Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and No. 2 Thereto, Relating to the Listing and Trading of the Shares of the Reality Shares NASDAQ-100 DIVS Index ETF Under Nasdaq Rule 5705, 69966-69974 [2014-27711]
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69966
Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices
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in particular, in that it is 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, in that
the amendments will provide greater
clarity to the Pricing Schedule.
The Exchange believes that removing
the historical reference date to the JBO
definition in the Preface will provide
greater clarity to the Pricing Schedule.
The Exchange believes that the
amendments provide greater specificity
and conforms word usage with the
Rulebook with respect to the usage of
the terms RMM and RMO. Also, by
adding tier numbers, it will be easier to
reference the various streaming fees.
The Exchange believes that generally
referring to Mini Options as specified in
the Rulebook will assist the Exchange in
maintaining a current list of Mini
Options which are subject to Section A
pricing. The NASDAQ Options Market
LLC pricing for Mini Options does not
specifically reference the Mini Options
symbols.5
The Exchange believes that further
clarifying the manner in which a
Category B Customer Rebate is paid by
stating that a Customer Complex PIXL
Order is excluded in the same manner
as other Customer Complex Orders adds
further clarity to the rule text. The
Exchange excludes Customer Complex
PIXL Orders today from the Category B
rebate. The Exchange will not change
the manner in which the Exchange pays
a rebate as a result of this filing.
Customer Complex PIXL Orders will
continue to be excluded.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange is merely seeking to add
greater clarity to the Pricing Schedule
by conforming the RMM and RMO
language to the current usage in Rule
507 of the Rulebook. The Exchange also
believes that the addition of tiers
provides greater clarity and
transparency to the Pricing Schedule
which benefits all market participants.
Generally citing to all Mini Options
provides greater accuracy to the Pricing
Schedule. Specifically stating that
Customer Complex PIXL Orders are
excluded in a manner similar to
Customer Complex Orders adds more
specificity to the manner in which the
Exchange pays the Category B Customer
Rebate. Finally, correcting typographical
errors and removing historical dates
avoid confusion.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(ii) of the Act 6 and
subparagraph (f)(6) of Rule 19b–4
thereunder.7
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2014–75 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2014–75. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
6 15
5 See
Chapter XV, Section 2(4).
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U.S.C. 78s(b)(3)(a)(ii).
CFR 240.19b–4(f)(6).
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post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2014–75 and should be submitted on or
before December 15, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–27710 Filed 11–21–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73630; File No. SR–
NASDAQ–2014–038]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule
Change, as Modified by Amendments
No. 1 and No. 2 Thereto, Relating to the
Listing and Trading of the Shares of
the Reality Shares NASDAQ–100 DIVS
Index ETF Under Nasdaq Rule 5705
November 18, 2014.
I. Introduction
On April 10, 2014, The NASDAQ
Stock Market LLC (‘‘Exchange’’ or
‘‘NASDAQ’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
8 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices
Rule 19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the Reality Shares
NASDAQ–100 DIVS Index ETF
(‘‘Fund’’) under Rule 5705. The
proposed rule change was published for
comment in the Federal Register on
April 30, 2014.3 On May 13, 2014, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety.4 On June 4, 2014, the
Exchange filed Amendment No. 2 to the
proposed rule change.5 On June 13,
2014, pursuant to Section 19(b)(2) of the
Act,6 the Commission designated a
longer period within which to approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.7
On July 29, 2014, the Commission
instituted proceedings under Section
19(b)(2)(B) of the Act 8 to determine
whether to approve or disapprove the
proposed rule change.9 In response to
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 72014
(Apr. 24, 2014), 79 FR 24465 (‘‘Notice’’).
4 In Amendment No. 1, the Exchange confirmed
the hours of the three trading sessions on the
Exchange, clarified the valuation of investments for
purposes of calculating net asset value, clarified
what information would be available on the Fund’s
Web site, and provided additional information
relating to surveillance with respect to certain
assets held by the Fund. Amendment No. 1
provided clarification to the proposed rule change,
and because it does not materially affect the
substance of the proposed rule change or raise
novel or unique regulatory issues, Amendment No.
1 is not subject to notice and comment.
5 The Exchange filed Amendment No. 2 to the
proposal to reflect a change to the name of the Fund
and the underlying index. Specifically, the
Exchange replaced each reference in the proposal
to the ‘‘Reality Shares NASDAQ–100 Isolated
Dividend Growth ETF’’ (the original name of the
Fund) with a reference to the ‘‘Reality Shares
NASDAQ–100 DIVS Index ETF.’’ Similarly, the
Exchange replaced each reference in the proposal
to the ‘‘Reality Shares NASDAQ–100 Isolated
Dividend Growth Index’’ with a reference to the
‘‘Reality Shares NASDAQ–100 DIVS Index.’’
Amendment No. 2 is a technical amendment and
is not subject to notice and comment as it does not
materially affect the substance of the filing.
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 72384,
79 FR 35205 (Jun. 19, 2014). The Commission
designated a longer period within which to take
action on the proposed rule change and designated
July 29, 2014, as the date by which it should
approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule
change.
8 15 U.S.C. 78s(b)(2)(B).
9 See Securities Exchange Act Release No. 72715,
79 FR 45556 (Aug. 5, 2014) (‘‘Order Instituting
Proceedings’’). Specifically, the Commission
instituted proceedings to allow for additional
analysis of the proposed rule change’s consistency
with Section 6(b)(5) of the Act, which requires,
among other things, that the rules of a national
securities exchange be ‘‘designed to prevent
fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade,’’ and
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3 See
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the Order Instituting Proceedings, the
Commission received two comment
letters on the proposal.10 On October 23,
2014, the Commission designated a
longer period for Commission action on
the Order Instituting Proceedings.11
This order grants approval of the
proposed rule change, as modified by
Amendments No. 1 and No. 2 thereto.
II. Description of the Proposal, as
Modified by Amendments No. 1 and
No. 2 Thereto
The Exchange proposes to list and
trade the Shares of the Fund under
NASDAQ Rule 5705(b), which governs
the listing and trading of Index Fund
Shares on the Exchange.12
A. The Fund, Generally
The Fund is an exchange-traded fund
(‘‘ETF’’) that will seek long-term capital
appreciation by tracking the Reality
Shares NASDAQ–100 DIVS Index
(‘‘Index’’). The Index measures market
expectations for dividend growth of the
companies included in the NASDAQ–
100 Index.13 The Shares of the Fund
will be offered by the Reality Shares
ETF Trust (‘‘Trust’’), which was
established as a Delaware statutory trust
on March 26, 2013. The Fund is a series
of the Trust. The Exchange represents
that the Trust will be registered with the
Commission as an open-end
management investment company.14
‘‘to protect investors and the public interest.’’ See
id.
10 See Letter from Eric R. Ervin, President, Reality
Shares ETF Trust and Reality Shares Advisors, LLC,
and President and CEO, Reality Shares, Inc., to
Kevin M. O’Neill, Deputy Secretary, Commission,
dated August 22, 2014 (‘‘Reality Shares Letter 1’’);
Letter from Eric R. Ervin, President, Reality Shares
ETF Trust and Reality Shares Advisors, LLC, and
President and CEO, Reality Shares, Inc., to Arun
Manoharan, Financial Economist, Commission,
dated October 21, 2014 (‘‘Reality Shares Letter 2’’).
11 See Securities Exchange Act Release No. 73418,
79 FR 64431 (Oct. 29, 2014).
12 Index Fund Shares that are issued by an openend investment company and listed and traded on
the Exchange under NASDAQ Rule 5705 seek to
provide investment results that correspond
generally to the price and yield performance of a
specific foreign or domestic stock index, fixed
income securities index, or combination thereof.
See Rule 5705(b)(1)(A).
13 The NASDAQ–100 Index is an index of 100 of
the largest domestic and international securities
(based on market capitalization) listed on The
NASDAQ Stock Market. The NASDAQ–100 Index
includes companies across major industry groups,
including computer hardware and software,
telecommunications, retail/wholesale trade and
biotechnology, and excludes securities of financial
companies.
14 According to the Exchange, the Trust will be
registered under the Investment Company Act of
1940 (‘‘1940 Act’’). On November 12, 2013, the
Trust filed a registration statement on Form N–1A
under the Securities Act of 1933 and 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
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69967
Reality Shares Advisors, LLC will serve
as the investment adviser to the Fund
(‘‘Adviser’’).15 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. The Exchange states
that the Adviser is not a broker-dealer
and is not affiliated with any brokerdealers.16
B. The Exchange’s Description of the
Fund
The Exchange has made the following
representations and statements in
describing the Fund and its investment
strategy, including permitted portfolio
holdings and investment restrictions.17
Reality Shares NASDAQ–100 DIVS
Index ETF
The Exchange states that the Index
was developed by Reality Shares, Inc.,
the parent company of the Adviser, in
conjunction with The NASDAQ OMX
Group, Inc., and is maintained by
Reality Shares, Inc. (‘‘Index
Provider’’).18 The Index Provider is not
a broker-dealer and is not affiliated with
any broker-dealers.19 The Exchange
811–22911) (‘‘Registration Statement’’). In addition,
the Exchange states that the Trust has obtained
certain exemptive relief under the 1940 Act.
Investment Company Act Release No. 30678 (Aug.
27, 2013) (‘‘Exemptive Order’’). The Exchange
represents that investments made by the Fund will
comply with the conditions set forth in the
Exemptive Order.
15 The Adviser is a wholly-owned subsidiary of
the Index Provider.
16 See note 19, infra.
17 Additional information regarding the Trust, the
Fund, and the Shares, including investment
strategy, risks, creation and redemption procedures,
fees, portfolio holdings disclosure policies,
distributions, and taxes, among other things, is
included in the Notice, Registration Statement, and
Exemptive Order, as applicable. See Notice, supra
note 3; see also Registration Statement and
Exemptive Order, supra note 14.
18 The Index will be calculated by International
Data Corporation, which is not affiliated with the
Adviser, Index Provider, or The NASDAQ OMX
Group, and which is not a broker-dealer or fund
advisor.
19 According to the Exchange, the Adviser and the
Index Provider have represented that a fire wall
exists around the respective personnel who have
access to information concerning changes and
adjustments to the Index. The Exchange further
represents that in the event (a) the Adviser, any subadviser, or the Index Provider becomes registered as
a broker-dealer or is newly affiliated with a broker
dealer, or (b) any new adviser, sub-adviser, or Index
Provider is a registered broker-dealer or becomes
affiliated with a broker dealer, the Adviser, subadviser or Index Provider will implement a fire wall
with respect to its relevant personnel or such broker
dealer affiliate, as applicable, regarding access to
information concerning the composition or changes
to the portfolio and will be subject to procedures
designed to prevent the use and dissemination of
material, non-public information regarding the
portfolio. The Fund does not currently intend to use
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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices
states that the Index for the Fund does
not meet all of the ‘‘generic’’ listing
requirements of paragraph (b)(3)(A)(i) of
Rule 5705 applicable to the listing of
Index Fund Shares based upon an index
of ‘‘U.S. Component Stocks.’’ 20
Specifically, Rule 5705(b)(3)(A)(i) sets
forth the requirements to be met by
components of an index or portfolio of
U.S. Component Stocks. The Index will
consist primarily of U.S. exchange-listed
and traded options on the NASDAQ–
100 Index and U.S. exchange-listed and
traded options on ETFs that track the
NASDAQ–100 Index.21 The Fund may
also invest up to 20% of its total assets
in other securities such as over-thecounter (‘‘OTC’’) options, futures, and
forward contracts on the NASDAQ–100
Index, and OTC options, futures, and
forward contracts on ETFs that track the
NASDAQ–100 Index. The Exchange has
represented that the Shares will
conform to the initial and continued
requirements of listing criteria under
Rule 5705(b), except to the extent that
the Index is composed of options based
on U.S. Component Stocks (i.e., ETFs
based on the NASDAQ–100 Index) and
options on an index of U.S. Component
Stocks (i.e., the NASDAQ–100 Index).
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Principal Investments of the Fund
The Fund will seek long-term capital
appreciation and will seek investment
results that, before fees and expenses,
generally correspond to the performance
of the Index. At least 80% of the Fund’s
total assets (exclusive of collateral held
from securities lending, if any) will be
invested in the component securities of
the Index. The Fund will seek a
correlation of 0.95 or better between its
performance and the performance of its
Index (a figure of 1.00 would represent
perfect correlation). The Fund generally
a sub-adviser. See Rule 5705(b)(1)(C); Rule
5705(b)(5)(A).
20 Paragraph (b)(1)(D) of Rule 5705 states that the
term ‘‘U.S. Component Stock’’ shall mean an equity
security that is registered under Sections 12(b) or
12(g) of the Exchange Act, or an American
Depositary Receipt, the underlying equity security
of which is registered under Sections 12(b) or 12(g)
of the Act. See Rule 5705(b)(1)(D).
21 Paragraph (b)(3)(A)(i) of Rule 5705 states, in
relevant part, that upon the initial listing of a series
of Index Fund Shares pursuant to 19b–4(e) under
the Act, all securities in the index or portfolio shall
be U.S. Component Stocks listed on NASDAQ
(including The NASDAQ Capital Market) or another
national securities exchange, and shall be NMS
Stocks as defined in Rule 600 of Regulation NMS
under the Act. The Exchange states that each
component stock of the NASDAQ–100 Index is a
U.S. Component Stock that is listed on a national
securities exchange and is an NMS Stock. Options,
however, are excluded from the definition of NMS
Stock. The Fund and the Index meet all of the
requirements of the listing standards for Index Fund
Shares in Rule 5705 except the requirements in
5705(b)(3)(A)(i)(a)–(e), because the Index includes
options on U.S. Component Stocks.
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will use a representative sampling
investment strategy.
The Fund will buy (i.e., hold a ‘‘long’’
position in) and sell (i.e., hold a ‘‘short’’
position in) put and call options. The
strategy of taking both a long position in
a security through its ex-dividend date
(the last date an investor can own the
security and receive dividends paid on
the security) and a corresponding short
position in the same security
immediately thereafter is designed to
allow the Fund to isolate its exposure to
the growth of the level of dividends
expected to be paid on such security
while minimizing its exposure to
changes in the trading price of such
security.
The Fund will buy and sell U.S.
exchange-listed options on the
NASDAQ–100 Index and U.S. exchangelisted options on ETFs designed to track
the NASDAQ–100 Index. 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. 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
expected dividends reflected in options
on the NASDAQ–100 Index and options
on ETFs tracking the NASDAQ–100
Index, while minimizing the Fund’s
exposure to changes in the trading price
of such securities.
Index Methodology
The Index will be calculated using a
proprietary, rules-based methodology
designed to track market expectations
for dividend growth conveyed in realtime using the mid-point of the bid-ask
spread on NASDAQ–100 Index options
and options on ETFs designed to track
the NASDAQ–100 Index.22 All options
included in the Index will be listed and
traded on a U.S. national securities
exchange. The Index will consist of a
minimum of 20 components.23
The prices of index and ETF options
reflect the market trading prices of the
22 The Exchange notes that there is no guarantee
that either the level of overall dividends paid by
such companies will grow over time, or that the
Index or Fund’s investment strategies will capture
such growth. The Fund will include appropriate
risk disclosure in its offering documents disclosing
these risks, which will be available for free on the
Commission’s Web site and on the Fund’s Web site,
www.realityshares.com.
23 See Rule 5705(b)(3).
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securities included in the applicable
underlying index or 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.
The Index constituents, and, therefore,
most 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 (i.e., options on the
NASDAQ–100 Index or options on
NASDAQ–100 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 options combinations on the same
reference asset with the same strike
price, but with different maturities, is
designed to gain exposure to the
expected dividends reflected in options
on the NASDAQ–100 Index and options
on ETFs tracking the NASDAQ–100
Index while neutralizing the impact of
stock price.
Once established, this portfolio
construction of options 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 Index
(and 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. Over time, the Index
will increase or decrease in value as the
dividend spread between the near-term
and long-term options combinations
increases or decreases as a result of
changing market expectations for
dividend growth.
Other Fund Investments
While, as described above, at least
80% of the Fund’s total assets (exclusive
of collateral held from securities
lending, if any) will be invested in the
component securities of the Index, the
Fund may invest up to 20% of its total
assets in other securities and financial
instruments, as described below.
The Fund may invest in: (a) U.S.
exchange-listed futures contracts based
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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices
on the NASDAQ–100 Index and ETFs
designed to track the NASDAQ–100
Index; and (b) forward contracts based
on the NASDAQ–100 Index and ETFs
designed to track the NASDAQ–100
Index. The Fund’s use of exchangelisted futures contracts and forward
contracts is designed to allow the Fund
to isolate its exposure to the growth of
the level of expected dividends reflected
in options on the NASDAQ–100 Index
and options on ETFs tracking the
NASDAQ–100 Index, while minimizing
the Fund’s exposure to changes in the
trading price of such securities. The
Fund may also buy and sell OTC
options on the NASDAQ–100 Index and
on ETFs designed to track the
NASDAQ–100 Index.
The Fund may enter into dividend
and total return swap transactions
(including equity swap transactions)
based on the NASDAQ–100 Index and
ETFs designed to track the NASDAQ–
100 Index.24 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, whereby the
Fund would receive or pay 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
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 20% of its
assets (exclusive of collateral held from
securities lending, if any) in exchangelisted equity securities and derivative
instruments (specifically, futures
24 The Fund will transact only with swap dealers
that have in place an ISDA agreement with the
Fund.
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20:32 Nov 21, 2014
Jkt 235001
contracts, forward contracts, and swap
transactions, as noted above) 25 relating
to the Index and its component
securities that the Adviser believes will
help the Fund track the Index. For
example, the Fund may buy and sell
ETFs and, to a limited extent, individual
large-capitalization equity securities
listed and traded on a U.S. national
securities exchange.
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 short positions and its
investments in swaps, futures contracts,
forward contracts and options based on
the NASDAQ–100 Index and ETFs
designed to track the NASDAQ–100
Index will be backed by investments in
cash, high-quality short-term debt
securities and money-market
instruments in an amount equal to the
Fund’s maximum liability under the
applicable position or contract, or will
otherwise be offset in accordance with
Section 18 of the 1940 Act. Short-term
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,26 and bonds
that are rated BBB or higher. In addition
to the investments described above, and
in a manner consistent with its
investment objective, the Fund may
invest a limited portion of its net assets
in high-quality, short-term debt
securities and money market
instruments for cash management
purposes.27
The Fund will attempt to limit
counterparty risk in non-cleared swap,
forward, and OTC option contracts by
entering into such contracts only with
25 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.
26 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.
27 The Fund may invest in shares of money
market mutual funds to the extent permitted by the
1940 Act.
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69969
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.28
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.29
Investment Restrictions
To the extent the Index concentrates
(i.e., holds 25% or more of its total
assets) in the securities of a particular
industry or group of industries, the
Fund will concentrate its investments to
approximately the same extent as the
Index.
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment) deemed illiquid by the
Adviser, consistent with Commission
guidance.30 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
28 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.
29 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.
30 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).
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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 make secured loans of
its portfolio securities; however,
securities loans will not be made if, as
a result, the aggregate amount of all
outstanding securities loans by the Fund
exceeds 331⁄3% of its total assets
(including the market value of collateral
received). To the extent the Fund
engages in securities lending, securities
loans will be made to broker-dealers
that the Adviser believes to be of
relatively high credit standing pursuant
to agreements requiring that the loans
continuously be collateralized by cash,
liquid securities, or shares of other
investment companies with a value at
least equal to the market value of the
loaned securities.
The Fund will be classified as a ‘‘nondiversified’’ investment company under
the 1940 Act. The Fund intends to
qualify for and to elect treatment as a
separate regulated investment company
(‘‘RIC’’) under Subchapter M of the
Internal Revenue Code.
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.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
III. Summary of Comment Letters
As noted above, the Commission
received two comment letters in
response to the Order Instituting
Proceedings.31 Both comment letters,
which were in favor of the proposal,
sought to address certain questions, as
outlined in the Order Instituting
Proceedings,32 and provide additional
clarification regarding the proposal.
31 See Reality Shares Letter 1; Reality Shares
Letter 2, supra note 10.
32 In the Order Instituting Proceedings, the
Commission sought comment on the following
questions: (a) Because the Index is designed to
reflect changes in market expectations of future
dividend growth, rather than to track actual
dividend growth, is the Fund’s investment strategy
fundamentally based on an assumption that the
options markets systemically underprice dividend
growth? What are commenters’ views regarding
whether investors would be able to understand the
strategy, risks, potential rewards, assumptions, and
expected performance of the Fund’s strategy? (b)
With respect to the trading of the Shares on the
Exchange, do commenters believe that the
Exchange’s rules governing sales practices are
adequately designed to ensure the suitability of
recommendations regarding the Shares? Why or
why not? If not, should the Exchange’s rules
governing sales practices be enhanced? If so, in
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A. Reality Shares Letter 1
In Reality Shares Letter 1, the
commenter offers its responses to the
Commission’s questions. The
commenter responds that the Fund’s
investment strategy is not based on the
assumption that dividend growth is
underpriced by the options markets,
stating that it is instead based on the
expected dividend value to be paid on
Nasdaq–100 securities (as implied in the
price of listed Nasdaq– Index options
over time) and the ‘‘historical high
correlation between such expected
dividend values and the value of actual
dividends paid on Nasdaq–
securities.’’ 33 The commenter then
explains that, as the value of actual
dividends paid increases or decreases,
market expectations for dividends
typically move up or down in a
corresponding direction and that, if the
current expected dividend value of the
options in the Fund’s portfolio changes,
the value of an investment in the Fund
changes correspondingly.34
The commenter asserts that the
Fund’s Registration Statement will
sufficiently disclose to investors the key
features of the Fund, including
explanations of how the Fund’s strategy
works and how the Fund is expected to
perform under various market
conditions, and disclosures highlighting
all material risks of investing in the
Fund.35 The commenter believes that
these disclosures, and the disclosures in
the Fund’s marketing materials, will
allow investors to understand the
Fund’s investment objective, strategy,
risks, potential rewards, assumptions,
and performance characteristics.36
what ways? (c) How closely do commenters think
the market price of the Shares will track the Fund’s
intraday indicative value (‘‘IIV’’) or the intraday
value of the Index? Are certain of these values
likely to be more volatile than others? If so, how
would this affect trading in the Shares? Are the
Shares likely to trade with a significant premium
or discount to IIV? What are commenters’ views of
how effectively the IIV of the Fund would represent
the Fund’s portfolio? What are commenters’ views
of how the Shares’ market price, the Fund’s IIV, and
the intraday value of the Index will relate to one
another during times of market stress? and (d) Does
the liquidity of the long-dated options in which the
Fund will invest differ materially from that of the
short-dated options in which the Fund will invest?
If so, how would that affect the ability of market
makers to engage in arbitrage or to hedge their
positions while making a market in the Shares?
Would the liquidity characteristics of the Index
components or of the options in the Fund’s
portfolio affect the calculation of the Index value,
the calculation of the Fund’s IIV, the calculation of
the Fund’s NAV, or the ability of market makers or
other market participants to value the Shares? If so,
how?
33 See Reality Shares Letter 1, supra note 10, at
2–3.
34 See id., at 3.
35 See id., at 3–4.
36 See id., at 4.
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Further, the commenter believes that the
Exchange’s rules governing sales
practices are sufficient to ensure the
suitability of recommendations to
investors regarding the Fund’s Shares.37
With respect to IIV, the commenter
responds that it believes that the market
price of the Fund Shares will closely
approximate the IIV of the Fund’s
portfolio and the intraday value of the
Fund’s underlying Index.38 While it
believes that ‘‘the Fund’s IIV and
intraday Index values may reflect higher
volatility than the market trading price
of Fund Shares,’’ the commenter does
not expect this will have any material
impact on secondary market trading of
Fund Shares or arbitrage in Fund
Shares.39 The commenter expects that
Authorized Participants and other
institutional investors will quote and
trade the option contracts held by the
Fund in combination (by holding
simultaneous long and short positions
in the same put/call contracts) and that
this combination tends to trade at
tighter bid/ask spreads than do the
individual contracts.40 The commenter
expects that Authorized Participants
and other market makers will factor the
price of the combination trades into
their assessment of the value of Fund
Shares, which will be reflected in the
trading price of Fund Shares.41 The
commenter explains that the Fund’s IIV
and the intraday Index values are based
on the intraday market price of
individual option contracts and do not
reflect the trading price of option
contracts held in combination. So, while
the commenter expects the price of
Fund Shares to closely approximate the
Fund’s IIV and the intraday values of
the Index, it also expects that the
trading price of Fund shares will be less
volatile than the Fund’s IIV and the
intraday value of the Index.42
In times of market stress, the
commenter believes that the Fund’s
Shares will trade within an acceptable
spread to the Fund’s IIV and the
intraday value of the Index.43 The
commenter believes that, because the
Fund’s portfolio is transparent and the
Index constituents are publicly
disclosed, market participants will be
able to assess the value of the Fund and
the Index and access the securities
necessary to hedge their position
exposures, even during times of market
37 See
38 See
id., at 5.
Reality Shares Letter 1, supra note 10, at
6.
39 See
id.
id.
41 See id., at 7.
42 See id.
43 See Reality Shares Letter 1, supra note 10, at
40 See
9.
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stress.44 Further, the commenter asserts
that, ‘‘[b]ecause of the transparency of
the Fund’s portfolio and the liquidity
and transparency of the underlying
listed index options . . . investors will
continue to have the ability to buy and
sell Shares in the secondary market at
fair and representative prices should
there be any material departure from the
IIV.’’ 45
The commenter states that the
liquidity of the longer-dated option
contracts in the Fund’s portfolio will
not differ materially from the liquidity
of the shorter-dated option contracts.46
Further, the commenter explains that
the liquidity characteristics of the
option contracts held by the Fund will
not negatively impact the Fund’s
operation, the calculation of the Index
value, the calculation of the Fund’s IIV,
or the calculation of the Fund’s NAV.47
The commenter believes that the
options contracts provide ‘‘sufficient
and ample liquidity . . . for Authorized
Participants and other investors to
engage in efficient hedging activity, to
value Fund Shares and to make markets
in Fund Shares.’’ 48
B. Reality Shares Letter 2
In Reality Shares Letter 2, the
commenter seeks to address whether the
Fund’s strategy will produce positive
returns for buy-and-hold investors over
the longer term in light of the efficient
nature of markets and the ability of
astute market participants to predict
dividend growth.49 The commenter
claims that the historical returns of the
Fund’s strategy have been positive over
long periods of time and that an investor
can reasonably expect returns in the
future that are non-zero and positive in
the long term.50
In support of this claim, the
commenter argues that all investments,
even in perfectly efficient markets, are
expected to have, at minimum, a riskfree rate associated with them.51 For
example, Treasury Bills (theoretically
risk-free assets) are discounted by the
risk-free rate in order to entice investors
to purchase them.52 Thus, even in a
perfectly efficient market such as the
one for Treasury Bills, an investment in
a riskless asset will produce a long-term
return greater than zero.53 In addition,
the commenter adds that, if any
uncertainty surrounds the future payoff
of an investment, one would expect a
risk premium to be attached to the
investment.54 This would be quantified
as the amount of money by which the
expected return on the asset exceeds the
known return of a risk-free asset.55 This
risk premium compensates investors for
the uncertainty in their investment in a
risky asset.56 If the dividend risk
premium were low, one would expect
the strategy to earn less than the actual
growth of dividends; if dividend risk
premium were high, one would expect
the strategy to earn more than actual
dividend growth.57 The commenter
notes that, while expected dividend
returns may not match dividend growth
exactly, the rate of return would (at a
minimum) be expected to be equal to
the risk free rate, plus the risk
premium.58
The commenter further asserts that,
beyond the theoretical analogy stated
above, an investment in the expected
dividend implied in the options markets
has historically produced positive
returns and that the Fund’s strategy can
be expected to produce future positive
long-term returns.59 While the
commenter believes that it is possible
for implied dividend strategies to
outperform equity returns, as well as
actual dividend growth, the commenter
argues that the foundation of the Fund’s
investment strategy is predicated on its
conclusion that implied dividends carry
risk and that, in an efficient market, this
risk will be reflected in the form of a
dividend risk premium.60
IV. Discussion and Commission
Findings
The Commission has carefully
considered the proposal and the
comments submitted in response to the
questions raised by the Commission in
the Order Instituting Proceedings. For
the reasons discussed below, the
Commission finds that the Exchange’s
proposal to list and trade the Shares is
consistent with the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
exchange.61 In particular, the
53 See
asabaliauskas on DSK5VPTVN1PROD with NOTICES
44 See
id.
45 See id., at 10.
46 See id.
47 See id., at 11.
48 See Reality Shares Letter 1, supra note 10, at
12.
49 See Reality Shares Letter 2, supra note 10, at
1.
50 See id.
51 See id.
52 See id.
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20:32 Nov 21, 2014
Jkt 235001
54 See
id.
Reality Shares Letter 2, supra note 10, at
2.
55 See
id.
id.
57 See id.
58 See id.
59 See Reality Shares Letter 2, supra note 10, at
56 See
2.
60 See
id., at 3.
approving this proposed rule change, the
Commission has considered the proposed rule’s
61 In
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69971
Commission finds that the proposed
rule change, as modified by
Amendments No. 1 and No. 2 thereto,
is consistent with Section 6(b)(5) of the
Exchange Act,62 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 also
finds that the proposal to list and trade
the Shares on the Exchange is consistent
with Section 11A(a)(1)(C)(iii) of the
Exchange Act,63 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
NASDAQ proprietary quote and trade
services, as well as in accordance with
the Unlisted Trading Privileges and the
Consolidated Tape Association plans for
the Shares. The value of the Index will
be published by one or more major
market data vendors every 15 seconds
during the Regular Market Session.
Information about the Index
constituents, the weighting of the
constituents, the Index’s methodology,
and the Index’s rules will be available
at no charge on the Index Provider’s
Web site at www.realityshares.com. In
addition, an estimated value, defined in
Rule 5705(b)(3)(C) as the ‘‘Intraday
Indicative Value,’’ will be disseminated.
The Intraday Indicative Value, available
on the NASDAQ OMX Information LLC
proprietary index data service,64 will be
based upon the current value for the
components of the Disclosed Portfolio
(as discussed herein) and will be
updated and widely disseminated and
broadly displayed at least every 15
seconds during the Regular Market
Session (currently 9:30 a.m. Eastern
time). On each business day, before
commencement of trading in Shares in
the Regular Market Session on the
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
62 15 U.S.C. 78f(b)(5).
63 15 U.S.C. 78k–1(a)(1)(C)(iii).
64 Currently, the NASDAQ OMX Global Index
Data Service (‘‘GIDS’’) is the NASDAQ OMX global
index data feed service, offering real-time updates,
daily summary messages, and access to widely
followed indexes and Intraday Indicative Values for
ETFs. GIDS provides investment professionals with
the daily information needed to track or trade
NASDAQ OMX indexes, listed ETFs, or third-party
partner indexes and ETFs.
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
Exchange, the Fund will disclose on its
Web site the identities and quantities of
the portfolio of securities and other
assets (the ‘‘Disclosed Portfolio’’) held
by the Fund that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.65 In addition,
a basket composition file, which
includes the security names and
quantities, as applicable, required to be
delivered in exchange for the Fund’s
Shares, together with estimates and
actual cash components, will be
publicly disseminated daily prior to the
opening of NASDAQ via the National
Securities Clearing Corporation. The
basket will represent one Creation Unit
of the Fund. The portfolio composition
file will represent one Creation Unit of
Shares of the Fund.
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. The Fund will calculate
NAV once each business day as of the
regularly scheduled close of trading on
the NYSE (normally, 4:00 p.m., Eastern
Time).66 Intra-day, executable price
65 Under accounting procedures to be followed by
the Fund, trades made on the prior business day
(‘‘T’’) will be booked and reflected in NAV on the
current business day (‘‘T+1’’). Accordingly, the
Fund will be able to disclose at the beginning of the
business day the portfolio that will form the basis
for the NAV calculation at the end of the business
day. On a daily basis, the Adviser, on behalf of 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 holdings in the Fund’s
portfolio. The Web site information will be publicly
available at no charge.
66 The Trust will generally value exchange-listed
securities (which include common stocks and
ETFs), exchange-listed options, and options on the
NASDAQ–100 Index or NASDAQ–100 ETFs at
market closing prices. Market closing price is
generally determined on the basis of last reported
sales prices on the applicable exchange, or if no
sales are reported, based on the mid-point between
the last reported bid and ask. The Trust will
generally value exchange-listed futures at the
settlement price determined by the applicable
exchange. Non-exchange-traded derivatives,
including OTC options, swap transactions, and
forward transactions, will normally be valued on
the basis of quotations or equivalent indication of
value supplied by a third-party pricing service or
major market makers or dealers. Debt securities and
money market instruments generally will be valued
based on prices provided by third-party pricing
services, which may use valuation models or matrix
pricing to determine current value. Investment
company securities (other than ETFs) will be valued
at NAV. The Trust generally will use amortized cost
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Jkt 235001
quotations on the securities and other
assets held by the Fund will be available
from major broker-dealer firms or on the
exchange on which they are traded, as
applicable. Intra-day price information
will also be available through
subscription services, such as
Bloomberg, Markit, and Thomson
Reuters, which can be accessed by
Authorized Participants and other
investors. Specifically, the intra-day,
closing and settlement prices of the
portfolio securities and other Fund
investments, including exchange-listed
equity securities (which include
common stocks and ETFs), exchangelisted futures, and exchange-listed
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 and
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.
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 Fund’s Web
site will include a form of the
prospectus for the Fund that may be
downloaded and additional data
relating to NAV and other applicable
quantitative information.
The Commission also 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 Fund that the NAV for the
Fund will be calculated daily and will
be made available to all market
participants at the same time. The
Exchange represents that it will halt or
pause trading in the Shares under the
to value fixed income or money market securities
that have a remaining maturity of 60 days or less.
PO 00000
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Fmt 4703
Sfmt 4703
conditions specified in NASDAQ Rules
4120 and 4121, including the trading
pauses under NASDAQ Rules
4120(a)(11) and (12). Trading also may
be halted because of market conditions
or for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.67 Trading in the Shares also
will be subject to Rules 5705(b)(1)(B)
and 5705(b)(9)(B), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, if
the IIV, the Index Value or the value of
the Index Components is not being
disseminated as required, the Exchange
may halt trading during the day in
which the disruption occurs; if the
interruption persists past the day in
which it occurred, the Exchange will
halt trading no later than the beginning
of the trading day following the
interruption.
The Exchange states that it has a
general policy prohibiting the
distribution of material, non-public
information by its employees. The
Commission notes that the Index
Provider is not registered as an
investment adviser or broker dealer and
is not affiliated with any broker-dealers,
and the Adviser is not registered as a
broker-dealer and is not affiliated with
any broker-dealers.68 Prior to the
commencement of trading, the Exchange
will inform its members in an
67 These reasons may include: (1) The extent to
which trading is not occurring in the securities or
the financial instruments comprising 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. The Exchange represents that it may
consider all relevant factors in exercising its
discretion to halt or suspend trading in the Shares
of the Fund.
68 See supra note 19 and accompanying text. 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.
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
Information Circular of the special
characteristics and risks associated with
trading the Shares. The Financial
Industry Regulatory Authority
(‘‘FINRA’’), on behalf of the Exchange,69
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.70 All exchange-listed equity
securities, ETFs, futures contracts and
options held by the Fund will be traded
on U.S. exchanges, all of which are
members of ISG or are exchanges with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. In addition, FINRA, on
behalf of the Exchange, is 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.
The Exchange deems the Shares 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:
(1) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.71
(2) The Shares will be subject to Rule
5705, which sets forth the initial and
69 The Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
70 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the portfolio for the Fund may trade
on markets that are members of ISG or with which
the Exchange has in place a comprehensive
surveillance sharing agreement.
71 See NASDAQ Rule 5705(b)(7) (describing the
three trading sessions on the Exchange: Regular
Market Session trading will occur between 9:30
a.m. and either 4:00 p.m. or 4:15 p.m. for each
series of Index Fund Shares, as specified by
NASDAQ). In addition, NASDAQ may designate
each series of Index Fund Shares for trading during
a Pre-Market Session beginning at 4:00 a.m. and/or
a Post-Market Session ending at 8:00 p.m.
VerDate Sep<11>2014
20:32 Nov 21, 2014
Jkt 235001
continued listing criteria applicable to
Index Fund Shares.
(3) Trading in the Shares will be
subject to the existing trading
surveillances, administered by both
NASDAQ and also FINRA on behalf of
the Exchange, which are designed to
detect violations of Exchange rules and
applicable federal securities laws. The
Exchange 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
applicable federal securities laws.
(4) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (b) NASDAQ Rule 2111A,
which imposes suitability obligations on
NASDAQ members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the Index Value
and Intraday Indicative Value will be
disseminated; (d) the risks involved in
trading the Shares during the PreMarket and Post-Market Sessions when
an updated Index Value and Intraday
Indicative Value will not be calculated
or publicly disseminated; (e) the
requirement that members 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 must be in compliance with
Rule 10A–3 under the Exchange Act.72
(6) At least 80% of the Fund’s total
assets (exclusive of collateral held from
securities lending, if any) will be
invested in the component securities of
the Index. The Fund will seek a
correlation of 0.95 or better between its
performance and the performance of its
Index. A figure of 1.00 would represent
perfect correlation. All options included
in the Index will be listed and traded on
a U.S. national securities exchange.
(7) 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. 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
72 17
PO 00000
CFR 240.10A–3.
Frm 00152
Fmt 4703
Sfmt 4703
69973
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. The Fund
may not invest in leveraged or inverse
leveraged (e.g., 2X, –2X, 3X, or –3X)
ETFs or options on such ETFs. 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.
(8) The Fund will transact only with
swap dealers that have in place an ISDA
agreement with the Fund. Where
practicable, the Fund intends to invest
in Cleared Swaps. The Fund will
attempt to limit counterparty risk in
non-cleared swap, forward, and OTC
option contracts by entering into such
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. 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.
(9) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment) deemed illiquid
by the Adviser, consistent with
Commission guidance.
(10) A minimum of 100,000 Shares for
the Fund will be outstanding at the
E:\FR\FM\24NON1.SGM
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69974
Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices
commencement of trading on the
Exchange.
(11) The Fund will include
appropriate risk disclosure in its
offering documents, which will be
available on the Commission’s Web site
and on the Fund’s Web site,
www.realityshares.com.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Fund.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by
Amendments No. 1 and No. 2 thereto,
is consistent with Section 6(b)(5) of the
Act 73 and the rules and regulations
thereunder applicable to a national
securities exchange.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,74 that the
proposed rule change (SR–Nasdaq–
2014–038), as modified by Amendments
No. 1 and No. 2 thereto, be, and it
hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.75
Kevin M. O’Neill,
Deputy Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73633; File No. SR–ISE–
2014–52]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of Proposed Rule
Change Regarding the Short Term
Option Series Program
asabaliauskas on DSK5VPTVN1PROD with NOTICES
November 18, 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
November 6, 2014 the International
Securities Exchange, LLC (the
‘‘Exchange’’ or the ‘‘ISE’’) filed with the
Securities and Exchange Commission
the proposed rule change, as described
in Items I, II, and III below, which items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
U.S.C. 78f(b)(5).
74 Id.
75 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
VerDate Sep<11>2014
20:32 Nov 21, 2014
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE proposes to amend its rules
governing the Short Term Option Series
Program to extend current $0.50 strike
price intervals in non-index options to
short term options with strike prices
less than $100. The text of the proposed
rule change is available on the
Exchange’s Web site (https://
www.ise.com), at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2014–27711 Filed 11–21–14; 8:45 am]
73 15
solicit comments on the proposed rule
change from interested persons.
1. Purpose
The Exchange proposes to amend its
rules governing the Short Term Option
Series Program to introduce finer strike
price intervals for certain short term
options. In particular, the Exchange
proposes to amend Supplementary
Material .12 to Rule 504 to extend $0.50
strike price intervals in non-index
options to short term options with strike
prices less than $100 instead of the
current $75. This proposed change is
intended to eliminate gapped strikes
between $75 and $100 that result from
conflicting strike price parameters
under the Short Term Option Series and
$2.50 Strike Price Programs as described
in more detail below.
Under the ISE’s rules, the Exchange
may list short term options in up to fifty
option classes in addition to option
classes that are selected by other
securities exchanges that employ a
similar program under their respective
rules.3 On any Thursday or Friday that
is a business day, the Exchange may list
short term option series in designated
option classes that expire at the close of
3 See
Jkt 235001
PO 00000
Supplementary Material .02(a) to Rule 504.
Frm 00153
Fmt 4703
Sfmt 4703
business on each of the next five Fridays
that are business days and are not
Fridays in which monthly or quarterly
options expire.4 These short term option
series trade in $0.50, $1, or $2.50 strike
price intervals depending on the strike
price and whether the option trades in
dollar increments in the related monthly
expiration.5 Specifically, short term
options in non-index option classes
admitted to the Short Term Options
Series Program currently trade in: (1)
$0.50 intervals [sic] for strike prices less
than $75, or for option classes that trade
in one dollar increments in the related
monthly expiration option; (2) $1
intervals [sic] for strike prices that are
between $75 and $150; and (3) $2.50
intervals [sic] for strike prices above
$150.6
The ISE also operates a $2.50 Strike
Price Program that permits the Exchange
to select up to sixty options classes on
individual stocks to trade in $2.50 strike
price intervals, in addition to option
classes selected by other securities
exchanges that employ a similar
program under their respective rules.7
Monthly expiration options in classes
admitted to the $2.50 Strike Price
Program trade in $2.50 intervals where
the strike price is (1) greater than $25
but less than $50; or (2) between $50
and $100 if the strikes are no more than
$10 from the closing price of the
underlying stock in its primary market
on the preceding day.8 These strike
price parameters conflict with strike
prices allowed for short term options as
dollar strikes between $75 and $100
otherwise allowed under the Short Term
Option Series Program may be within
$0.50 of strikes listed pursuant to the
$2.50 Strike Price Program. In order to
remedy this conflict, the Exchange
proposes to extend the $0.50 strike price
intervals currently allowed for short
term options with strike prices less than
$75 to short term options with strike
prices less than $100. With this
proposed change, short term options in
non-index option classes will trade in:
(1) $0.50 intervals [sic] for strike prices
less than $100, or for option classes that
trade in one dollar increments in the
related monthly expiration option; (2)
$1 intervals [sic] for strike prices that
are between $100 and $150; and (3)
$2.50 intervals [sic] for strike prices
above $150.
4 See
5 See
Supplementary Material .02 to Rule 504.
Supplementary Material .12 to Rule 504.
6 Id.
7 See
Rule 504(g).
The term ‘‘primary market’’ is defined in ISE
Rule 100(a)(37) as the principal market in which an
underlying security is traded.
8 Id.
E:\FR\FM\24NON1.SGM
24NON1
]]>Agencies
[Federal Register Volume 79, Number 226 (Monday, November 24, 2014)]
[Notices]
[Pages 69966-69974]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27711]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73630; File No. SR-NASDAQ-2014-038]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendments
No. 1 and No. 2 Thereto, Relating to the Listing and Trading of the
Shares of the Reality Shares NASDAQ-100 DIVS Index ETF Under Nasdaq
Rule 5705
November 18, 2014.
I. Introduction
On April 10, 2014, The NASDAQ Stock Market LLC (``Exchange'' or
``NASDAQ'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and
[[Page 69967]]
Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade
shares (``Shares'') of the Reality Shares NASDAQ-100 DIVS Index ETF
(``Fund'') under Rule 5705. The proposed rule change was published for
comment in the Federal Register on April 30, 2014.\3\ On May 13, 2014,
the Exchange filed Amendment No. 1 to the proposed rule change, which
amended and replaced the proposed rule change in its entirety.\4\ On
June 4, 2014, the Exchange filed Amendment No. 2 to the proposed rule
change.\5\ On June 13, 2014, pursuant to Section 19(b)(2) of the
Act,\6\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72014 (Apr. 24,
2014), 79 FR 24465 (``Notice'').
\4\ In Amendment No. 1, the Exchange confirmed the hours of the
three trading sessions on the Exchange, clarified the valuation of
investments for purposes of calculating net asset value, clarified
what information would be available on the Fund's Web site, and
provided additional information relating to surveillance with
respect to certain assets held by the Fund. Amendment No. 1 provided
clarification to the proposed rule change, and because it does not
materially affect the substance of the proposed rule change or raise
novel or unique regulatory issues, Amendment No. 1 is not subject to
notice and comment.
\5\ The Exchange filed Amendment No. 2 to the proposal to
reflect a change to the name of the Fund and the underlying index.
Specifically, the Exchange replaced each reference in the proposal
to the ``Reality Shares NASDAQ-100 Isolated Dividend Growth ETF''
(the original name of the Fund) with a reference to the ``Reality
Shares NASDAQ-100 DIVS Index ETF.'' Similarly, the Exchange replaced
each reference in the proposal to the ``Reality Shares NASDAQ-100
Isolated Dividend Growth Index'' with a reference to the ``Reality
Shares NASDAQ-100 DIVS Index.'' Amendment No. 2 is a technical
amendment and is not subject to notice and comment as it does not
materially affect the substance of the filing.
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 72384, 79 FR 35205
(Jun. 19, 2014). The Commission designated a longer period within
which to take action on the proposed rule change and designated July
29, 2014, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
---------------------------------------------------------------------------
On July 29, 2014, the Commission instituted proceedings under
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or
disapprove the proposed rule change.\9\ In response to the Order
Instituting Proceedings, the Commission received two comment letters on
the proposal.\10\ On October 23, 2014, the Commission designated a
longer period for Commission action on the Order Instituting
Proceedings.\11\ This order grants approval of the proposed rule
change, as modified by Amendments No. 1 and No. 2 thereto.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ See Securities Exchange Act Release No. 72715, 79 FR 45556
(Aug. 5, 2014) (``Order Instituting Proceedings''). Specifically,
the Commission instituted proceedings to allow for additional
analysis of the proposed rule change's consistency with Section
6(b)(5) of the Act, which requires, among other things, that the
rules of a national securities exchange be ``designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade,'' and ``to protect investors and the
public interest.'' See id.
\10\ See Letter from Eric R. Ervin, President, Reality Shares
ETF Trust and Reality Shares Advisors, LLC, and President and CEO,
Reality Shares, Inc., to Kevin M. O'Neill, Deputy Secretary,
Commission, dated August 22, 2014 (``Reality Shares Letter 1'');
Letter from Eric R. Ervin, President, Reality Shares ETF Trust and
Reality Shares Advisors, LLC, and President and CEO, Reality Shares,
Inc., to Arun Manoharan, Financial Economist, Commission, dated
October 21, 2014 (``Reality Shares Letter 2'').
\11\ See Securities Exchange Act Release No. 73418, 79 FR 64431
(Oct. 29, 2014).
---------------------------------------------------------------------------
II. Description of the Proposal, as Modified by Amendments No. 1 and
No. 2 Thereto
The Exchange proposes to list and trade the Shares of the Fund
under NASDAQ Rule 5705(b), which governs the listing and trading of
Index Fund Shares on the Exchange.\12\
---------------------------------------------------------------------------
\12\ Index Fund Shares that are issued by an open-end investment
company and listed and traded on the Exchange under NASDAQ Rule 5705
seek to provide investment results that correspond generally to the
price and yield performance of a specific foreign or domestic stock
index, fixed income securities index, or combination thereof. See
Rule 5705(b)(1)(A).
---------------------------------------------------------------------------
A. The Fund, Generally
The Fund is an exchange-traded fund (``ETF'') that will seek long-
term capital appreciation by tracking the Reality Shares NASDAQ-100
DIVS Index (``Index''). The Index measures market expectations for
dividend growth of the companies included in the NASDAQ-100 Index.\13\
The Shares of the Fund will be offered by the Reality Shares ETF Trust
(``Trust''), which was established as a Delaware statutory trust on
March 26, 2013. The Fund is a series of the Trust. The Exchange
represents that the Trust will be registered with the Commission as an
open-end management investment company.\14\ Reality Shares Advisors,
LLC will serve as the investment adviser to the Fund (``Adviser'').\15\
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. The
Exchange states that the Adviser is not a broker-dealer and is not
affiliated with any broker-dealers.\16\
---------------------------------------------------------------------------
\13\ The NASDAQ-100 Index is an index of 100 of the largest
domestic and international securities (based on market
capitalization) listed on The NASDAQ Stock Market. The NASDAQ-100
Index includes companies across major industry groups, including
computer hardware and software, telecommunications, retail/wholesale
trade and biotechnology, and excludes securities of financial
companies.
\14\ According to the Exchange, the Trust will be registered
under the Investment Company Act of 1940 (``1940 Act''). On November
12, 2013, the Trust filed a registration statement on Form N-1A
under the Securities Act of 1933 and 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)
(``Registration Statement''). In addition, the Exchange states that
the Trust has obtained certain exemptive relief under the 1940 Act.
Investment Company Act Release No. 30678 (Aug. 27, 2013)
(``Exemptive Order''). The Exchange represents that investments made
by the Fund will comply with the conditions set forth in the
Exemptive Order.
\15\ The Adviser is a wholly-owned subsidiary of the Index
Provider.
\16\ See note 19, infra.
---------------------------------------------------------------------------
B. The Exchange's Description of the Fund
The Exchange has made the following representations and statements
in describing the Fund and its investment strategy, including permitted
portfolio holdings and investment restrictions.\17\
---------------------------------------------------------------------------
\17\ Additional information regarding the Trust, the Fund, and
the Shares, including investment strategy, risks, creation and
redemption procedures, fees, portfolio holdings disclosure policies,
distributions, and taxes, among other things, is included in the
Notice, Registration Statement, and Exemptive Order, as applicable.
See Notice, supra note 3; see also Registration Statement and
Exemptive Order, supra note 14.
---------------------------------------------------------------------------
Reality Shares NASDAQ-100 DIVS Index ETF
The Exchange states that the Index was developed by Reality Shares,
Inc., the parent company of the Adviser, in conjunction with The NASDAQ
OMX Group, Inc., and is maintained by Reality Shares, Inc. (``Index
Provider'').\18\ The Index Provider is not a broker-dealer and is not
affiliated with any broker-dealers.\19\ The Exchange
[[Page 69968]]
states that the Index for the Fund does not meet all of the ``generic''
listing requirements of paragraph (b)(3)(A)(i) of Rule 5705 applicable
to the listing of Index Fund Shares based upon an index of ``U.S.
Component Stocks.'' \20\ Specifically, Rule 5705(b)(3)(A)(i) sets forth
the requirements to be met by components of an index or portfolio of
U.S. Component Stocks. The Index will consist primarily of U.S.
exchange-listed and traded options on the NASDAQ-100 Index and U.S.
exchange-listed and traded options on ETFs that track the NASDAQ-100
Index.\21\ The Fund may also invest up to 20% of its total assets in
other securities such as over-the-counter (``OTC'') options, futures,
and forward contracts on the NASDAQ-100 Index, and OTC options,
futures, and forward contracts on ETFs that track the NASDAQ-100 Index.
The Exchange has represented that the Shares will conform to the
initial and continued requirements of listing criteria under Rule
5705(b), except to the extent that the Index is composed of options
based on U.S. Component Stocks (i.e., ETFs based on the NASDAQ-100
Index) and options on an index of U.S. Component Stocks (i.e., the
NASDAQ-100 Index).
---------------------------------------------------------------------------
\18\ The Index will be calculated by International Data
Corporation, which is not affiliated with the Adviser, Index
Provider, or The NASDAQ OMX Group, and which is not a broker-dealer
or fund advisor.
\19\ According to the Exchange, the Adviser and the Index
Provider have represented that a fire wall exists around the
respective personnel who have access to information concerning
changes and adjustments to the Index. The Exchange further
represents that in the event (a) the Adviser, any sub-adviser, or
the Index Provider becomes registered as a broker-dealer or is newly
affiliated with a broker dealer, or (b) any new adviser, sub-
adviser, or Index Provider is a registered broker-dealer or becomes
affiliated with a broker dealer, the Adviser, sub-adviser or Index
Provider will implement a fire wall with respect to its relevant
personnel or such broker dealer affiliate, as applicable, regarding
access to information concerning the composition or changes to the
portfolio and will be subject to procedures designed to prevent the
use and dissemination of material, non-public information regarding
the portfolio. The Fund does not currently intend to use a sub-
adviser. See Rule 5705(b)(1)(C); Rule 5705(b)(5)(A).
\20\ Paragraph (b)(1)(D) of Rule 5705 states that the term
``U.S. Component Stock'' shall mean an equity security that is
registered under Sections 12(b) or 12(g) of the Exchange Act, or an
American Depositary Receipt, the underlying equity security of which
is registered under Sections 12(b) or 12(g) of the Act. See Rule
5705(b)(1)(D).
\21\ Paragraph (b)(3)(A)(i) of Rule 5705 states, in relevant
part, that upon the initial listing of a series of Index Fund Shares
pursuant to 19b-4(e) under the Act, all securities in the index or
portfolio shall be U.S. Component Stocks listed on NASDAQ (including
The NASDAQ Capital Market) or another national securities exchange,
and shall be NMS Stocks as defined in Rule 600 of Regulation NMS
under the Act. The Exchange states that each component stock of the
NASDAQ-100 Index is a U.S. Component Stock that is listed on a
national securities exchange and is an NMS Stock. Options, however,
are excluded from the definition of NMS Stock. The Fund and the
Index meet all of the requirements of the listing standards for
Index Fund Shares in Rule 5705 except the requirements in
5705(b)(3)(A)(i)(a)-(e), because the Index includes options on U.S.
Component Stocks.
---------------------------------------------------------------------------
Principal Investments of the Fund
The Fund will seek long-term capital appreciation and will seek
investment results that, before fees and expenses, generally correspond
to the performance of the Index. At least 80% of the Fund's total
assets (exclusive of collateral held from securities lending, if any)
will be invested in the component securities of the Index. The Fund
will seek a correlation of 0.95 or better between its performance and
the performance of its Index (a figure of 1.00 would represent perfect
correlation). The Fund generally will use a representative sampling
investment strategy.
The Fund will buy (i.e., hold a ``long'' position in) and sell
(i.e., hold a ``short'' position in) put and call options. The strategy
of taking both a long position in a security through its ex-dividend
date (the last date an investor can own the security and receive
dividends paid on the security) and a corresponding short position in
the same security immediately thereafter is designed to allow the Fund
to isolate its exposure to the growth of the level of dividends
expected to be paid on such security while minimizing its exposure to
changes in the trading price of such security.
The Fund will buy and sell U.S. exchange-listed options on the
NASDAQ-100 Index and U.S. exchange-listed options on ETFs designed to
track the NASDAQ-100 Index. 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. 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 expected
dividends reflected in options on the NASDAQ-100 Index and options on
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's
exposure to changes in the trading price of such securities.
Index Methodology
The Index will be calculated using a proprietary, rules-based
methodology designed to track market expectations for dividend growth
conveyed in real-time using the mid-point of the bid-ask spread on
NASDAQ-100 Index options and options on ETFs designed to track the
NASDAQ-100 Index.\22\ All options included in the Index will be listed
and traded on a U.S. national securities exchange. The Index will
consist of a minimum of 20 components.\23\
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\22\ The Exchange notes that there is no guarantee that either
the level of overall dividends paid by such companies will grow over
time, or that the Index or Fund's investment strategies will capture
such growth. The Fund will include appropriate risk disclosure in
its offering documents disclosing these risks, which will be
available for free on the Commission's Web site and on the Fund's
Web site, www.realityshares.com.
\23\ See Rule 5705(b)(3).
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The prices of index and ETF options reflect the market trading
prices of the securities included in the applicable underlying index or
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. The
Index constituents, and, therefore, most 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
(i.e., options on the NASDAQ-100 Index or options on NASDAQ-100 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 options combinations on the same
reference asset with the same strike price, but with different
maturities, is designed to gain exposure to the expected dividends
reflected in options on the NASDAQ-100 Index and options on ETFs
tracking the NASDAQ-100 Index while neutralizing the impact of stock
price.
Once established, this portfolio construction of options
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 Index (and 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. Over time, the Index will increase or decrease in value as
the dividend spread between the near-term and long-term options
combinations increases or decreases as a result of changing market
expectations for dividend growth.
Other Fund Investments
While, as described above, at least 80% of the Fund's total assets
(exclusive of collateral held from securities lending, if any) will be
invested in the component securities of the Index, the Fund may invest
up to 20% of its total assets in other securities and financial
instruments, as described below.
The Fund may invest in: (a) U.S. exchange-listed futures contracts
based
[[Page 69969]]
on the NASDAQ-100 Index and ETFs designed to track the NASDAQ-100
Index; and (b) forward contracts based on the NASDAQ-100 Index and ETFs
designed to track the NASDAQ-100 Index. The Fund's use of exchange-
listed futures contracts and forward contracts is designed to allow the
Fund to isolate its exposure to the growth of the level of expected
dividends reflected in options on the NASDAQ-100 Index and options on
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's
exposure to changes in the trading price of such securities. The Fund
may also buy and sell OTC options on the NASDAQ-100 Index and on ETFs
designed to track the NASDAQ-100 Index.
The Fund may enter into dividend and total return swap transactions
(including equity swap transactions) based on the NASDAQ-100 Index and
ETFs designed to track the NASDAQ-100 Index.\24\ 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, whereby the Fund would receive or pay 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 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.
---------------------------------------------------------------------------
\24\ The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund.
---------------------------------------------------------------------------
The Fund may invest up to 20% of its assets (exclusive of
collateral held from securities lending, if any) in exchange-listed
equity securities and derivative instruments (specifically, futures
contracts, forward contracts, and swap transactions, as noted above)
\25\ relating to the Index and its component securities that the
Adviser believes will help the Fund track the Index. For example, the
Fund may buy and sell ETFs and, to a limited extent, individual large-
capitalization equity securities listed and traded on a U.S. national
securities exchange.
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\25\ 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 may invest in the securities of other investment companies
(including money market funds) to the extent permitted under the 1940
Act.
The Fund's short positions and its investments in swaps, futures
contracts, forward contracts and options based on the NASDAQ-100 Index
and ETFs designed to track the NASDAQ-100 Index will be backed by
investments in cash, high-quality short-term debt securities and money-
market instruments in an amount equal to the Fund's maximum liability
under the applicable position or contract, or will otherwise be offset
in accordance with Section 18 of the 1940 Act. Short-term 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,\26\ and bonds that are rated BBB or higher. In addition to
the investments described above, and in a manner consistent with its
investment objective, the Fund may invest a limited portion of its net
assets in high-quality, short-term debt securities and money market
instruments for cash management purposes.\27\
---------------------------------------------------------------------------
\26\ 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.
\27\ The Fund may invest in shares of money market mutual funds
to the extent permitted by the 1940 Act.
---------------------------------------------------------------------------
The Fund will attempt to limit counterparty risk in non-cleared
swap, forward, and OTC option contracts by entering into such 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.\28\
---------------------------------------------------------------------------
\28\ 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.\29\
---------------------------------------------------------------------------
\29\ 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.
---------------------------------------------------------------------------
Investment Restrictions
To the extent the Index concentrates (i.e., holds 25% or more of
its total assets) in the securities of a particular industry or group
of industries, the Fund will concentrate its investments to
approximately the same extent as the Index.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser, consistent with Commission guidance.\30\ 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
[[Page 69970]]
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.
---------------------------------------------------------------------------
\30\ 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 make secured loans of its portfolio securities;
however, securities loans will not be made if, as a result, the
aggregate amount of all outstanding securities loans by the Fund
exceeds 33\1/3\% of its total assets (including the market value of
collateral received). To the extent the Fund engages in securities
lending, securities loans will be made to broker-dealers that the
Adviser believes to be of relatively high credit standing pursuant to
agreements requiring that the loans continuously be collateralized by
cash, liquid securities, or shares of other investment companies with a
value at least equal to the market value of the loaned securities.
The Fund will be classified as a ``non-diversified'' investment
company under the 1940 Act. The Fund intends to qualify for and to
elect treatment as a separate regulated investment company (``RIC'')
under Subchapter M of the Internal Revenue Code.
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.
III. Summary of Comment Letters
As noted above, the Commission received two comment letters in
response to the Order Instituting Proceedings.\31\ Both comment
letters, which were in favor of the proposal, sought to address certain
questions, as outlined in the Order Instituting Proceedings,\32\ and
provide additional clarification regarding the proposal.
---------------------------------------------------------------------------
\31\ See Reality Shares Letter 1; Reality Shares Letter 2, supra
note 10.
\32\ In the Order Instituting Proceedings, the Commission sought
comment on the following questions: (a) Because the Index is
designed to reflect changes in market expectations of future
dividend growth, rather than to track actual dividend growth, is the
Fund's investment strategy fundamentally based on an assumption that
the options markets systemically underprice dividend growth? What
are commenters' views regarding whether investors would be able to
understand the strategy, risks, potential rewards, assumptions, and
expected performance of the Fund's strategy? (b) With respect to the
trading of the Shares on the Exchange, do commenters believe that
the Exchange's rules governing sales practices are adequately
designed to ensure the suitability of recommendations regarding the
Shares? Why or why not? If not, should the Exchange's rules
governing sales practices be enhanced? If so, in what ways? (c) How
closely do commenters think the market price of the Shares will
track the Fund's intraday indicative value (``IIV'') or the intraday
value of the Index? Are certain of these values likely to be more
volatile than others? If so, how would this affect trading in the
Shares? Are the Shares likely to trade with a significant premium or
discount to IIV? What are commenters' views of how effectively the
IIV of the Fund would represent the Fund's portfolio? What are
commenters' views of how the Shares' market price, the Fund's IIV,
and the intraday value of the Index will relate to one another
during times of market stress? and (d) Does the liquidity of the
long-dated options in which the Fund will invest differ materially
from that of the short-dated options in which the Fund will invest?
If so, how would that affect the ability of market makers to engage
in arbitrage or to hedge their positions while making a market in
the Shares? Would the liquidity characteristics of the Index
components or of the options in the Fund's portfolio affect the
calculation of the Index value, the calculation of the Fund's IIV,
the calculation of the Fund's NAV, or the ability of market makers
or other market participants to value the Shares? If so, how?
---------------------------------------------------------------------------
A. Reality Shares Letter 1
In Reality Shares Letter 1, the commenter offers its responses to
the Commission's questions. The commenter responds that the Fund's
investment strategy is not based on the assumption that dividend growth
is underpriced by the options markets, stating that it is instead based
on the expected dividend value to be paid on Nasdaq-100 securities (as
implied in the price of listed Nasdaq- Index options over time) and the
``historical high correlation between such expected dividend values and
the value of actual dividends paid on Nasdaq- securities.'' \33\ The
commenter then explains that, as the value of actual dividends paid
increases or decreases, market expectations for dividends typically
move up or down in a corresponding direction and that, if the current
expected dividend value of the options in the Fund's portfolio changes,
the value of an investment in the Fund changes correspondingly.\34\
---------------------------------------------------------------------------
\33\ See Reality Shares Letter 1, supra note 10, at 2-3.
\34\ See id., at 3.
---------------------------------------------------------------------------
The commenter asserts that the Fund's Registration Statement will
sufficiently disclose to investors the key features of the Fund,
including explanations of how the Fund's strategy works and how the
Fund is expected to perform under various market conditions, and
disclosures highlighting all material risks of investing in the
Fund.\35\ The commenter believes that these disclosures, and the
disclosures in the Fund's marketing materials, will allow investors to
understand the Fund's investment objective, strategy, risks, potential
rewards, assumptions, and performance characteristics.\36\ Further, the
commenter believes that the Exchange's rules governing sales practices
are sufficient to ensure the suitability of recommendations to
investors regarding the Fund's Shares.\37\
---------------------------------------------------------------------------
\35\ See id., at 3-4.
\36\ See id., at 4.
\37\ See id., at 5.
---------------------------------------------------------------------------
With respect to IIV, the commenter responds that it believes that
the market price of the Fund Shares will closely approximate the IIV of
the Fund's portfolio and the intraday value of the Fund's underlying
Index.\38\ While it believes that ``the Fund's IIV and intraday Index
values may reflect higher volatility than the market trading price of
Fund Shares,'' the commenter does not expect this will have any
material impact on secondary market trading of Fund Shares or arbitrage
in Fund Shares.\39\ The commenter expects that Authorized Participants
and other institutional investors will quote and trade the option
contracts held by the Fund in combination (by holding simultaneous long
and short positions in the same put/call contracts) and that this
combination tends to trade at tighter bid/ask spreads than do the
individual contracts.\40\ The commenter expects that Authorized
Participants and other market makers will factor the price of the
combination trades into their assessment of the value of Fund Shares,
which will be reflected in the trading price of Fund Shares.\41\ The
commenter explains that the Fund's IIV and the intraday Index values
are based on the intraday market price of individual option contracts
and do not reflect the trading price of option contracts held in
combination. So, while the commenter expects the price of Fund Shares
to closely approximate the Fund's IIV and the intraday values of the
Index, it also expects that the trading price of Fund shares will be
less volatile than the Fund's IIV and the intraday value of the
Index.\42\
---------------------------------------------------------------------------
\38\ See Reality Shares Letter 1, supra note 10, at 6.
\39\ See id.
\40\ See id.
\41\ See id., at 7.
\42\ See id.
---------------------------------------------------------------------------
In times of market stress, the commenter believes that the Fund's
Shares will trade within an acceptable spread to the Fund's IIV and the
intraday value of the Index.\43\ The commenter believes that, because
the Fund's portfolio is transparent and the Index constituents are
publicly disclosed, market participants will be able to assess the
value of the Fund and the Index and access the securities necessary to
hedge their position exposures, even during times of market
[[Page 69971]]
stress.\44\ Further, the commenter asserts that, ``[b]ecause of the
transparency of the Fund's portfolio and the liquidity and transparency
of the underlying listed index options . . . investors will continue to
have the ability to buy and sell Shares in the secondary market at fair
and representative prices should there be any material departure from
the IIV.'' \45\
---------------------------------------------------------------------------
\43\ See Reality Shares Letter 1, supra note 10, at 9.
\44\ See id.
\45\ See id., at 10.
---------------------------------------------------------------------------
The commenter states that the liquidity of the longer-dated option
contracts in the Fund's portfolio will not differ materially from the
liquidity of the shorter-dated option contracts.\46\ Further, the
commenter explains that the liquidity characteristics of the option
contracts held by the Fund will not negatively impact the Fund's
operation, the calculation of the Index value, the calculation of the
Fund's IIV, or the calculation of the Fund's NAV.\47\ The commenter
believes that the options contracts provide ``sufficient and ample
liquidity . . . for Authorized Participants and other investors to
engage in efficient hedging activity, to value Fund Shares and to make
markets in Fund Shares.'' \48\
---------------------------------------------------------------------------
\46\ See id.
\47\ See id., at 11.
\48\ See Reality Shares Letter 1, supra note 10, at 12.
---------------------------------------------------------------------------
B. Reality Shares Letter 2
In Reality Shares Letter 2, the commenter seeks to address whether
the Fund's strategy will produce positive returns for buy-and-hold
investors over the longer term in light of the efficient nature of
markets and the ability of astute market participants to predict
dividend growth.\49\ The commenter claims that the historical returns
of the Fund's strategy have been positive over long periods of time and
that an investor can reasonably expect returns in the future that are
non-zero and positive in the long term.\50\
---------------------------------------------------------------------------
\49\ See Reality Shares Letter 2, supra note 10, at 1.
\50\ See id.
---------------------------------------------------------------------------
In support of this claim, the commenter argues that all
investments, even in perfectly efficient markets, are expected to have,
at minimum, a risk-free rate associated with them.\51\ For example,
Treasury Bills (theoretically risk-free assets) are discounted by the
risk-free rate in order to entice investors to purchase them.\52\ Thus,
even in a perfectly efficient market such as the one for Treasury
Bills, an investment in a riskless asset will produce a long-term
return greater than zero.\53\ In addition, the commenter adds that, if
any uncertainty surrounds the future payoff of an investment, one would
expect a risk premium to be attached to the investment.\54\ This would
be quantified as the amount of money by which the expected return on
the asset exceeds the known return of a risk-free asset.\55\ This risk
premium compensates investors for the uncertainty in their investment
in a risky asset.\56\ If the dividend risk premium were low, one would
expect the strategy to earn less than the actual growth of dividends;
if dividend risk premium were high, one would expect the strategy to
earn more than actual dividend growth.\57\ The commenter notes that,
while expected dividend returns may not match dividend growth exactly,
the rate of return would (at a minimum) be expected to be equal to the
risk free rate, plus the risk premium.\58\
---------------------------------------------------------------------------
\51\ See id.
\52\ See id.
\53\ See id.
\54\ See Reality Shares Letter 2, supra note 10, at 2.
\55\ See id.
\56\ See id.
\57\ See id.
\58\ See id.
---------------------------------------------------------------------------
The commenter further asserts that, beyond the theoretical analogy
stated above, an investment in the expected dividend implied in the
options markets has historically produced positive returns and that the
Fund's strategy can be expected to produce future positive long-term
returns.\59\ While the commenter believes that it is possible for
implied dividend strategies to outperform equity returns, as well as
actual dividend growth, the commenter argues that the foundation of the
Fund's investment strategy is predicated on its conclusion that implied
dividends carry risk and that, in an efficient market, this risk will
be reflected in the form of a dividend risk premium.\60\
---------------------------------------------------------------------------
\59\ See Reality Shares Letter 2, supra note 10, at 2.
\60\ See id., at 3.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
The Commission has carefully considered the proposal and the
comments submitted in response to the questions raised by the
Commission in the Order Instituting Proceedings. For the reasons
discussed below, the Commission finds that the Exchange's proposal to
list and trade the Shares is consistent with the Exchange Act and the
rules and regulations thereunder applicable to a national securities
exchange.\61\ In particular, the Commission finds that the proposed
rule change, as modified by Amendments No. 1 and No. 2 thereto, is
consistent with Section 6(b)(5) of the Exchange Act,\62\ 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 also finds that the proposal to list and trade
the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii)
of the Exchange Act,\63\ 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.
---------------------------------------------------------------------------
\61\ 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).
\62\ 15 U.S.C. 78f(b)(5).
\63\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
Quotation and last-sale information for the Shares will be
available via NASDAQ proprietary quote and trade services, as well as
in accordance with the Unlisted Trading Privileges and the Consolidated
Tape Association plans for the Shares. The value of the Index will be
published by one or more major market data vendors every 15 seconds
during the Regular Market Session. Information about the Index
constituents, the weighting of the constituents, the Index's
methodology, and the Index's rules will be available at no charge on
the Index Provider's Web site at www.realityshares.com. In addition, an
estimated value, defined in Rule 5705(b)(3)(C) as the ``Intraday
Indicative Value,'' will be disseminated. The Intraday Indicative
Value, available on the NASDAQ OMX Information LLC proprietary index
data service,\64\ will be based upon the current value for the
components of the Disclosed Portfolio (as discussed herein) and will be
updated and widely disseminated and broadly displayed at least every 15
seconds during the Regular Market Session (currently 9:30 a.m. Eastern
time). On each business day, before commencement of trading in Shares
in the Regular Market Session on the
[[Page 69972]]
Exchange, the Fund will disclose on its Web site the identities and
quantities of the portfolio of securities and other assets (the
``Disclosed Portfolio'') held by the Fund that will form the basis for
the Fund's calculation of NAV at the end of the business day.\65\ In
addition, a basket composition file, which includes the security names
and quantities, as applicable, required to be delivered in exchange for
the Fund's Shares, together with estimates and actual cash components,
will be publicly disseminated daily prior to the opening of NASDAQ via
the National Securities Clearing Corporation. The basket will represent
one Creation Unit of the Fund. The portfolio composition file will
represent one Creation Unit of Shares of the Fund.
---------------------------------------------------------------------------
\64\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service,
offering real-time updates, daily summary messages, and access to
widely followed indexes and Intraday Indicative Values for ETFs.
GIDS provides investment professionals with the daily information
needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-
party partner indexes and ETFs.
\65\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day. On a daily basis, the Adviser, on
behalf of 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 holdings in the Fund's
portfolio. The Web site information will be publicly available at no
charge.
---------------------------------------------------------------------------
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. The
Fund will calculate NAV once each business day as of the regularly
scheduled close of trading on the NYSE (normally, 4:00 p.m., Eastern
Time).\66\ Intra-day, executable price quotations on the securities and
other assets held by the Fund will be available from major broker-
dealer firms or on the exchange on which they are traded, as
applicable. Intra-day price information will also be available through
subscription services, such as Bloomberg, Markit, and Thomson Reuters,
which can be accessed by Authorized Participants and other investors.
Specifically, the intra-day, closing and settlement prices of the
portfolio securities and other Fund investments, including exchange-
listed equity securities (which include common stocks and ETFs),
exchange-listed futures, and exchange-listed 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 and 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. 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 Fund's Web site will include a form of the
prospectus for the Fund that may be downloaded and additional data
relating to NAV and other applicable quantitative information.
---------------------------------------------------------------------------
\66\ The Trust will generally value exchange-listed securities
(which include common stocks and ETFs), exchange-listed options, and
options on the NASDAQ-100 Index or NASDAQ-100 ETFs at market closing
prices. Market closing price is generally determined on the basis of
last reported sales prices on the applicable exchange, or if no
sales are reported, based on the mid-point between the last reported
bid and ask. The Trust will generally value exchange-listed futures
at the settlement price determined by the applicable exchange. Non-
exchange-traded derivatives, including OTC options, swap
transactions, and forward transactions, will normally be valued on
the basis of quotations or equivalent indication of value supplied
by a third-party pricing service or major market makers or dealers.
Debt securities and money market instruments generally will be
valued based on prices provided by third-party pricing services,
which may use valuation models or matrix pricing to determine
current value. Investment company securities (other than ETFs) will
be valued at NAV. The Trust generally will use amortized cost to
value fixed income or money market securities that have a remaining
maturity of 60 days or less.
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The Commission also 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 Fund that
the NAV for the Fund will be calculated daily and will be made
available to all market participants at the same time. The Exchange
represents that it will halt or pause trading in the Shares under the
conditions specified in NASDAQ Rules 4120 and 4121, including the
trading pauses under NASDAQ Rules 4120(a)(11) and (12). Trading also
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable.\67\
Trading in the Shares also will be subject to Rules 5705(b)(1)(B) and
5705(b)(9)(B), which sets forth circumstances under which Shares of the
Fund may be halted. In addition, if the IIV, the Index Value or the
value of the Index Components is not being disseminated as required,
the Exchange may halt trading during the day in which the disruption
occurs; if the interruption persists past the day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
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\67\ These reasons may include: (1) The extent to which trading
is not occurring in the securities or the financial instruments
comprising 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. The Exchange represents
that it may consider all relevant factors in exercising its
discretion to halt or suspend trading in the Shares of the Fund.
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The Exchange states that it has a general policy prohibiting the
distribution of material, non-public information by its employees. The
Commission notes that the Index Provider is not registered as an
investment adviser or broker dealer and is not affiliated with any
broker-dealers, and the Adviser is not registered as a broker-dealer
and is not affiliated with any broker-dealers.\68\ Prior to the
commencement of trading, the Exchange will inform its members in an
[[Page 69973]]
Information Circular of the special characteristics and risks
associated with trading the Shares. The Financial Industry Regulatory
Authority (``FINRA''), on behalf of the Exchange,\69\ 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.\70\ All exchange-listed
equity securities, ETFs, futures contracts and options held by the Fund
will be traded on U.S. exchanges, all of which are members of ISG or
are exchanges with which the Exchange has in place a comprehensive
surveillance sharing agreement. In addition, FINRA, on behalf of the
Exchange, is 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.
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\68\ See supra note 19 and accompanying text. 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.
\69\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
\70\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
portfolio for the Fund may trade on markets that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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The Exchange deems the Shares 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:
(1) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.\71\
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\71\ See NASDAQ Rule 5705(b)(7) (describing the three trading
sessions on the Exchange: Regular Market Session trading will occur
between 9:30 a.m. and either 4:00 p.m. or 4:15 p.m. for each series
of Index Fund Shares, as specified by NASDAQ). In addition, NASDAQ
may designate each series of Index Fund Shares for trading during a
Pre-Market Session beginning at 4:00 a.m. and/or a Post-Market
Session ending at 8:00 p.m.
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(2) The Shares will be subject to Rule 5705, which sets forth the
initial and continued listing criteria applicable to Index Fund Shares.
(3) Trading in the Shares will be subject to the existing trading
surveillances, administered by both NASDAQ and also FINRA on behalf of
the Exchange, which are designed to detect violations of Exchange rules
and applicable federal securities laws. The Exchange 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 applicable federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) NASDAQ Rule 2111A, which imposes
suitability obligations on NASDAQ members with respect to recommending
transactions in the Shares to customers; (c) how information regarding
the Index Value and Intraday Indicative Value will be disseminated; (d)
the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Index Value and Intraday
Indicative Value will not be calculated or publicly disseminated; (e)
the requirement that members 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 must be in
compliance with Rule 10A-3 under the Exchange Act.\72\
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\72\ 17 CFR 240.10A-3.
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(6) At least 80% of the Fund's total assets (exclusive of
collateral held from securities lending, if any) will be invested in
the component securities of the Index. The Fund will seek a correlation
of 0.95 or better between its performance and the performance of its
Index. A figure of 1.00 would represent perfect correlation. All
options included in the Index will be listed and traded on a U.S.
national securities exchange.
(7) 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. 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. The Fund may not invest in leveraged or inverse
leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs or options on such ETFs. 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.
(8) The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund. Where practicable, the Fund
intends to invest in Cleared Swaps. The Fund will attempt to limit
counterparty risk in non-cleared swap, forward, and OTC option
contracts by entering into such 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. 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.
(9) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser, consistent with Commission guidance.
(10) A minimum of 100,000 Shares for the Fund will be outstanding
at the
[[Page 69974]]
commencement of trading on the Exchange.
(11) The Fund will include appropriate risk disclosure in its
offering documents, which will be available on the Commission's Web
site and on the Fund's Web site, www.realityshares.com.
This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice, and
the Exchange's description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendments No. 1 and No. 2 thereto, is
consistent with Section 6(b)(5) of the Act \73\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\73\ 15 U.S.C. 78f(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\74\ that the proposed rule change (SR-Nasdaq-2014-038), as
modified by Amendments No. 1 and No. 2 thereto, be, and it hereby is,
approved.
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\74\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\75\
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\75\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27711 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P
