status is such
that the risk of default is reduced; however, the risk of losses
resulting from default is still possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition to
information provided by credit agencies, the Adviser will evaluate each
approved counterparty using various methods of analysis, such as, for
example, the counterparty's liquidity in the event of default, the
counterparty's reputation, the Adviser's past experience with the
counterparty, and the counterparty's share of market participation.
(10) The Fund's investments in swaps, futures contracts, forward
contracts, and options will be consistent with the Fund's investment
objective
[[Page 55864]]
and with the requirements of the 1940 Act. To limit the potential risk
associated with such transactions, the Fund will segregate or
``earmark'' assets determined to be liquid by the Adviser in accordance
with procedures established by the Trust's Board of Trustees and in
accordance with the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its
obligations arising from such transactions. These procedures have been
adopted consistent with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Fund will include appropriate
risk disclosure in its offering documents, including leveraging risk.
Leveraging risk is the risk that certain transactions of the Fund,
including the Fund's use of derivatives, may give rise to leverage,
causing the Fund to be more volatile than if it had not been leveraged.
To mitigate leveraging risk, the Adviser will segregate or ``earmark''
liquid assets or otherwise cover the transactions that may give rise to
such risk.
(11) The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).
(12) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's representations,
including those set forth above and in the Notice and Order, and the
Exchange's description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 3 and 5, is consistent with
Section 6(b)(5) of the Act \39\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\39\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\40\ that the proposed rule change (SR-NYSEArca-2014-20), as
modified by Amendment Nos. 3 and 5, be, and it hereby is, approved.
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\40\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22163 Filed 9-16-14; 8:45 am]
BILLING CODE 8011-01-P
