Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, To List and Trade Shares of the JPMorgan Diversified Event Driven ETF Under NYSE Arca Equities Rule 8.600, 96539-96545 [2016-31683]
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Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Notices
srobinson on DSK5SPTVN1PROD with NOTICES
section 22(e) to prevent unreasonable,
undisclosed or unforeseen delays in the
actual payment of redemption proceeds.
7. Applicants request an exemption to
permit Funds of Funds to acquire Fund
shares beyond the limits of section
12(d)(1)(A) of the Act; and the Funds,
and any principal underwriter for the
Funds, and/or any broker or dealer
registered under the Exchange Act, to
sell shares to Funds of Funds beyond
the limits of section 12(d)(1)(B) of the
Act. The application’s terms and
conditions are designed to, among other
things, help prevent any potential (i)
undue influence over a Fund through
control or voting power, or in
connection with certain services,
transactions, and underwritings, (ii)
excessive layering of fees, and (iii)
overly complex fund structures, which
are the concerns underlying the limits
in sections 12(d)(1)(A) and (B) of the
Act.
8. Applicants request an exemption
from sections 17(a)(1) and 17(a)(2) of the
Act to permit persons that are Affiliated
Persons, or Second Tier Affiliates, of the
Funds, solely by virtue of certain
ownership interests, to effectuate
purchases and redemptions in-kind. The
deposit procedures for in-kind
purchases of Creation Units and the
redemption procedures for in-kind
redemptions of Creation Units will be
the same for all purchases and
redemptions and Deposit Instruments
and Redemption Instruments will be
valued in the same manner as those
investment positions currently held by
the Funds. Applicants also seek relief
from the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.3
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Applicants also request relief to
permit a Feeder Fund to acquire shares
of another registered investment
company managed by the Adviser
having substantially the same
investment objectives as the Feeder
Fund (‘‘Master Fund’’) beyond the
3 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
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limitations in section 12(d)(1)(A) and
permit the Master Fund, and any
principal underwriter for the Master
Fund, to sell shares of the Master Fund
to the Feeder Fund beyond the
limitations in section 12(d)(1)(B).
10. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Brent J. Fields,
Secretary.
[FR Doc. 2016–31684 Filed 12–29–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79683; File No. SR–
NYSEArca–2016–82]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
a Proposed Rule Change, as Modified
by Amendment Nos. 1, 2, and 3
Thereto, To List and Trade Shares of
the JPMorgan Diversified Event Driven
ETF Under NYSE Arca Equities Rule
8.600
December 23, 2016.
I. Introduction
On June 20, 2016, NYSE Arca, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
1 15
PO 00000
Rule 19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the JPMorgan Diversified
Event Driven ETF (‘‘Fund’’) under NYSE
Arca Equities Rule 8.600. The proposed
rule change was published for comment
in the Federal Register on July 7, 2016.3
On August 18, 2016, the Exchange filed
Amendment No. 1 to the proposed rule
change.4 On the same day, pursuant to
Section 19(b)(2) of the Act,5 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.6 On September 1,
2016, the Exchange filed Amendment
No. 2 to the proposed rule change.7 On
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 78218
(Jul. 1, 2016), 81 FR 44339 (‘‘Notice’’).
4 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
the Exchange clarified: (a) Certain aspects relating
to the Fund’s investment strategy, including
descriptions of (i) certain return factors that the
Fund seeks to utilize to achieve its investment
objective, (ii) the Fund’s total net long market
exposure, (iii) the Fund’s use of derivative
instruments and its market exposure to such
instruments, and (iv) the Fund’s investments in
mutual funds; (b) that the common stock into which
convertible securities held by the Fund can be
converted will be exchange-traded; (c) that the Fund
may invest no more than 5% of its assets, in the
aggregate, in over-the-counter (‘‘OTC’’) common
stocks, preferred stocks, warrants, rights, and
contingent value rights (‘‘CVRs’’) of U.S. and foreign
corporations (including emerging market
securities); (d) the redemption order submission
cut-off time; (e) that no more than 10% of the net
assets of the Fund will be invested in Depositary
Receipts (as defined herein) that are not exchangelisted; and (f) the use of certain defined terms.
Amendment No. 1 to the proposed rule change is
available at: https://www.sec.gov/comments/srnysearca-2016-82/nysearca201682-1.pdf. Because
Amendment No. 1 to the proposed rule change does
not materially alter the substance of the proposed
rule change or raise unique or novel regulatory
issues, Amendment No. 1 is not subject to notice
and comment.
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 78610,
81 FR 57960 (Aug. 24, 2016). The Commission
designated October 5, 2016, as the date by which
the Commission shall either approve or disapprove,
or institute proceedings to determine whether to
disapprove, the proposed rule change.
7 In Amendment No. 2, which partially amended
the proposed rule change, as modified by
Amendment No. 1 thereto, the Exchange clarified
(a) the Fund’s holdings in mutual fund shares as the
only non-exchange-traded investment company
securities the Fund may hold, and (b) that
Depositary Receipts (as defined herein) are
included as equity securities subject to the 10%
limitation on equity securities whose principal
market is not a member of the Intermarket
Surveillance Group (‘‘ISG’’) or is a market with
which the Exchange does not have a comprehensive
surveillance sharing agreement. Amendment No. 2
to the proposed rule change is available at: https://
www.sec.gov/comments/sr-nysearca-2016-82/
nysearca201682-2.pdf. Because Amendment No. 2
to the proposed rule change does not materially
alter the substance of the proposed rule change or
3 See
U.S.C. 78s(b)(1).
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Continued
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Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Notices
September 2, 2016, the Exchange filed
Amendment No. 3 to the proposed rule
change.8 On October 5, 2016, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 9 to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3 thereto.10 The Commission has
received no comments on the proposal.
This order grants approval of the
proposed rule change, as modified by
Amendment Nos. 1, 2, and 3 thereto.
srobinson on DSK5SPTVN1PROD with NOTICES
II. Exchange’s Description of the
Proposal
The Exchange proposes to list and
trade Shares of the Fund under NYSE
Arca Equities Rule 8.600, which governs
the listing and trading of Managed Fund
Shares. The Fund is a series of J.P.
Morgan Exchange-Traded Fund Trust
(‘‘Trust’’), a Delaware statutory trust.11
J.P. Morgan Investment Management
Inc. (‘‘Adviser’’) will be the investment
adviser to the Fund. The Adviser will
also provide administrative services for,
and will oversee the other service
providers of, the Fund. SEI Investments
Distribution Co. will be the distributor
of the Fund’s Shares. The Exchange
represents that the Adviser is not
registered as a broker-dealer, but is
affiliated with a broker-dealer and has
raise unique or novel regulatory issues, Amendment
No. 2 is not subject to notice and comment.
8 In Amendment No. 3, which partially amended
the proposed rule change, as modified by
Amendment Nos. 1 and 2 thereto, the Exchange (a)
made conforming changes to the Statutory Basis
section of the filing to reflect the same changes
made by Amendment No. 2 to the proposed rule
change, and (b) clarified a reference to the term
‘‘advisor’’ to mean ‘‘Adviser.’’ Amendment No. 3 to
the proposed rule change is available at: https://
www.sec.gov/comments/sr-nysearca-2016-82/
nysearca201682-3.pdf. Because Amendment No. 3
to the proposed rule change does not materially
alter the substance of the proposed rule change or
raise unique or novel regulatory issues, Amendment
No. 3 is not subject to notice and comment.
9 15 U.S.C. 78s(b)(2)(B).
10 See Securities Exchange Act Release No. 79052,
81 FR 70455 (Oct. 12, 2016). 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., 81 FR at 70459.
11 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). The Exchange
states that, on April 22, 2016, the Trust filed with
the Commission an amendment to its registration
statement on Form N–1A under the Securities Act
of 1933 (‘‘Securities Act’’) and the 1940 Act relating
to the Fund (File Nos. 333–191837 and 811–22903)
(‘‘Registration Statement’’). The Exchange also notes
that an exemptive order (‘‘Exemptive Order’’) was
issued under the 1940 Act on February 19, 2016.
The Exchange represents that investments made by
the Fund will comply with the conditions set forth
in the Exemptive Order.
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19:18 Dec 29, 2016
Jkt 241001
implemented and will maintain a fire
wall with respect to such broker-dealer
affiliate regarding access to information
concerning the composition of, and
changes to, the portfolio.12
The Fund will seek to provide longterm total return and will seek to
achieve its investment objective by
employing an event-driven investment
strategy, primarily investing in
companies that the Adviser believes
will be impacted by pending or
anticipated corporate or special
situation events. Under normal market
conditions,13 the Fund will seek to
achieve its investment objective by
employing its investment strategy to
access certain ‘‘return factors.’’ The
Fund will invest its assets globally to
gain exposure to equity securities
(across market capitalizations) in
developed markets. The Fund may use
both long and short positions (achieved
primarily through the use of derivative
instruments as described below). The
Fund generally will maintain a total net
long market exposure, meaning that the
Fund’s aggregate exposure will be
greater to instruments that the Adviser
expects to outperform. However, the
Fund may have net long or net short
exposure to one or more industry
sectors, individual markets, and/or
currencies based on the return factors.
The Adviser will make use of
derivatives (as described below) in
implementing its strategies. Under
normal market conditions, the Adviser
currently expects that a significant
portion of the Fund’s exposure will be
attained through the use of derivatives
in addition to its exposure through
direct investments. Derivatives will
primarily be used as an efficient means
of implementing a particular strategy in
order to gain exposure to a desired
return factor. For example, the Fund
12 The Exchange further represents that, in the
event (a) the Adviser becomes registered as a
broker-dealer or newly affiliated with one or more
broker-dealers, or (b) any new adviser or subadviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, it will implement
and maintain a fire wall with respect to its relevant
personnel or its broker-dealer affiliate regarding
access to information concerning the composition
of, and changes to, the portfolio, and will be subject
to procedures designed to prevent the use and
dissemination of material, non-public information
regarding such portfolio.
13 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the securities
markets or the financial markets generally;
circumstances under which the Fund’s investments
are made for temporary defensive purposes;
operational issues (e.g., systems failure) causing
dissemination of inaccurate market information; or
force majeure type events such as cyber-attacks,
natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot or labor disruption, or
any similar intervening circumstance.
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
may use a total return swap to establish
both long and short positions in order
to gain the desired exposure rather than
physically purchasing and selling short
each instrument. Derivatives may also
be used to increase gain, to effectively
gain targeted exposure from its cash
positions, to hedge various investments,
and/or for risk management. As a result
of the Fund’s use of derivatives and to
serve as collateral, the Fund may hold
significant amounts of U.S. Treasury
obligations, including Treasury bills,
bonds and notes and other obligations
issued or guaranteed by the U.S.
Treasury, other short-term investments,
including money market funds, and
foreign currencies, in which certain
derivatives are denominated.
The amount that may be invested in
any one instrument will vary and
generally depend on the return factors
employed by the Adviser at that time.
However, with the exception of
specified investment limitations for
certain assets described below, there are
no stated percentage limitations on the
amount that can be invested in any one
type of instrument, and the Adviser
may, at times, focus on a smaller
number of instruments. Moreover, the
Fund will generally be unconstrained by
any particular capitalization, style, or
sector, and may invest in any developed
region or country. The Adviser will
make use of quantitative models and
information and data supplied by third
parties to, among other things, help
determine the portfolio’s weightings
among various investments and
construct sets of transactions and
investments.
In addition to its main return factors,
the Fund may utilize return factors that
use debt securities. The Fund may
invest, either directly or through
financial derivative instruments, debt
securities that are subject to a
downgrade from investment grade to
non-investment grade (also known as
high yield/junk bond) status. For
example, the Fund may invest in the
bonds that have been downgraded while
hedging credit risk more broadly by
using credit default swaps indices in
order to attempt to keep the Fund’s
exposure market neutral.
The Exchange has made the following
representations and statements in
describing the Fund.14
14 The Commission notes that additional
information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks,
creation and redemption procedures, calculation of
net asset value (‘‘NAV’’), fees, distributions, and
taxes, among other things, can be found in the
Notice, Amendment Nos. 1, 2, and 3, and the
Registration Statement, as applicable. See supra
notes 3, 4, 7, 8, and 11, respectively, and
accompanying text.
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srobinson on DSK5SPTVN1PROD with NOTICES
A. Exchange’s Description of the Fund’s
Principal Investments
Under normal market conditions, the
Fund will invest principally (i.e., more
than 50% of the Fund’s assets) in the
securities and financial instruments
described below, which may be
represented by derivatives, as discussed
below.
The Fund may invest in exchangelisted and traded common stocks,
preferred stocks, warrants and rights of
U.S. and foreign corporations (including
emerging market securities), and U.S.
and non-U.S. real estate investment
trusts (‘‘REITs’’). Exchange-listed and
traded common stocks, preferred stocks,
warrants and rights of U.S. corporations,
and U.S. REITs will be traded on U.S.
national securities exchanges.
The Fund may invest in exchangelisted and OTC ‘‘Depositary Receipts’’ 15
as described below.
The Fund may invest in the following
cash and cash equivalents: Investments
in money market funds (for which the
Adviser and/or its affiliates serve as
investment adviser or administrator),
bank obligations,16 commercial paper,
repurchase agreements, and short-term
funding agreements.17
The Fund may invest in corporate
debt.18
In addition to money market funds
referenced above, the Fund may invest
in shares of non-exchange-traded
investment company securities, that is,
mutual fund shares, including mutual
fund shares for which the Adviser and/
or its affiliates may serve as investment
adviser or administrator, to the extent
permitted by Section 12(d)(1)19 of the
1940 Act and the rules thereunder.
In addition, the Fund may invest in
exchange traded funds (‘‘ETFs’’),20
15 Depositary Receipts include American
Depositary Receipts (‘‘ADRs’’), Global Depositary
Receipts (‘‘GDRs’’) and European Depositary
Receipts (‘‘EDRs’’). No more than 10% of the net
assets of the Fund will be invested in Depositary
Receipts that are not exchange-listed.
16 Bank obligations include the following:
Bankers’ acceptances, certificates of deposit, and
time deposits.
17 Short-term funding agreements are agreements
issued by banks and highly rated U.S. insurance
companies such as Guaranteed Investment
Contracts and Bank Investment Contracts.
18 The Adviser expects that, under normal market
conditions, the Fund will invest at least 75% of its
corporate debt securities in issuances that have at
least $100,000,000 par amount outstanding in
developed countries, or at least $200,000,000 par
amount outstanding in emerging market countries.
19 15 U.S.C. 80a–12(d)(1).
20 The ETFs in which the Fund may invest will
be registered under the 1940 Act and include
Investment Company Units (as described in NYSE
Arca Equities Rule 5.2(j)(3)); Portfolio Depositary
Receipts (as described in NYSE Arca Equities Rule
8.100); and Managed Fund Shares (as described in
NYSE Arca Equities Rule 8.600). Such ETFs all will
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19:18 Dec 29, 2016
Jkt 241001
purchase and sell futures contracts on
indexes of securities, invest in swaps
(credit default swaps (‘‘CDSs’’), CDS
indices, and total return swaps on
equity securities, equity indexes, fixed
income securities, and fixed income
futures), invest in forward and spot
currency transactions 21 (such
investments consist of non-deliverable
forwards (‘‘NDFs’’), foreign forward
currency contracts, and spot currency
transactions), and invest in OTC and
exchange-traded call and put options on
equities, fixed income securities, and
currencies or options on indexes of
equities, fixed income securities, and
currencies.
The Fund may invest in U.S.
Government obligations, which may
include direct obligations of the U.S.
Treasury, including Treasury bills, notes
and bonds, all of which are backed as
to principal and interest payments by
the full faith and credit of the United
States, and separately traded principal
and interest component parts of such
obligations that are transferable through
the Federal book-entry system known as
Separate Trading of Registered Interest
and Principal of Securities and Coupons
Under Book Entry Safekeeping.
B. Exchange’s Description of the Fund’s
Other Investments
While the Fund, under normal market
conditions, will invest at least fifty
percent (50%) of its assets in the
securities and financial instruments
described above, the Fund may invest
its remaining assets in other assets and
financial instruments, as described
below.
The Fund may invest in U.S. and nonU.S. convertible securities, which are
bonds or preferred stock that can
convert to common stock. The common
stock into which convertible securities
can be converted will be exchangetraded.
The Fund may invest in reverse
repurchase agreements.
The Fund may invest in sovereign
obligations, which are investments in
debt obligations issued or guaranteed by
a foreign sovereign government or its
agencies, authorities, or political
subdivisions.
The Fund may invest no more than
5% of its assets in equity and debt
securities that are restricted securities
be listed and traded in the U.S. on registered
exchanges. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged or
inverse leveraged (e.g., 2X, –2X, 3X, or –3X) ETFs.
21 The Fund will limit its investments in
currencies to those currencies with a minimum
average daily foreign exchange turnover of USD $1
billion as determined by the Bank for International
Settlements (‘‘BIS’’) Triennial Central Bank Survey.
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
96541
(Rule 144A securities), in addition to
Rule 144A securities deemed illiquid by
the Adviser, as referenced below.
Under normal market conditions, the
Fund may invest no more than 5% of its
assets, in the aggregate, in OTC common
stocks, preferred stocks, warrants,
rights, and CVRs of U.S. and foreign
corporations (including emerging
market securities).22
C. Exchange’s Description of the Fund’s
Investment Restrictions
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including Rule 144A
securities deemed illiquid by the
Adviser, consistent with Commission
guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. 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 invest in other
investment companies to the extent
permitted by Section 12(d)(1) of the
1940 Act and rules thereunder and/or
any applicable exemption or exemptive
order under the 1940 Act with respect
to such investments.
The Fund may invest in securities
denominated in U.S. dollars, major
reserve currencies, and currencies of
other countries in which the Fund may
invest.
The Fund may invest in both
investment grade and high yield debt
securities.
The Fund intends to qualify for and
to elect treatment as a separate regulated
investment company under Subchapter
M of the Internal Revenue Code.
Furthermore, the Fund may not
concentrate investments in a particular
industry or group of industries, as
concentration is defined under the 1940
Act, the rules or regulations thereunder,
22 The Exchange further represents that not more
than 10% of the net assets of the Fund, in the
aggregate, invested in equity securities (other than
mutual fund shares) shall consist of equity
securities, including common stock into which
convertible securities can be converted and
Depositary Receipts, whose principal market is not
a member of the ISG or is a market with which the
Exchange does not have a comprehensive
surveillance sharing agreement. See Amendment
No. 2 to the proposed rule change, supra note 7.
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or any exemption therefrom, as such
statute, rules, or regulations may be
amended or interpreted from time to
time.
The Fund is a diversified series of the
Trust. The Fund intends to meet the
diversification requirements of the 1940
Act.
The Fund’s investments, including
derivatives, will be consistent with the
Fund’s investment objective and will
not be used to enhance leverage
(although certain derivatives may result
in leverage). That is, while the Fund
will be permitted to borrow as permitted
under the 1940 Act, the Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).23
srobinson on DSK5SPTVN1PROD with NOTICES
D. Exchange’s Description of the Fund’s
Use of Derivatives
The Fund proposes to seek certain
exposures through transactions in the
specific derivative instruments
described above. The derivatives to be
used are futures, swaps, NDFs, foreign
forward currency contracts, and call and
put options. Derivatives, which are
instruments that have a value based on
another instrument, exchange rate, or
index, may also be used as substitutes
for securities in which the Fund can
invest. The Fund may use these
derivative instruments to increase gain,
to effectively gain targeted exposure
from its cash positions, to hedge various
investments, and/or for risk
management.
Investments in derivative instruments
will be made in accordance with the
1940 Act and consistent with the Fund’s
investment objective and policies. 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 under
derivative instruments. 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
23 The
Fund’s broad-based securities benchmark
index will be identified in a future amendment to
the Registration Statement following the Fund’s
first full calendar year of performance.
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19:18 Dec 29, 2016
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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.24
Because the markets for certain assets,
or the assets themselves, may be
unavailable or cost prohibitive as
compared to derivative instruments,
suitable derivative transactions may be
an efficient alternative for the Fund to
obtain the desired asset exposure.
E. Exchange’s Description of the Impact
on the Arbitrage Mechanism
The Exchange states that, according to
the Adviser, there will be minimal
impact to the arbitrage mechanism as a
result of the use of derivatives. Market
makers and participants should be able
to value derivatives as long as the
positions are disclosed with relevant
information. The price at which Shares
trade will continue to be disciplined by
arbitrage opportunities created by the
ability to purchase or redeem creation
Shares at their NAV, which should
ensure that Shares will not trade at a
material discount or premium in
relation to their NAV.
In addition, the Exchange states that,
according to the Adviser, there will not
be any significant impacts to the
settlement or operational aspects of the
Fund’s arbitrage mechanism due to the
use of derivatives. Because derivatives
generally are not eligible for in-kind
transfer, they will typically be
substituted with a ‘‘cash in lieu’’
amount when the Fund processes
purchases or redemptions of creation
units in-kind.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the Exchange’s proposal to list
and trade the Shares is consistent with
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.25 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,26 which requires,
among other things, that the Exchange’s
rules be designed to prevent fraudulent
and manipulative acts and practices,
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
24 To mitigate leveraging risk, the Adviser will
segregate or ‘‘earmark’’ liquid assets or otherwise
cover the transactions that may give rise to such
risk.
25 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).
26 15 U.S.C. 78f(b)(5).
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Sfmt 4703
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 Act,27 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
and for portfolio holdings of the Fund
that are U.S. exchange listed, including
common stocks, preferred stocks,
warrants, rights, ETFs, REITs, and U.S.
exchange-traded ADRs will be available
via the Consolidated Tape Association
(‘‘CTA’’) high speed line. Quotation and
last-sale information for such U.S.
exchange-listed securities, as well as
futures, also will be available from the
exchange on which they are listed.
Quotation and last-sale information for
exchange-listed options cleared via the
Options Clearing Corporation will be
available via the Options Price
Reporting Authority, and quotation and
last-sale information for non-U.S. equity
securities (including GDRs and EDRs)
will be available from the exchanges on
which they trade and from major market
data vendors, as applicable.
In addition, the Intra-day Indicative
Value (‘‘IIV’’), which is the Portfolio
Indicative Value, as defined in NYSE
Arca Equities Rule 8.600(c)(3), will be
widely disseminated by one or more
major market data vendors at least every
15 seconds during the Core Trading
Session.28 According to the Exchange, a
third party market data provider will
calculate the IIV for the Fund. The third
party market data provider may use
market quotes if available or may fair
value securities against proxies (such as
swap or yield curves).
With respect to specific derivatives:
• NDFs and foreign forward currency
contracts may be valued intraday using
market quotes, or another proxy as
determined to be appropriate by the
third party market data provider.
• Futures may be valued intraday
using the relevant futures exchange
data, or another proxy as determined to
be appropriate by the third party market
data provider.
• CDS and CDS indices swaps may be
valued using intraday data from market
27 15
U.S.C. 78k–1(a)(1)(C)(iii).
to the Exchange, several major
market data vendors display and/or make widely
available IIVs taken from the CTA or other data
feeds.
28 According
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vendors, or based on underlying asset
price, or another proxy as determined to
be appropriate by the third party market
data provider.
• Total return swaps may be valued
intraday using the underlying asset
price, or another proxy as determined to
be appropriate by the third party market
data provider.
• Exchange-listed options may be
valued intraday using the relevant
exchange data, or another proxy as
determined to be appropriate by the
third party market data provider.
• OTC options may be valued
intraday through option valuation
models (e.g., Black-Scholes) or using
exchange traded options as a proxy, or
another proxy as determined to be
appropriate by the third party market
data provider.
On each business day, before
commencement of trading in Shares in
the Core Trading Session (normally,
9:30 a.m. to 4:00 p.m., Eastern Time or
‘‘E.T.’’) on the Exchange, the Adviser
will disclose on the Fund’s Web site the
Disclosed Portfolio for the Fund as
defined in NYSE Arca Equities Rule
8.600(c)(2) that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.29 According to
the Exchange, the Fund’s disclosure of
derivative positions in the Disclosed
Portfolio will include information that
market participants can use to value
these positions intraday. On a daily
basis, the Adviser 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, index, or other
asset or instrument underlying the
holding, if any; for options, the option
strike price; quantity held (as measured
by, for example, par value, notional
value, or number of shares, contracts, or
units); maturity date, if any; coupon
rate, if any; effective date, if any; market
value of the holding; and the percentage
weighting of the holding in the Fund’s
portfolio. The Web site information will
be publicly available at no charge.
The NAV of Shares, under normal
market conditions, will be calculated
each business day as of the close of the
Exchange, which is typically 4:00 p.m.
29 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.
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E.T. On occasion, the Exchange will
close before 4:00 p.m. E.T. When that
happens, NAV will be calculated as of
the time the Exchange closes.30
Price information for OTC common
stocks (including certain OTC ADRs),
preferred stocks, warrants, rights, and
CVRs will be available from one or more
major market data vendors or brokerdealers in the securities. Quotation
information for OTC options, cash
equivalents, swaps, money market
funds, non-exchange-listed investment
company securities (other than money
market funds), Rule 144A securities,
U.S. Government obligations, U.S.
Government agency obligations,
sovereign obligations, corporate debt,
and reverse repurchase agreements may
be obtained from brokers and dealers
who make markets in such securities or
through nationally recognized pricing
services through subscription
agreements. The U.S. dollar value of
foreign securities, instruments, and
currencies can be derived by using
foreign currency exchange rate
quotations obtained from nationally
recognized pricing services. Forwards
and spot currency price information
will be available from major market data
vendors. The Fund’s Web site will
include a form of the prospectus for the
Fund and additional data relating to
NAV and other applicable quantitative
information.
The Commission believes that the
proposal to list and trade the Shares is
reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Exchange will obtain a representation
from the issuer of the Shares that the
NAV per Share will be calculated daily
and that the NAV and the Disclosed
Portfolio will be made available to all
market participants at the same time.
Trading in Shares of the Fund will be
halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have
30 Securities for which market quotations are
readily available will generally be valued at their
current market value. Other securities and assets,
including securities for which market quotations
are not readily available or market quotations are
determined not to be reliable; or, if their value has
been materially affected by events occurring after
the close of trading on the exchange or market on
which the security is principally traded but before
the Fund’s NAV is calculated, may be valued at fair
value in accordance with policies and procedures
adopted by the Trust’s Board of Trustees. Fair value
represents a good faith determination of the value
of a security or other asset based upon specifically
applied procedures. Fair valuation may require
subjective determinations. See Notice, supra note 3,
81 FR at 44344 (describing additional details with
respect to the Fund’s NAV valuation methodology).
PO 00000
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96543
been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable,31 and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth additional circumstances under
which Shares of the Fund may be
halted.
The Exchange represents that it has a
general policy prohibiting the
distribution of material, non-public
information by its employees. In
addition, Commentary .06 to NYSE Arca
Equities Rule 8.600 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material, non-public information
regarding the open-end fund’s portfolio.
The Exchange represents that the
Adviser is not registered as a brokerdealer, but is affiliated with a brokerdealer and has implemented and will
maintain a fire wall with respect to such
broker-dealer affiliate regarding access
to information concerning the
composition of, and changes to, the
portfolio.32 The Commission also notes
that, pursuant to NYSE Arca Equities
Rule 8.600(d)(2)(B)(ii), the ‘‘Reporting
Authority’’ that provides the Disclosed
Portfolio must implement and maintain,
or be subject to, procedures designed to
31 These reasons may include: (1) The extent to
which trading is not occurring in the securities or
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. With Respect to trading halts, the Exchange
may consider all relevant factors in exercising its
discretion to halt or suspend trading in the Shares
of the Fund.
32 See supra note 12. The Exchange further notes
that an investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (‘‘Advisers Act’’). As a result,
the Adviser and its related personnel are subject to
the provisions of Rule 204A–1 under the Advisers
Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that
reflects the fiduciary nature of the relationship to
clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed
to prevent the communication and misuse of nonpublic information by an investment adviser must
be consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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prevent the use and dissemination of
material, non-public information
regarding the actual components of the
portfolio.33
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in an
Information Bulletin (‘‘Bulletin’’) of the
special characteristics and risks
associated with trading the Shares. The
Exchange represents that that trading in
the Shares will be subject to the existing
trading surveillances administered by
the Exchange as well as cross-market
surveillances administered by the
Financial Industry Regulatory Authority
(‘‘FINRA’’) on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and applicable federal
securities laws.34
The Exchange represents that it deems
the Shares to be equity securities, thus
rendering the trading of the Shares
subject to the Exchange’s existing rules
governing the trading of equity
securities.
In support of this proposal, the
Exchange has made the following
additional representations:
(1) The Shares will conform to the
initial and continued listing criteria
under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange’s surveillance
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) The Exchange, or FINRA, on
behalf of the Exchange, or both, will
communicate as needed regarding
trading in the Shares, certain exchangelisted equity securities (including
Depositary Receipts, ETFs, REITs,
common and preferred stocks, common
stock into which convertible securities
can be converted, warrants, rights,
certain futures, and certain exchangetraded options with other markets and
other entities that are members of the
ISG, and the Exchange or FINRA, on
behalf of the Exchange, or both, may
obtain trading information regarding
trading such securities and financial
instruments from such markets and
other entities. In addition, the Exchange
may obtain information regarding
trading in such securities and financial
33 ‘‘Reporting Authority’’ is defined in NYSE Arca
Equites Rule (c)(4).
34 The Exchange represents that FINRA conducts
cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services
agreement, and the Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
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instruments from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement.35 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.
(5) Not more than 10% of the net
assets of the Fund, in the aggregate,
invested in equity securities (other than
mutual fund shares) shall consist of
equity securities, including common
stock into which convertible securities
can be converted and Depositary
Receipts, whose principal market is not
a member of the ISG or is a market with
which the Exchange does not have a
comprehensive surveillance sharing
agreement. In addition, not more than
10% of the net assets of the Fund in the
aggregate invested in futures contracts
or exchange-traded options shall consist
of futures contracts or options whose
principal market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement.
(6) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in a
Bulletin of the special characteristics
and risks associated with trading the
Shares. Specifically, the Bulletin will
discuss the following: (a) the procedures
for purchases and redemptions of
Shares in Creation Unit aggregations
(and that Shares are not individually
redeemable); (b) NYSE Arca Equities
Rule 9.2(a), which imposes a duty of
due diligence on its Equity Trading
Permit Holders to learn the essential
facts relating to every customer prior to
trading the Shares; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated IIV will not be
calculated or publicly disseminated; (d)
how information regarding the IIV and
the Disclosed Portfolio is disseminated;
(e) the requirement that Equity Trading
Permit Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information. The Bulletin will
also discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Act.
35 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed 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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(7) For initial and continued listing,
the Fund must be in compliance with
Rule 10A–3 under the Act.36
(8) Exchange-listed and traded
common stocks, preferred stocks,
warrants and rights of U.S. corporations,
and U.S. REITs will be traded on U.S.
national securities exchanges. In
addition, no more than 10% of the net
assets of the Fund will be invested in
Depositary Receipts that are not
exchange-listed, and the common stock
into which convertible securities
holdings can be converted will be
exchange-traded.
(9) The ETFs in which the Fund may
invest will be registered under the 1940
Act and include Investment Company
Units (as described in NYSE Arca
Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in
NYSE Arca Equities Rule 8.100); and
Managed Fund Shares (as described in
NYSE Arca Equities Rule 8.600). Such
ETFs all will be listed and traded in the
U.S. on registered exchanges. While the
Fund may invest in inverse ETFs, the
Fund will not invest in leveraged or
inverse leveraged (e.g., 2X, –2X, 3X, or
–3X) ETFs.
(10) The Adviser expects that, under
normal market conditions, the Fund
will invest at least 75% of its corporate
debt securities in issuances that have at
least $100,000,000 par amount
outstanding in developed countries, or
at least $200,000,000 par amount
outstanding in emerging market
countries.
(11) The Fund will limit its
investments in currencies to those
currencies with a minimum average
daily foreign exchange turnover of USD
$1 billion as determined by the BIS
Triennial Central Bank Survey.
(12) The Fund may invest no more
than 5% of its assets in equity and debt
securities that are restricted securities
(Rule 144A securities), in addition to
Rule 144A securities deemed illiquid by
the Adviser. In addition, under normal
market conditions, the Fund may invest
no more than 5% of its assets, in the
aggregate, in OTC common stocks,
preferred stocks, warrants, rights, and
CVRs of U.S. and foreign corporations
(including emerging market securities).
(13) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including Rule
144A securities deemed illiquid by the
Adviser, consistent with Commission
guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
36 See
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liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
(14) The Fund’s investments,
including derivatives, will be consistent
with the Fund’s investment objective
and will not be used to enhance
leverage (although certain derivatives
may result in leverage). That is, while
the Fund will be permitted to borrow as
permitted under the 1940 Act, the
Fund’s investments will not be used to
seek performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).
(15) Investments in derivative
instruments will be made in accordance
with the 1940 Act and consistent with
the Fund’s investment objective and
policies. 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 under
derivative instruments. 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.37
The Exchange also represents that all
statements and representations made in
this filing regarding (a) the description
of the portfolio, (b) limitations on
portfolio holdings or reference assets, or
(c) the applicability of Exchange rules
and surveillance procedures shall
constitute continued listing
requirements for listing the Shares of
the Fund on the Exchange.
37 To mitigate leveraging risk, the Adviser will
segregate or ‘‘earmark’’ liquid assets or otherwise
cover the transactions that may give rise to such
risk.
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The issuer has represented to the
Exchange that it will advise the
Exchange of any failure by the Fund to
comply with the continued listing
requirements, and, pursuant to its
obligations under Section 19(g)(1) of the
Act, the Exchange will monitor for
compliance with the continued listing
requirements.38 If the Fund is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
NYSE Arca Equities Rule 5.5(m).
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice,39 Amendment Nos. 1, 2 and
3 to the proposed rule change,40 and the
Exchange’s description of the Fund. The
Commission notes that the Fund and the
Shares must comply with the
requirements of NYSE Arca Equities
Rule 8.600 to be listed and traded on the
Exchange on an initial and continued
basis.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1, 2, and 3 thereto, is consistent
with Section 6(b)(5) of the Act 41 and the
rules and regulations thereunder
applicable to a national securities
exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,42 that the
proposed rule change (SR–NYSEArca–
2016–82), as modified by Amendment
Nos. 1, 2, and 3 thereto, be, and it
hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–31683 Filed 12–29–16; 8:45 am]
BILLING CODE 8011–01–P
38 The Commission notes that certain other
proposals for the listing and trading of Managed
Fund Shares include a representation that the
exchange will ‘‘surveil’’ for compliance with the
continued listing requirements. See, e.g., Securities
Exchange Act Release No. 78005 (Jun. 7, 2016), 81
FR 38247 (Jun. 13, 2016) (SR–BATS–2015–100). In
the context of this representation, it is the
Commission’s view that ‘‘monitor’’ and ‘‘surveil’’
both mean ongoing oversight of a fund’s compliance
with the continued listing requirements. Therefore,
the Commission does not view ‘‘monitor’’ as a more
or less stringent obligation than ‘‘surveil’’ with
respect to the continued listing requirements.
39 See supra note 3.
40 See supra notes 4, 7, and 8.
41 15 U.S.C. 78f(b)(5).
42 Id.
43 17 CFR 200.30–3(a)(12).
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96545
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79687; File No. SR–
NASDAQ–2016–183]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Shorten the Settlement Cycle From
T+3 to T+2
December 23, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
22, 2016, The NASDAQ Stock Market
LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Nasdaq Rules 11140 (Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’
or ‘‘Ex-Warrants’’), 11150 (Transactions
‘‘Ex-Interest’’ in Bonds Which Are Dealt
in ‘‘Flat’’), 11210 (Sent by Each Party),
11320 (Dates of Delivery), 11620
(Computation of Interest), and IM–
11810 (Sample Buy-In Forms), to
conform to the Commission’s proposed
amendment to SEA Rule 15c6–1(a) to
shorten the standard settlement cycle
for most broker-dealer transactions from
three business days after the trade date
(‘‘T+3’’) to two business days after the
trade date (‘‘T+2’’) and the industry-led
initiative to shorten the settlement cycle
from T+3 to T+2.3
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.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
Exchange included statements
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78962
(September 28, 2016), 81 FR 69240 (October 5,
2016) (Amendment to Securities Transaction
Settlement Cycle) (File No. S7–22–16) (‘‘SEC
Proposing Release’’).
2 17
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[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Notices]
[Pages 96539-96545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31683]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79683; File No. SR-NYSEArca-2016-82]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2,
and 3 Thereto, To List and Trade Shares of the JPMorgan Diversified
Event Driven ETF Under NYSE Arca Equities Rule 8.600
December 23, 2016.
I. Introduction
On June 20, 2016, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the JPMorgan
Diversified Event Driven ETF (``Fund'') under NYSE Arca Equities Rule
8.600. The proposed rule change was published for comment in the
Federal Register on July 7, 2016.\3\ On August 18, 2016, the Exchange
filed Amendment No. 1 to the proposed rule change.\4\ On the same day,
pursuant to Section 19(b)(2) of the Act,\5\ 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.\6\ On
September 1, 2016, the Exchange filed Amendment No. 2 to the proposed
rule change.\7\ On
[[Page 96540]]
September 2, 2016, the Exchange filed Amendment No. 3 to the proposed
rule change.\8\ On October 5, 2016, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment Nos. 1, 2, and 3 thereto.\10\ The Commission has received
no comments on the proposal. This order grants approval of the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 78218 (Jul. 1,
2016), 81 FR 44339 (``Notice'').
\4\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange clarified: (a) Certain
aspects relating to the Fund's investment strategy, including
descriptions of (i) certain return factors that the Fund seeks to
utilize to achieve its investment objective, (ii) the Fund's total
net long market exposure, (iii) the Fund's use of derivative
instruments and its market exposure to such instruments, and (iv)
the Fund's investments in mutual funds; (b) that the common stock
into which convertible securities held by the Fund can be converted
will be exchange-traded; (c) that the Fund may invest no more than
5% of its assets, in the aggregate, in over-the-counter (``OTC'')
common stocks, preferred stocks, warrants, rights, and contingent
value rights (``CVRs'') of U.S. and foreign corporations (including
emerging market securities); (d) the redemption order submission
cut-off time; (e) that no more than 10% of the net assets of the
Fund will be invested in Depositary Receipts (as defined herein)
that are not exchange-listed; and (f) the use of certain defined
terms. Amendment No. 1 to the proposed rule change is available at:
https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-1.pdf. Because Amendment No. 1 to the proposed rule change does not
materially alter the substance of the proposed rule change or raise
unique or novel regulatory issues, Amendment No. 1 is not subject to
notice and comment.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 78610, 81 FR 57960
(Aug. 24, 2016). The Commission designated October 5, 2016, as the
date by which the Commission shall either approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\7\ In Amendment No. 2, which partially amended the proposed
rule change, as modified by Amendment No. 1 thereto, the Exchange
clarified (a) the Fund's holdings in mutual fund shares as the only
non-exchange-traded investment company securities the Fund may hold,
and (b) that Depositary Receipts (as defined herein) are included as
equity securities subject to the 10% limitation on equity securities
whose principal market is not a member of the Intermarket
Surveillance Group (``ISG'') or is a market with which the Exchange
does not have a comprehensive surveillance sharing agreement.
Amendment No. 2 to the proposed rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-2.pdf.
Because Amendment No. 2 to the proposed rule change does not
materially alter the substance of the proposed rule change or raise
unique or novel regulatory issues, Amendment No. 2 is not subject to
notice and comment.
\8\ In Amendment No. 3, which partially amended the proposed
rule change, as modified by Amendment Nos. 1 and 2 thereto, the
Exchange (a) made conforming changes to the Statutory Basis section
of the filing to reflect the same changes made by Amendment No. 2 to
the proposed rule change, and (b) clarified a reference to the term
``advisor'' to mean ``Adviser.'' Amendment No. 3 to the proposed
rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-3.pdf. Because Amendment No. 3 to
the proposed rule change does not materially alter the substance of
the proposed rule change or raise unique or novel regulatory issues,
Amendment No. 3 is not subject to notice and comment.
\9\ 15 U.S.C. 78s(b)(2)(B).
\10\ See Securities Exchange Act Release No. 79052, 81 FR 70455
(Oct. 12, 2016). 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., 81 FR at
70459.
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II. Exchange's Description of the Proposal
The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Equities Rule 8.600, which governs the listing and trading of
Managed Fund Shares. The Fund is a series of J.P. Morgan Exchange-
Traded Fund Trust (``Trust''), a Delaware statutory trust.\11\ J.P.
Morgan Investment Management Inc. (``Adviser'') will be the investment
adviser to the Fund. The Adviser will also provide administrative
services for, and will oversee the other service providers of, the
Fund. SEI Investments Distribution Co. will be the distributor of the
Fund's Shares. The Exchange represents that the Adviser is not
registered as a broker-dealer, but is affiliated with a broker-dealer
and has implemented and will maintain a fire wall with respect to such
broker-dealer affiliate regarding access to information concerning the
composition of, and changes to, the portfolio.\12\
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\11\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). The Exchange states that, on April 22, 2016,
the Trust filed with the Commission an amendment to its registration
statement on Form N-1A under the Securities Act of 1933
(``Securities Act'') and the 1940 Act relating to the Fund (File
Nos. 333-191837 and 811-22903) (``Registration Statement''). The
Exchange also notes that an exemptive order (``Exemptive Order'')
was issued under the 1940 Act on February 19, 2016. The Exchange
represents that investments made by the Fund will comply with the
conditions set forth in the Exemptive Order.
\12\ The Exchange further represents that, in the event (a) the
Adviser becomes registered as a broker-dealer or newly affiliated
with one or more broker-dealers, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, it will implement and maintain a fire wall with
respect to its relevant personnel or its broker-dealer affiliate
regarding access to information concerning the composition of, and
changes to, the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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The Fund will seek to provide long-term total return and will seek
to achieve its investment objective by employing an event-driven
investment strategy, primarily investing in companies that the Adviser
believes will be impacted by pending or anticipated corporate or
special situation events. Under normal market conditions,\13\ the Fund
will seek to achieve its investment objective by employing its
investment strategy to access certain ``return factors.'' The Fund will
invest its assets globally to gain exposure to equity securities
(across market capitalizations) in developed markets. The Fund may use
both long and short positions (achieved primarily through the use of
derivative instruments as described below). The Fund generally will
maintain a total net long market exposure, meaning that the Fund's
aggregate exposure will be greater to instruments that the Adviser
expects to outperform. However, the Fund may have net long or net short
exposure to one or more industry sectors, individual markets, and/or
currencies based on the return factors.
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\13\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the securities markets or the financial markets generally;
circumstances under which the Fund's investments are made for
temporary defensive purposes; operational issues (e.g., systems
failure) causing dissemination of inaccurate market information; or
force majeure type events such as cyber-attacks, natural or man-made
disaster, act of God, armed conflict, act of terrorism, riot or
labor disruption, or any similar intervening circumstance.
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The Adviser will make use of derivatives (as described below) in
implementing its strategies. Under normal market conditions, the
Adviser currently expects that a significant portion of the Fund's
exposure will be attained through the use of derivatives in addition to
its exposure through direct investments. Derivatives will primarily be
used as an efficient means of implementing a particular strategy in
order to gain exposure to a desired return factor. For example, the
Fund may use a total return swap to establish both long and short
positions in order to gain the desired exposure rather than physically
purchasing and selling short each instrument. Derivatives may also be
used to increase gain, to effectively gain targeted exposure from its
cash positions, to hedge various investments, and/or for risk
management. As a result of the Fund's use of derivatives and to serve
as collateral, the Fund may hold significant amounts of U.S. Treasury
obligations, including Treasury bills, bonds and notes and other
obligations issued or guaranteed by the U.S. Treasury, other short-term
investments, including money market funds, and foreign currencies, in
which certain derivatives are denominated.
The amount that may be invested in any one instrument will vary and
generally depend on the return factors employed by the Adviser at that
time. However, with the exception of specified investment limitations
for certain assets described below, there are no stated percentage
limitations on the amount that can be invested in any one type of
instrument, and the Adviser may, at times, focus on a smaller number of
instruments. Moreover, the Fund will generally be unconstrained by any
particular capitalization, style, or sector, and may invest in any
developed region or country. The Adviser will make use of quantitative
models and information and data supplied by third parties to, among
other things, help determine the portfolio's weightings among various
investments and construct sets of transactions and investments.
In addition to its main return factors, the Fund may utilize return
factors that use debt securities. The Fund may invest, either directly
or through financial derivative instruments, debt securities that are
subject to a downgrade from investment grade to non-investment grade
(also known as high yield/junk bond) status. For example, the Fund may
invest in the bonds that have been downgraded while hedging credit risk
more broadly by using credit default swaps indices in order to attempt
to keep the Fund's exposure market neutral.
The Exchange has made the following representations and statements
in describing the Fund.\14\
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\14\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, creation and redemption procedures, calculation
of net asset value (``NAV''), fees, distributions, and taxes, among
other things, can be found in the Notice, Amendment Nos. 1, 2, and
3, and the Registration Statement, as applicable. See supra notes 3,
4, 7, 8, and 11, respectively, and accompanying text.
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[[Page 96541]]
A. Exchange's Description of the Fund's Principal Investments
Under normal market conditions, the Fund will invest principally
(i.e., more than 50% of the Fund's assets) in the securities and
financial instruments described below, which may be represented by
derivatives, as discussed below.
The Fund may invest in exchange-listed and traded common stocks,
preferred stocks, warrants and rights of U.S. and foreign corporations
(including emerging market securities), and U.S. and non-U.S. real
estate investment trusts (``REITs''). Exchange-listed and traded common
stocks, preferred stocks, warrants and rights of U.S. corporations, and
U.S. REITs will be traded on U.S. national securities exchanges.
The Fund may invest in exchange-listed and OTC ``Depositary
Receipts'' \15\ as described below.
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\15\ Depositary Receipts include American Depositary Receipts
(``ADRs''), Global Depositary Receipts (``GDRs'') and European
Depositary Receipts (``EDRs''). No more than 10% of the net assets
of the Fund will be invested in Depositary Receipts that are not
exchange-listed.
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The Fund may invest in the following cash and cash equivalents:
Investments in money market funds (for which the Adviser and/or its
affiliates serve as investment adviser or administrator), bank
obligations,\16\ commercial paper, repurchase agreements, and short-
term funding agreements.\17\
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\16\ Bank obligations include the following: Bankers'
acceptances, certificates of deposit, and time deposits.
\17\ Short-term funding agreements are agreements issued by
banks and highly rated U.S. insurance companies such as Guaranteed
Investment Contracts and Bank Investment Contracts.
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The Fund may invest in corporate debt.\18\
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\18\ The Adviser expects that, under normal market conditions,
the Fund will invest at least 75% of its corporate debt securities
in issuances that have at least $100,000,000 par amount outstanding
in developed countries, or at least $200,000,000 par amount
outstanding in emerging market countries.
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In addition to money market funds referenced above, the Fund may
invest in shares of non-exchange-traded investment company securities,
that is, mutual fund shares, including mutual fund shares for which the
Adviser and/or its affiliates may serve as investment adviser or
administrator, to the extent permitted by Section 12(d)(1)\19\ of the
1940 Act and the rules thereunder.
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\19\ 15 U.S.C. 80a-12(d)(1).
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In addition, the Fund may invest in exchange traded funds
(``ETFs''),\20\ purchase and sell futures contracts on indexes of
securities, invest in swaps (credit default swaps (``CDSs''), CDS
indices, and total return swaps on equity securities, equity indexes,
fixed income securities, and fixed income futures), invest in forward
and spot currency transactions \21\ (such investments consist of non-
deliverable forwards (``NDFs''), foreign forward currency contracts,
and spot currency transactions), and invest in OTC and exchange-traded
call and put options on equities, fixed income securities, and
currencies or options on indexes of equities, fixed income securities,
and currencies.
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\20\ The ETFs in which the Fund may invest will be registered
under the 1940 Act and include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100);
and Managed Fund Shares (as described in NYSE Arca Equities Rule
8.600). Such ETFs all will be listed and traded in the U.S. on
registered exchanges. While the Fund may invest in inverse ETFs, the
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X, or -3X) ETFs.
\21\ The Fund will limit its investments in currencies to those
currencies with a minimum average daily foreign exchange turnover of
USD $1 billion as determined by the Bank for International
Settlements (``BIS'') Triennial Central Bank Survey.
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The Fund may invest in U.S. Government obligations, which may
include direct obligations of the U.S. Treasury, including Treasury
bills, notes and bonds, all of which are backed as to principal and
interest payments by the full faith and credit of the United States,
and separately traded principal and interest component parts of such
obligations that are transferable through the Federal book-entry system
known as Separate Trading of Registered Interest and Principal of
Securities and Coupons Under Book Entry Safekeeping.
B. Exchange's Description of the Fund's Other Investments
While the Fund, under normal market conditions, will invest at
least fifty percent (50%) of its assets in the securities and financial
instruments described above, the Fund may invest its remaining assets
in other assets and financial instruments, as described below.
The Fund may invest in U.S. and non-U.S. convertible securities,
which are bonds or preferred stock that can convert to common stock.
The common stock into which convertible securities can be converted
will be exchange-traded.
The Fund may invest in reverse repurchase agreements.
The Fund may invest in sovereign obligations, which are investments
in debt obligations issued or guaranteed by a foreign sovereign
government or its agencies, authorities, or political subdivisions.
The Fund may invest no more than 5% of its assets in equity and
debt securities that are restricted securities (Rule 144A securities),
in addition to Rule 144A securities deemed illiquid by the Adviser, as
referenced below.
Under normal market conditions, the Fund may invest no more than 5%
of its assets, in the aggregate, in OTC common stocks, preferred
stocks, warrants, rights, and CVRs of U.S. and foreign corporations
(including emerging market securities).\22\
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\22\ The Exchange further represents that not more than 10% of
the net assets of the Fund, in the aggregate, invested in equity
securities (other than mutual fund shares) shall consist of equity
securities, including common stock into which convertible securities
can be converted and Depositary Receipts, whose principal market is
not a member of the ISG or is a market with which the Exchange does
not have a comprehensive surveillance sharing agreement. See
Amendment No. 2 to the proposed rule change, supra note 7.
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C. Exchange's Description of the Fund's Investment Restrictions
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. 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 invest in other investment companies to the extent
permitted by Section 12(d)(1) of the 1940 Act and rules thereunder and/
or any applicable exemption or exemptive order under the 1940 Act with
respect to such investments.
The Fund may invest in securities denominated in U.S. dollars,
major reserve currencies, and currencies of other countries in which
the Fund may invest.
The Fund may invest in both investment grade and high yield debt
securities.
The Fund intends to qualify for and to elect treatment as a
separate regulated investment company under Subchapter M of the
Internal Revenue Code. Furthermore, the Fund may not concentrate
investments in a particular industry or group of industries, as
concentration is defined under the 1940 Act, the rules or regulations
thereunder,
[[Page 96542]]
or any exemption therefrom, as such statute, rules, or regulations may
be amended or interpreted from time to time.
The Fund is a diversified series of the Trust. The Fund intends to
meet the diversification requirements of the 1940 Act.
The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and will not be used to enhance
leverage (although certain derivatives may result in leverage). That
is, while the Fund will be permitted to borrow as permitted under the
1940 Act, the Fund's investments will not be used to seek performance
that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the
Fund's primary broad-based securities benchmark index (as defined in
Form N-1A).\23\
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\23\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
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D. Exchange's Description of the Fund's Use of Derivatives
The Fund proposes to seek certain exposures through transactions in
the specific derivative instruments described above. The derivatives to
be used are futures, swaps, NDFs, foreign forward currency contracts,
and call and put options. Derivatives, which are instruments that have
a value based on another instrument, exchange rate, or index, may also
be used as substitutes for securities in which the Fund can invest. The
Fund may use these derivative instruments to increase gain, to
effectively gain targeted exposure from its cash positions, to hedge
various investments, and/or for risk management.
Investments in derivative instruments will be made in accordance
with the 1940 Act and consistent with the Fund's investment objective
and policies. 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 under derivative
instruments. 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.\24\ Because the markets for
certain assets, or the assets themselves, may be unavailable or cost
prohibitive as compared to derivative instruments, suitable derivative
transactions may be an efficient alternative for the Fund to obtain the
desired asset exposure.
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\24\ To mitigate leveraging risk, the Adviser will segregate or
``earmark'' liquid assets or otherwise cover the transactions that
may give rise to such risk.
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E. Exchange's Description of the Impact on the Arbitrage Mechanism
The Exchange states that, according to the Adviser, there will be
minimal impact to the arbitrage mechanism as a result of the use of
derivatives. Market makers and participants should be able to value
derivatives as long as the positions are disclosed with relevant
information. The price at which Shares trade will continue to be
disciplined by arbitrage opportunities created by the ability to
purchase or redeem creation Shares at their NAV, which should ensure
that Shares will not trade at a material discount or premium in
relation to their NAV.
In addition, the Exchange states that, according to the Adviser,
there will not be any significant impacts to the settlement or
operational aspects of the Fund's arbitrage mechanism due to the use of
derivatives. Because derivatives generally are not eligible for in-kind
transfer, they will typically be substituted with a ``cash in lieu''
amount when the Fund processes purchases or redemptions of creation
units in-kind.
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\25\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\26\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\25\ 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).
\26\ 15 U.S.C. 78f(b)(5).
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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 Act,\27\ 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 and for portfolio holdings of the Fund
that are U.S. exchange listed, including common stocks, preferred
stocks, warrants, rights, ETFs, REITs, and U.S. exchange-traded ADRs
will be available via the Consolidated Tape Association (``CTA'') high
speed line. Quotation and last-sale information for such U.S. exchange-
listed securities, as well as futures, also will be available from the
exchange on which they are listed. Quotation and last-sale information
for exchange-listed options cleared via the Options Clearing
Corporation will be available via the Options Price Reporting
Authority, and quotation and last-sale information for non-U.S. equity
securities (including GDRs and EDRs) will be available from the
exchanges on which they trade and from major market data vendors, as
applicable.
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\27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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In addition, the Intra-day Indicative Value (``IIV''), which is the
Portfolio Indicative Value, as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the Core Trading
Session.\28\ According to the Exchange, a third party market data
provider will calculate the IIV for the Fund. The third party market
data provider may use market quotes if available or may fair value
securities against proxies (such as swap or yield curves).
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\28\ According to the Exchange, several major market data
vendors display and/or make widely available IIVs taken from the CTA
or other data feeds.
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With respect to specific derivatives:
NDFs and foreign forward currency contracts may be valued
intraday using market quotes, or another proxy as determined to be
appropriate by the third party market data provider.
Futures may be valued intraday using the relevant futures
exchange data, or another proxy as determined to be appropriate by the
third party market data provider.
CDS and CDS indices swaps may be valued using intraday
data from market
[[Page 96543]]
vendors, or based on underlying asset price, or another proxy as
determined to be appropriate by the third party market data provider.
Total return swaps may be valued intraday using the
underlying asset price, or another proxy as determined to be
appropriate by the third party market data provider.
Exchange-listed options may be valued intraday using the
relevant exchange data, or another proxy as determined to be
appropriate by the third party market data provider.
OTC options may be valued intraday through option
valuation models (e.g., Black-Scholes) or using exchange traded options
as a proxy, or another proxy as determined to be appropriate by the
third party market data provider.
On each business day, before commencement of trading in Shares in
the Core Trading Session (normally, 9:30 a.m. to 4:00 p.m., Eastern
Time or ``E.T.'') on the Exchange, the Adviser will disclose on the
Fund's Web site the Disclosed Portfolio for the Fund as defined in NYSE
Arca Equities Rule 8.600(c)(2) that will form the basis for the Fund's
calculation of NAV at the end of the business day.\29\ According to the
Exchange, the Fund's disclosure of derivative positions in the
Disclosed Portfolio will include information that market participants
can use to value these positions intraday. On a daily basis, the
Adviser 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, index, or other asset or
instrument underlying the holding, if any; for options, the option
strike price; quantity held (as measured by, for example, par value,
notional value, or number of shares, contracts, or units); maturity
date, if any; coupon rate, if any; effective date, if any; market value
of the holding; and the percentage weighting of the holding in the
Fund's portfolio. The Web site information will be publicly available
at no charge.
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\29\ 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.
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The NAV of Shares, under normal market conditions, will be
calculated each business day as of the close of the Exchange, which is
typically 4:00 p.m. E.T. On occasion, the Exchange will close before
4:00 p.m. E.T. When that happens, NAV will be calculated as of the time
the Exchange closes.\30\
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\30\ Securities for which market quotations are readily
available will generally be valued at their current market value.
Other securities and assets, including securities for which market
quotations are not readily available or market quotations are
determined not to be reliable; or, if their value has been
materially affected by events occurring after the close of trading
on the exchange or market on which the security is principally
traded but before the Fund's NAV is calculated, may be valued at
fair value in accordance with policies and procedures adopted by the
Trust's Board of Trustees. Fair value represents a good faith
determination of the value of a security or other asset based upon
specifically applied procedures. Fair valuation may require
subjective determinations. See Notice, supra note 3, 81 FR at 44344
(describing additional details with respect to the Fund's NAV
valuation methodology).
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Price information for OTC common stocks (including certain OTC
ADRs), preferred stocks, warrants, rights, and CVRs will be available
from one or more major market data vendors or broker-dealers in the
securities. Quotation information for OTC options, cash equivalents,
swaps, money market funds, non-exchange-listed investment company
securities (other than money market funds), Rule 144A securities, U.S.
Government obligations, U.S. Government agency obligations, sovereign
obligations, corporate debt, and reverse repurchase agreements may be
obtained from brokers and dealers who make markets in such securities
or through nationally recognized pricing services through subscription
agreements. The U.S. dollar value of foreign securities, instruments,
and currencies can be derived by using foreign currency exchange rate
quotations obtained from nationally recognized pricing services.
Forwards and spot currency price information will be available from
major market data vendors. The Fund's Web site will include a form of
the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information.
The Commission believes that the proposal to list and trade the
Shares is reasonably designed to promote fair disclosure of information
that may be necessary to price the Shares appropriately and to prevent
trading when a reasonable degree of transparency cannot be assured. The
Exchange will obtain a representation from the issuer of the Shares
that the NAV per Share will be calculated daily and that the NAV and
the Disclosed Portfolio will be made available to all market
participants at the same time. Trading in Shares of the Fund will be
halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached or because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable,\31\ and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances
under which Shares of the Fund may be halted.
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\31\ These reasons may include: (1) The extent to which trading
is not occurring in the securities or 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. With Respect to trading
halts, the Exchange may consider all relevant factors in exercising
its discretion to halt or suspend trading in the Shares of the Fund.
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The Exchange represents that it has a general policy prohibiting
the distribution of material, non-public information by its employees.
In addition, Commentary .06 to NYSE Arca Equities Rule 8.600 further
requires that personnel who make decisions on the open-end fund's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material, non-public information regarding
the open-end fund's portfolio. The Exchange represents that the Adviser
is not registered as a broker-dealer, but is affiliated with a broker-
dealer and has implemented and will maintain a fire wall with respect
to such broker-dealer affiliate regarding access to information
concerning the composition of, and changes to, the portfolio.\32\ The
Commission also notes that, pursuant to NYSE Arca Equities Rule
8.600(d)(2)(B)(ii), the ``Reporting Authority'' that provides the
Disclosed Portfolio must implement and maintain, or be subject to,
procedures designed to
[[Page 96544]]
prevent the use and dissemination of material, non-public information
regarding the actual components of the portfolio.\33\
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\32\ See supra note 12. The Exchange further notes 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.
\33\ ``Reporting Authority'' is defined in NYSE Arca Equites
Rule (c)(4).
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Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'')
of the special characteristics and risks associated with trading the
Shares. The Exchange represents that that trading in the Shares will be
subject to the existing trading surveillances administered by the
Exchange as well as cross-market surveillances administered by the
Financial Industry Regulatory Authority (``FINRA'') on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
applicable federal securities laws.\34\
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\34\ The Exchange represents that FINRA conducts cross-market
surveillances on behalf of the Exchange pursuant to a regulatory
services agreement, and the Exchange is responsible for FINRA's
performance under this regulatory services agreement.
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The Exchange represents that it deems the Shares to be equity
securities, thus rendering the trading of the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made the following
additional representations:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance 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) The Exchange, or FINRA, on behalf of the Exchange, or both,
will communicate as needed regarding trading in the Shares, certain
exchange-listed equity securities (including Depositary Receipts, ETFs,
REITs, common and preferred stocks, common stock into which convertible
securities can be converted, warrants, rights, certain futures, and
certain exchange-traded options with other markets and other entities
that are members of the ISG, and the Exchange or FINRA, on behalf of
the Exchange, or both, may obtain trading information regarding trading
such securities and financial instruments from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in such securities and financial instruments from markets and
other entities that are members of ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement.\35\ 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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\35\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed 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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(5) Not more than 10% of the net assets of the Fund, in the
aggregate, invested in equity securities (other than mutual fund
shares) shall consist of equity securities, including common stock into
which convertible securities can be converted and Depositary Receipts,
whose principal market is not a member of the ISG or is a market with
which the Exchange does not have a comprehensive surveillance sharing
agreement. In addition, not more than 10% of the net assets of the Fund
in the aggregate invested in futures contracts or exchange-traded
options shall consist of futures contracts or options whose principal
market is not a member of ISG or is a market with which the Exchange
does not have a comprehensive surveillance sharing agreement.
(6) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit Holders in a Bulletin of the special
characteristics and risks associated with trading the Shares.
Specifically, the Bulletin will discuss the following: (a) the
procedures for purchases and redemptions of Shares in Creation Unit
aggregations (and that Shares are not individually redeemable); (b)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated IIV will not be calculated or publicly
disseminated; (d) how information regarding the IIV and the Disclosed
Portfolio is disseminated; (e) the requirement that Equity Trading
Permit Holders deliver a prospectus to investors purchasing newly
issued Shares prior to or concurrently with the confirmation of a
transaction; and (f) trading information. The Bulletin will also
discuss any exemptive, no-action, and interpretive relief granted by
the Commission from any rules under the Act.
(7) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act.\36\
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\36\ See 17 CFR 240.10A-3.
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(8) Exchange-listed and traded common stocks, preferred stocks,
warrants and rights of U.S. corporations, and U.S. REITs will be traded
on U.S. national securities exchanges. In addition, no more than 10% of
the net assets of the Fund will be invested in Depositary Receipts that
are not exchange-listed, and the common stock into which convertible
securities holdings can be converted will be exchange-traded.
(9) The ETFs in which the Fund may invest will be registered under
the 1940 Act and include Investment Company Units (as described in NYSE
Arca Equities Rule 5.2(j)(3)); Portfolio Depositary Receipts (as
described in NYSE Arca Equities Rule 8.100); and Managed Fund Shares
(as described in NYSE Arca Equities Rule 8.600). Such ETFs all will be
listed and traded in the U.S. on registered exchanges. While the Fund
may invest in inverse ETFs, the Fund will not invest in leveraged or
inverse leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
(10) The Adviser expects that, under normal market conditions, the
Fund will invest at least 75% of its corporate debt securities in
issuances that have at least $100,000,000 par amount outstanding in
developed countries, or at least $200,000,000 par amount outstanding in
emerging market countries.
(11) The Fund will limit its investments in currencies to those
currencies with a minimum average daily foreign exchange turnover of
USD $1 billion as determined by the BIS Triennial Central Bank Survey.
(12) The Fund may invest no more than 5% of its assets in equity
and debt securities that are restricted securities (Rule 144A
securities), in addition to Rule 144A securities deemed illiquid by the
Adviser. In addition, under normal market conditions, the Fund may
invest no more than 5% of its assets, in the aggregate, in OTC common
stocks, preferred stocks, warrants, rights, and CVRs of U.S. and
foreign corporations (including emerging market securities).
(13) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of
[[Page 96545]]
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
(14) The Fund's investments, including derivatives, will be
consistent with the Fund's investment objective and will not be used to
enhance leverage (although certain derivatives may result in leverage).
That is, while the Fund will be permitted to borrow as permitted under
the 1940 Act, the Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (i.e., 2Xs and
3Xs) of the Fund's primary broad-based securities benchmark index (as
defined in Form N-1A).
(15) Investments in derivative instruments will be made in
accordance with the 1940 Act and consistent with the Fund's investment
objective and policies. 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 under derivative
instruments. 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.\37\
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\37\ To mitigate leveraging risk, the Adviser will segregate or
``earmark'' liquid assets or otherwise cover the transactions that
may give rise to such risk.
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The Exchange also represents that all statements and
representations made in this filing regarding (a) the description of
the portfolio, (b) limitations on portfolio holdings or reference
assets, or (c) the applicability of Exchange rules and surveillance
procedures shall constitute continued listing requirements for listing
the Shares of the Fund on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements.\38\ If the Fund is not in compliance
with the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Equities Rule 5.5(m).
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\38\ The Commission notes that certain other proposals for the
listing and trading of Managed Fund Shares include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
78005 (Jun. 7, 2016), 81 FR 38247 (Jun. 13, 2016) (SR-BATS-2015-
100). In the context of this representation, it is the Commission's
view that ``monitor'' and ``surveil'' both mean ongoing oversight of
a fund's compliance with the continued listing requirements.
Therefore, the Commission does not view ``monitor'' as a more or
less stringent obligation than ``surveil'' with respect to the
continued listing requirements.
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This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice,\39\
Amendment Nos. 1, 2 and 3 to the proposed rule change,\40\ and the
Exchange's description of the Fund. The Commission notes that the Fund
and the Shares must comply with the requirements of NYSE Arca Equities
Rule 8.600 to be listed and traded on the Exchange on an initial and
continued basis.
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\39\ See supra note 3.
\40\ See supra notes 4, 7, and 8.
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, is
consistent with Section 6(b)(5) of the Act \41\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\41\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\42\ that the proposed rule change (SR-NYSEArca-2016-82), as
modified by Amendment Nos. 1, 2, and 3 thereto, be, and it hereby is,
approved.
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\42\ Id.
\43\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-31683 Filed 12-29-16; 8:45 am]
BILLING CODE 8011-01-P
