Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change To List and Trade Shares of the PowerShares S&P 500 Downside Hedged Portfolio Under NYSE Arca Equities Rule 8.600, 67412-67416 [2012-27364]

Download as PDF 67412 Federal Register / Vol. 77, No. 218 / Friday, November 9, 2012 / Notices IV. Solicitation of Comments transmissions and settlement with respect to such payments. Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: (B) Self-Regulatory Organization’s Statement on Burden on Competition NSCC does not believe that the proposed rule change will have any impact or impose any burden on competition. Electronic Comments (C) Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not been solicited or received. NSCC will notify the Commission of any written comments received by NSCC. tkelley on DSK3SPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has become effective upon filing pursuant to Section 19(b)(3)(A)(iii) 9 of the Act, Rule 19b–4(f)(2),10 and Rule 19b–4(f)(4)(i) 11 thereunder because it effects changes in an existing service of NSCC that do not adversely affect the safeguarding of securities or funds in the custody or control of NSCC or for which NSCC is responsible and do not significantly affect the respective rights or obligations of NSCC or persons using the service. NSCC’s Mutual Fund Services are non-guaranteed services, and therefore, the funds in NSCC’s control are not adversely affected by the proposed rule change. Further, the proposed rule change does not provide any greater or lesser rights to or obligations on either NSCC or the users of the Service in comparison to the current rights and obligations of the respective parties with regard to the Service as it is currently offered. In addition, the proposed rule change establishes fees charged by NSCC applicable only to members. The implementation date for the proposals in this proposed rule change filing other than the change in the Service’s name will be December 1, 2012. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 9 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(2). 11 17 CFR 240.19b–4(f)(4)(i). 10 17 VerDate Mar<15>2010 17:34 Nov 08, 2012 Jkt 229001 • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–NSCC–2012–08 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NSCC–2012–08. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings also will be available for inspection and copying at the principal office of NSCC and on NSCC’s Web site at https://www.dtcc.com/downloads/ legal/rule_filings/2012/nscc/SR-NSCC2012-08.pdf. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NSCC–2012–08 and should be submitted on or before November 30, 2012. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.12 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–27357 Filed 11–8–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68158; File No. SR– NYSEArca–2012–101] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change To List and Trade Shares of the PowerShares S&P 500 Downside Hedged Portfolio Under NYSE Arca Equities Rule 8.600 November 5, 2012. I. Introduction On September 6, 2012, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 PowerShares S&P 500 Downside Hedged Portfolio (‘‘Fund’’) under NYSE Arca Equities Rule 8.600. The proposed rule change was published for comment in the Federal Register on September 24, 2012.3 The Commission received no comments on the proposed rule change. This order grants approval of the proposed rule change. II. Description of the Proposed Rule Change The Exchange proposes to list and trade Shares of the Fund pursuant to NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares on the Exchange. The Shares will be offered by PowerShares Actively Managed Exchange-Traded Fund Trust (‘‘Trust’’),4 a statutory trust organized under the 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 67881 (September 18, 2012), 77 FR 58889 (‘‘Notice’’). 4 The Trust is registered under the Investment Company Act of 1940 (‘‘1940 Act’’). On August 14, 2012, the Trust filed with the Commission a posteffective amendment to Form N–1A under the Securities Act of 1933 (‘‘Securities Act’’) and under the 1940 Act relating to the Fund (File Nos. 333– 147622 and 811–22148) (‘‘Registration Statement’’). In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 28171 (February 27, 2008) (File No. 812– 13386). 1 15 E:\FR\FM\09NON1.SGM 09NON1 Federal Register / Vol. 77, No. 218 / Friday, November 9, 2012 / Notices laws of the State of Delaware and registered with the Commission as an open-end management investment company. The investment adviser to the Fund is Invesco PowerShares Capital Management LLC (‘‘Adviser’’). The Bank of New York Mellon Corporation is the administrator, custodian, and transfer agent for the Fund, and Invesco Distributors, Inc. is the distributor for the Fund Shares. The Exchange states that the Adviser is affiliated with a broker-dealer and has implemented a fire wall with respect to its brokerdealer affiliate regarding access to information concerning the composition and/or changes to the Fund’s portfolio.5 The Fund will be an actively managed exchange-traded fund that will seek to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed income market returns. The Fund will seek to achieve its investment objective by using a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the S&P 500 Dynamic VEQTOR Index (‘‘Benchmark’’). The Fund’s Benchmark allocates between equity securities and CBOE Volatility Index futures. The Fund seeks to gain exposure to equity securities contained in the S&P 500 Index, CBOE Volatility Index (‘‘VIX Index’’) related instruments (as described in more detail below, ‘‘VIX Index Related Instruments’’), money market instruments, cash, cash equivalents, and futures contracts that track the S&P 500 Index (‘‘E-mini S&P 500 Futures’’). tkelley on DSK3SPTVN1PROD with NOTICES The Benchmark, the VIX Index, and the S&P 500 VIX Short Term Futures Index The Benchmark is comprised of three types of components at any given time: An equity component, represented by the S&P 500 Index; a volatility component, represented by the S&P 500 VIX Short Term Futures Index (‘‘VIX Futures Index’’); and cash, represented by the overnight London Interbank Offered Rate.6 The VIX Futures Index utilizes the prices of the first and second month futures contracts based on the VIX Index, replicating a position that 5 See NYSE Arca Equities Rule 8.600, Commentary .06. In the event (a) the Adviser becomes newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser becomes affiliated with a broker-dealer, it will implement a fire wall with respect to such broker-dealer regarding access to information concerning the composition and/or 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. 6 As of June 30, 2012, the Benchmark allocation was as follows: 97.5% to the equity component, represented by the S&P 500 Index; 2.5% to the VIX Futures Index; and 0% allocated to cash. VerDate Mar<15>2010 17:34 Nov 08, 2012 Jkt 229001 rolls the nearest month VIX futures contracts to the next month VIX futures contracts on a daily basis in equal fractional amounts. Following the proprietary formula of Standard & Poor’s (‘‘S&P’’ or ‘‘Index Provider’’), under normal circumstances (i.e., times other than when the Benchmark’s stop-loss process is triggered, as described below), the allocation to the VIX Futures Index constitutes between 2.5% and 40% of the Benchmark, with equity securities contained in the S&P 500 Index composing the remainder. The allocation to the VIX Futures Index generally increases when realized volatility and implied volatility are higher, and decreases when realized volatility and implied volatility are lower. With respect to the stop-loss process, in the event losses on the Benchmark over the previous five business days are greater than 2%, the Benchmark moves its entire allocation to cash. Unless the stop-loss is in place, the Benchmark is entirely allocated to a combination of the S&P 500 Index and the VIX Futures Index. While allocations are reviewed daily, these allocations may change on a less frequent basis. The Benchmark’s allocation to the VIX Futures Index serves as an implied volatility hedge as volatility historically tends to correlate negatively to the performance of the U.S. equity markets (i.e., rapid declines in the performance of the U.S. equity markets generally are associated with particularly high volatility in such markets). ‘‘Implied volatility’’ is a measure of the expected volatility of the S&P 500 Index that is reflected by the value of the VIX Index. The U.S. Index Committee of the Index Provider maintains the Benchmark.7 That Committee meets monthly. At each meeting, the Committee reviews pending corporate actions that may affect Benchmark constituents, statistics comparing the composition of the Benchmark to the market, companies that are being considered as candidates for addition to the Benchmark, and any significant market events. In addition, the Committee may revise the Benchmark’s policy covering rules for selecting companies, treatment of dividends, share counts, or other matters. The VIX Index is a theoretical calculation and cannot be traded. It is a benchmark index designed to measure the market price of volatility in large 7 The Index Provider is not a broker-dealer and has implemented procedures designed to prevent the use and dissemination of material, non-public information regarding the Index. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 67413 cap U.S. stocks over 30 days in the future, and is calculated based on the prices of certain put and call options on the S&P 500 Index. The VIX Index measures the premium paid by investors for certain options linked to the S&P 500 Index. During periods of market instability, the implied level of volatility of the S&P 500 Index typically increases and, consequently, the prices of options linked to the S&P 500 Index typically increase (assuming all other relevant factors remain constant or have negligible changes). This, in turn, causes the level of the VIX Index to increase. The VIX Index historically has had negative correlations to the S&P 500 Index. Investments The Fund, in accordance with strategy allocation rules provided by the Index Provider, will invest in a combination of equity securities contained in the S&P 500 Index and that are listed on a U.S. securities exchange; VIX Index Related Instruments; money market instruments; cash; cash equivalents; and E-mini S&P 500 Futures that are listed on the Chicago Mercantile Exchange (‘‘CME’’).8 The allocation among the Fund’s investments will approximate the allocation among the components of the Benchmark. Accordingly, during periods of low volatility, a greater portion of the Fund’s assets will be invested in equity securities, and during periods of increased volatility, a greater portion of the Fund’s assets will be invested in VIX Index Related Instruments. However, the Fund will be actively managed, and, although the Fund will seek performance comparable to the Benchmark, the Fund may have a higher or lower exposure to any component within the Benchmark at any time. VIX Index Related Instruments that the Fund will invest in include listed VIX futures contracts contained in the VIX Futures Index or exchange-traded funds (‘‘ETFs’’) 9 and exchange-traded notes (‘‘ETNs’’) 10 that are listed on a U.S. securities exchange and provide exposure to the VIX Index. All of the 8 The Fund will be ‘‘non-diversified’’ under the 1940 Act and may invest more of its assets in fewer issuers than ‘‘diversified’’ funds. The diversification standard is set forth in Section 5(b)(1) of the 1940 Act. 9 For purposes of this proposed rule change, ETFs are securities registered under the 1940 Act such as those listed and traded on the Exchange under NYSE Arca Equities Rules 5.2(j)(3), 8.100, and 8.600. 10 For purposes of this proposed rule change, ETNs are securities registered under the Securities Act such as those listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(6). E:\FR\FM\09NON1.SGM 09NON1 67414 Federal Register / Vol. 77, No. 218 / Friday, November 9, 2012 / Notices tkelley on DSK3SPTVN1PROD with NOTICES VIX Index Related Instruments will be listed on a U.S. exchange. Futures contracts on the VIX Index have expirations ranging from the near month consecutively out to the tenth month. Futures on the VIX Index provide investors the ability to invest in forward market volatility based on their view of the future direction or movement of the VIX Index. Because the VIX Index is not a tangible item that can be purchased and sold directly, a futures contract on the VIX Index provides for the payment and receipt of cash based on the level of the VIX Index at settlement or liquidation of the contract. The Fund may invest a portion of its assets in high-quality money market instruments, cash, and cash equivalents to provide liquidity, to collateralize its futures contracts investments, or to track the Benchmark during times when the Benchmark moves its entire allocation to cash. The instruments in which the Fund may invest include: (i) Short-term obligations issued by the U.S. Government; 11 (ii) short-term negotiable obligations of commercial banks, fixed time deposits, and bankers’ acceptances of U.S. and foreign banks and similar institutions; (iii) commercial paper rated at the date of purchase ‘‘Prime-1’’ by Moody’s Investors Service, Inc., or ‘‘A–1+’’ or ‘‘A–1’’ by S&P, or has a similar rating from a comparable rating agency, or, if unrated, of comparable quality as determined by the Adviser; and (iv) money market mutual funds. The Fund also may invest in E-mini S&P 500 Futures that are listed on the CME. E-mini S&P 500 Futures are futures contracts that track the S&P 500 Index. They are substantially similar to traditional futures contracts on the S&P 500 Index, except that the notional value of E-mini S&P 500 Futures are one-fifth the size of their larger counterpart futures contracts. The Subsidiary The Fund may gain exposure to the VIX Index futures markets through investments in a subsidiary organized in the Cayman Islands (‘‘Subsidiary’’). Should the Fund invest in the Subsidiary, that investment may not exceed 25% of the Fund’s total assets at the end of each tax year quarter. The Subsidiary would be wholly-owned and controlled by the Fund, and its 11 The Fund may invest in short-term obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities, including bills, notes, and bonds issued by the U.S. Treasury, as well as ‘‘stripped’’ or ‘‘zero coupon’’ U.S. Treasury obligations representing future interest or principal payments on U.S. Treasury notes or bonds. VerDate Mar<15>2010 17:34 Nov 08, 2012 Jkt 229001 investments would be consolidated into the Fund’s financial statements. The Fund’s and Subsidiary’s investments would be disclosed on the Fund’s Web site on a daily basis. Should the Fund invest in the Subsidiary, it would be expected to provide the Fund with exposure to investment returns from VIX Index futures contracts within the limits of the federal tax requirements applicable to investment companies, such as the Fund. The Subsidiary would be able to invest in VIX Index futures, as well as other investments that would serve as margin or collateral or otherwise support the Subsidiary’s VIX Index futures positions. The Subsidiary would be subject to the same general investment policies and restrictions as the Fund, except that, unlike the Fund (which is subject to Rule 4.5 of the Commodity Exchange Act (‘‘CEA’’)), the Subsidiary would be able to invest without limitation in VIX Index futures and may use leveraged investment techniques. Otherwise, references to the investment strategies of the Fund for non-equity investments include the investment strategies of the Subsidiary. The Fund may utilize the Subsidiary, but is not required to do so. If it is utilized, the Subsidiary will not be registered under the 1940 Act. The Fund, as the sole shareholder of the Subsidiary, will not have the protections offered to investors in registered investment companies. However, because the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary will be managed by the Adviser, it is unlikely that the Subsidiary will take action contrary to the interests of the Fund or the Fund’s shareholders. The Board of Trustees of the Trust (‘‘Board’’) will have oversight responsibility for the investment activities of the Fund, including its investment in the Subsidiary, and the Fund’s role as the sole shareholder of the Subsidiary. Also, in managing the Subsidiary’s portfolio, the Adviser will be subject to the same investment restrictions and operational guidelines that apply to the management of the Fund. Other Investments In addition to the VIX Index futures contracts and E-mini S&P 500 Futures that are part of its primary investments, the Fund may enter into other U.S.listed futures contracts on the S&P 500 Index. The Fund will not use futures for speculative purposes. The Fund will only enter into futures contracts that are traded on U.S. exchanges. The Fund may invest in stock index contracts, in addition to the E-mini S&P PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 500 Futures. Stock index contracts are futures based on indices that reflect the market value of common stock of the firms included in the indices. The Fund may enter into U.S.-listed futures contracts to purchase security indices when the Adviser anticipates purchasing the underlying securities and believes prices will rise before the purchase will be made. To the extent the Fund uses futures it will do so only in accordance with Rule 4.5 of the CEA.12 Under recently adopted amendments to Rule 4.5, an investment adviser of a registered investment company may claim exclusion from registration as a commodity pool operator (‘‘CPO’’) only if the registered investment company it advises uses futures contracts solely for ‘‘bona fide hedging purposes’’ or limits its use of futures contracts for non-bona fide hedging purposes in specified ways. Because the Fund does not expect to use futures contracts solely for ‘‘bona fide hedging purposes,’’ effective December 31, 2012, the Fund will be subject to rules that will require it to limit its use of positions in futures contracts in accordance with the requirements of amended Rule 4.5, unless it otherwise complies with CPO regulation. The Fund may enter into repurchase agreements, which are agreements pursuant to which securities are acquired by the Fund from a third party with the understanding that they will be repurchased by the seller at a fixed price on an agreed date. These agreements may be made with respect to any of the portfolio securities in which the Fund is authorized to invest. Repurchase agreements may be characterized as loans secured by the underlying securities. The Fund may enter into repurchase agreements with: (i) Member banks of the Federal Reserve System having total assets in excess of $500 million; and (ii) securities dealers (‘‘Qualified Institutions’’). The Adviser will monitor the continued creditworthiness of Qualified Institutions. The Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date, and interest payment and have the characteristics of borrowing. The securities purchased with the funds obtained from the agreement and securities collateralizing 12 The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term ‘‘commodity pool operator’’ in accordance with Rule 4.5 of the CEA so that the Fund is not subject to registration or regulation as a CPO under the CEA. E:\FR\FM\09NON1.SGM 09NON1 Federal Register / Vol. 77, No. 218 / Friday, November 9, 2012 / Notices the agreement will have maturity dates no later than the repayment date. In addition to the ETFs and ETNs that are listed on U.S. exchanges and provide exposure to the VIX Index, the Fund may invest in the securities of other investment companies (including money market funds) to the extent permitted under the 1940 Act. The Fund also may purchase warrants. The Fund does not expect to invest in options or enter into swap agreements, including credit default swaps, but may do so if such investments are in the best interests of the Fund’s shareholders. tkelley on DSK3SPTVN1PROD with NOTICES Investment Limitations The Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. The Fund will not invest in equities that are traded overthe-counter (‘‘OTC’’) or equities listed on a non-U.S. exchange, or enter into futures that are not traded on a U.S. exchange. The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including 144A Securities. 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 securities and other illiquid assets. The Fund may not concentrate its investments (i.e., invest more than 25% of the value of its total assets in securities of issuers in any one industry or group of industries). This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities. The Fund intends to qualify for and to elect to be treated as a separate regulated investment company under Subchapter M of the Internal Revenue Code.13 Additional information regarding the Trust, the Fund, and the Shares, including investment strategies, risks, creation and redemption procedures, net asset value (‘‘NAV’’), fees, portfolio holdings disclosure policies, distributions, and taxes, among other things, is included in the Notice and Registration Statement, as applicable.14 13 See 26 U.S.C. 851. Notice and Registration Statement, supra notes 3 and 4, respectively. 14 See VerDate Mar<15>2010 17:34 Nov 08, 2012 Jkt 229001 III. Discussion and Commission’s Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act 15 and the rules and regulations thereunder applicable to a national securities exchange.16 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,17 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission notes that the Fund and the Shares must comply with the requirements of NYSE Arca Equities Rule 8.600 to be listed and traded on the Exchange. The Commission finds that the proposal to list and trade the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Act,18 which sets forth Congress’s finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for, and transactions in, securities. Quotation and last-sale information for the Shares will be available via the Consolidated Tape Association (‘‘CTA’’) high-speed line. In addition, the Portfolio Indicative Value, 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.19 On each business day, before commencement of trading in Shares in the Core Trading Session on the Exchange, the Fund will disclose on its Web site the Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2), held by the Fund and the Subsidiary that will form the basis for the Fund’s calculation of NAV at the 15 15 U.S.C. 78f. approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 17 15 U.S.C. 78f(b)(5). 18 15 U.S.C. 78k–1(a)(1)(C)(iii). 19 According to the Exchange, several major market data vendors widely disseminate Portfolio Indicative Values taken from CTA or other data feeds. 16 In PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 67415 end of the business day.20 The NAV of the Fund will be determined at the close of regular trading (ordinarily 4:00 p.m. Eastern Time) every day the New York Stock Exchange is open. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. The intra-day, closing and settlement prices of the portfolio investments (e.g., futures contracts, equity securities, ETFs, and ETNs) are also readily available from the national securities exchanges trading such securities, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. The Fund’s Web site will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. The Commission further believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The Commission notes that 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.21 In addition, trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. The Exchange may halt trading in the Shares if trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of the Fund, or if other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly 20 On a daily basis, the Adviser will disclose for each portfolio security and other financial instrument of the Fund and the Subsidiary, if applicable, the following information on the Fund’s Web site: Ticker symbol (if applicable); name of security and financial instrument; number of shares or dollar value of each security and financial instrument held in the portfolio; and percentage weighting of the security and financial instrument in the portfolio. The Web site information will be publicly available at no charge. 21 See NYSE Arca Equities Rule 8.600(d)(1)(B). E:\FR\FM\09NON1.SGM 09NON1 67416 Federal Register / Vol. 77, No. 218 / Friday, November 9, 2012 / Notices market are present.22 Further, the Commission notes that the Reporting Authority that provides the Disclosed Portfolio must implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the actual components of the portfolio.23 All equity securities, ETFs, and ETNs in which the Fund invests will be listed on a U.S. securities exchange. The Exchange may obtain information via the Intermarket Surveillance Group (‘‘ISG’’) from other exchanges that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. In addition, the Exchange could obtain information from the U.S. futures exchanges, all of which are ISG members, on which futures held by the Fund are listed and traded. The Exchange states that it has a general policy prohibiting the distribution of material, non-public information by its employees. The Exchange also states that the Adviser is affiliated with a broker-dealer, and the Adviser has implemented a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio.24 tkelley on DSK3SPTVN1PROD with NOTICES 22 See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing additional considerations for the suspension of trading in or removal from listing of Managed Fund Shares on the Exchange). With respect to trading halts, the Exchange may consider other relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. 23 See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii). 24 See supra note 5. The Commission 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 VerDate Mar<15>2010 17:34 Nov 08, 2012 Jkt 229001 The Exchange represents that the Shares are deemed to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. In support of this proposal, the Exchange has made representations, including: (1) The Shares will be subject to NYSE Arca Equities Rule 8.600, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. (2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. (3) The Exchange’s surveillance procedures applicable to derivative products, which include Managed Fund Shares, are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. (4) Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (‘‘ETP’’) Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (a) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (c) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated Portfolio Indicative Value will not be calculated or publicly disseminated; (d) how information regarding the Portfolio Indicative Value is disseminated; (e) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (f) trading information. (5) For initial and/or continued listing, the Fund must be in compliance with Rule 10A–3 under the Exchange Act,25 as provided by NYSE Arca Equities Rule 5.3. (6) All of the equities and VIX Index Related Instruments will be listed on a U.S. exchange. The Fund will not enter into futures that are not traded on a U.S. exchange. In addition, the Fund does not expect to invest in options or enter into swap agreements, including credit default swaps, but may do so if such administering the policies and procedures adopted under subparagraph (i) above. 25 17 CFR 240.10A–3. PO 00000 Frm 00088 Fmt 4703 Sfmt 9990 investments are in the best interests of the Fund’s shareholders. The Fund’s investments will be consistent with its investment objective and will not be used to enhance leverage. (7) The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities. (8) Should the Fund invest in the Subsidiary, that investment may not exceed 25% of the Fund’s total assets at the end of each tax year quarter. (9) A minimum of 100,000 Shares of the Fund will be outstanding at the commencement of trading on the Exchange. This approval order is based on all of the Exchange’s representations and description of the Fund, including those set forth above and in the Notice.26 For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 27 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,28 that the proposed rule change (SR–NYSEArca– 2012–101) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–27364 Filed 11–8–12; 8:45 am] BILLING CODE 8011–01–P 26 The Commission notes that it does not regulate the market for futures in which the Fund plans to take positions, which is the responsibility of the Commodity Futures Trading Commission (‘‘CFTC’’). The CFTC has the authority to set limits on the positions that any person may take in futures. These limits may be directly set by the CFTC or by the markets on which the futures are traded. The Commission has no role in establishing position limits on futures even though such limits could impact an exchange-traded product that is under the jurisdiction of the Commission. 27 15 U.S.C. 78f(b)(5). 28 15 U.S.C. 78s(b)(2). 29 17 CFR 200.30–3(a)(12). E:\FR\FM\09NON1.SGM 09NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67412-67416]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27364]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68158; File No. SR-NYSEArca-2012-101]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade Shares of the 
PowerShares S&P 500 Downside Hedged Portfolio Under NYSE Arca Equities 
Rule 8.600

November 5, 2012.

I. Introduction

    On September 6, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') 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 PowerShares S&P 500 Downside Hedged Portfolio 
(``Fund'') under NYSE Arca Equities Rule 8.600. The proposed rule 
change was published for comment in the Federal Register on September 
24, 2012.\3\ The Commission received no comments on the proposed rule 
change. This order grants approval of the proposed rule change.
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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. 67881 (September 18, 
2012), 77 FR 58889 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to NYSE Arca Equities Rule 8.600, which governs the listing and trading 
of Managed Fund Shares on the Exchange. The Shares will be offered by 
PowerShares Actively Managed Exchange-Traded Fund Trust (``Trust''),\4\ 
a statutory trust organized under the

[[Page 67413]]

laws of the State of Delaware and registered with the Commission as an 
open-end management investment company. The investment adviser to the 
Fund is Invesco PowerShares Capital Management LLC (``Adviser''). The 
Bank of New York Mellon Corporation is the administrator, custodian, 
and transfer agent for the Fund, and Invesco Distributors, Inc. is the 
distributor for the Fund Shares. The Exchange states that the Adviser 
is affiliated with a broker-dealer and has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the Fund's portfolio.\5\
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On August 14, 2012, the Trust filed with the 
Commission a post-effective amendment to Form N-1A under the 
Securities Act of 1933 (``Securities Act'') and under the 1940 Act 
relating to the Fund (File Nos. 333-147622 and 811-22148) 
(``Registration Statement''). In addition, the Commission has issued 
an order granting certain exemptive relief to the Trust under the 
1940 Act. See Investment Company Act Release No. 28171 (February 27, 
2008) (File No. 812-13386).
    \5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the 
event (a) the Adviser becomes newly affiliated with a broker-dealer, 
or (b) any new adviser or sub-adviser becomes affiliated with a 
broker-dealer, it will implement a fire wall with respect to such 
broker-dealer regarding access to information concerning the 
composition and/or 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 be an actively managed exchange-traded fund that will 
seek to achieve positive total returns in rising or falling markets 
that are not directly correlated to broad equity or fixed income market 
returns. The Fund will seek to achieve its investment objective by 
using a quantitative, rules-based strategy designed to provide returns 
that correspond to the performance of the S&P 500 Dynamic VEQTOR Index 
(``Benchmark''). The Fund's Benchmark allocates between equity 
securities and CBOE Volatility Index futures. The Fund seeks to gain 
exposure to equity securities contained in the S&P 500 Index, CBOE 
Volatility Index (``VIX Index'') related instruments (as described in 
more detail below, ``VIX Index Related Instruments''), money market 
instruments, cash, cash equivalents, and futures contracts that track 
the S&P 500 Index (``E-mini S&P 500 Futures'').

The Benchmark, the VIX Index, and the S&P 500 VIX Short Term Futures 
Index

    The Benchmark is comprised of three types of components at any 
given time: An equity component, represented by the S&P 500 Index; a 
volatility component, represented by the S&P 500 VIX Short Term Futures 
Index (``VIX Futures Index''); and cash, represented by the overnight 
London Interbank Offered Rate.\6\ The VIX Futures Index utilizes the 
prices of the first and second month futures contracts based on the VIX 
Index, replicating a position that rolls the nearest month VIX futures 
contracts to the next month VIX futures contracts on a daily basis in 
equal fractional amounts.
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    \6\ As of June 30, 2012, the Benchmark allocation was as 
follows: 97.5% to the equity component, represented by the S&P 500 
Index; 2.5% to the VIX Futures Index; and 0% allocated to cash.
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    Following the proprietary formula of Standard & Poor's (``S&P'' or 
``Index Provider''), under normal circumstances (i.e., times other than 
when the Benchmark's stop-loss process is triggered, as described 
below), the allocation to the VIX Futures Index constitutes between 
2.5% and 40% of the Benchmark, with equity securities contained in the 
S&P 500 Index composing the remainder. The allocation to the VIX 
Futures Index generally increases when realized volatility and implied 
volatility are higher, and decreases when realized volatility and 
implied volatility are lower. With respect to the stop-loss process, in 
the event losses on the Benchmark over the previous five business days 
are greater than 2%, the Benchmark moves its entire allocation to cash. 
Unless the stop-loss is in place, the Benchmark is entirely allocated 
to a combination of the S&P 500 Index and the VIX Futures Index. While 
allocations are reviewed daily, these allocations may change on a less 
frequent basis.
    The Benchmark's allocation to the VIX Futures Index serves as an 
implied volatility hedge as volatility historically tends to correlate 
negatively to the performance of the U.S. equity markets (i.e., rapid 
declines in the performance of the U.S. equity markets generally are 
associated with particularly high volatility in such markets). 
``Implied volatility'' is a measure of the expected volatility of the 
S&P 500 Index that is reflected by the value of the VIX Index.
    The U.S. Index Committee of the Index Provider maintains the 
Benchmark.\7\ That Committee meets monthly. At each meeting, the 
Committee reviews pending corporate actions that may affect Benchmark 
constituents, statistics comparing the composition of the Benchmark to 
the market, companies that are being considered as candidates for 
addition to the Benchmark, and any significant market events. In 
addition, the Committee may revise the Benchmark's policy covering 
rules for selecting companies, treatment of dividends, share counts, or 
other matters.
---------------------------------------------------------------------------

    \7\ The Index Provider is not a broker-dealer and has 
implemented procedures designed to prevent the use and dissemination 
of material, non-public information regarding the Index.
---------------------------------------------------------------------------

    The VIX Index is a theoretical calculation and cannot be traded. It 
is a benchmark index designed to measure the market price of volatility 
in large cap U.S. stocks over 30 days in the future, and is calculated 
based on the prices of certain put and call options on the S&P 500 
Index. The VIX Index measures the premium paid by investors for certain 
options linked to the S&P 500 Index. During periods of market 
instability, the implied level of volatility of the S&P 500 Index 
typically increases and, consequently, the prices of options linked to 
the S&P 500 Index typically increase (assuming all other relevant 
factors remain constant or have negligible changes). This, in turn, 
causes the level of the VIX Index to increase. The VIX Index 
historically has had negative correlations to the S&P 500 Index.

Investments

    The Fund, in accordance with strategy allocation rules provided by 
the Index Provider, will invest in a combination of equity securities 
contained in the S&P 500 Index and that are listed on a U.S. securities 
exchange; VIX Index Related Instruments; money market instruments; 
cash; cash equivalents; and E-mini S&P 500 Futures that are listed on 
the Chicago Mercantile Exchange (``CME'').\8\
---------------------------------------------------------------------------

    \8\ The Fund will be ``non-diversified'' under the 1940 Act and 
may invest more of its assets in fewer issuers than ``diversified'' 
funds. The diversification standard is set forth in Section 5(b)(1) 
of the 1940 Act.
---------------------------------------------------------------------------

    The allocation among the Fund's investments will approximate the 
allocation among the components of the Benchmark. Accordingly, during 
periods of low volatility, a greater portion of the Fund's assets will 
be invested in equity securities, and during periods of increased 
volatility, a greater portion of the Fund's assets will be invested in 
VIX Index Related Instruments. However, the Fund will be actively 
managed, and, although the Fund will seek performance comparable to the 
Benchmark, the Fund may have a higher or lower exposure to any 
component within the Benchmark at any time.
    VIX Index Related Instruments that the Fund will invest in include 
listed VIX futures contracts contained in the VIX Futures Index or 
exchange-traded funds (``ETFs'') \9\ and exchange-traded notes 
(``ETNs'') \10\ that are listed on a U.S. securities exchange and 
provide exposure to the VIX Index. All of the

[[Page 67414]]

VIX Index Related Instruments will be listed on a U.S. exchange.
---------------------------------------------------------------------------

    \9\ For purposes of this proposed rule change, ETFs are 
securities registered under the 1940 Act such as those listed and 
traded on the Exchange under NYSE Arca Equities Rules 5.2(j)(3), 
8.100, and 8.600.
    \10\ For purposes of this proposed rule change, ETNs are 
securities registered under the Securities Act such as those listed 
and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(6).
---------------------------------------------------------------------------

    Futures contracts on the VIX Index have expirations ranging from 
the near month consecutively out to the tenth month. Futures on the VIX 
Index provide investors the ability to invest in forward market 
volatility based on their view of the future direction or movement of 
the VIX Index. Because the VIX Index is not a tangible item that can be 
purchased and sold directly, a futures contract on the VIX Index 
provides for the payment and receipt of cash based on the level of the 
VIX Index at settlement or liquidation of the contract.
    The Fund may invest a portion of its assets in high-quality money 
market instruments, cash, and cash equivalents to provide liquidity, to 
collateralize its futures contracts investments, or to track the 
Benchmark during times when the Benchmark moves its entire allocation 
to cash. The instruments in which the Fund may invest include: (i) 
Short-term obligations issued by the U.S. Government; \11\ (ii) short-
term negotiable obligations of commercial banks, fixed time deposits, 
and bankers' acceptances of U.S. and foreign banks and similar 
institutions; (iii) commercial paper rated at the date of purchase 
``Prime-1'' by Moody's Investors Service, Inc., or ``A-1+'' or ``A-1'' 
by S&P, or has a similar rating from a comparable rating agency, or, if 
unrated, of comparable quality as determined by the Adviser; and (iv) 
money market mutual funds.
---------------------------------------------------------------------------

    \11\ The Fund may invest in short-term obligations issued or 
guaranteed by the U.S. Government, its agencies and 
instrumentalities, including bills, notes, and bonds issued by the 
U.S. Treasury, as well as ``stripped'' or ``zero coupon'' U.S. 
Treasury obligations representing future interest or principal 
payments on U.S. Treasury notes or bonds.
---------------------------------------------------------------------------

    The Fund also may invest in E-mini S&P 500 Futures that are listed 
on the CME. E-mini S&P 500 Futures are futures contracts that track the 
S&P 500 Index. They are substantially similar to traditional futures 
contracts on the S&P 500 Index, except that the notional value of E-
mini S&P 500 Futures are one-fifth the size of their larger counterpart 
futures contracts.

The Subsidiary

    The Fund may gain exposure to the VIX Index futures markets through 
investments in a subsidiary organized in the Cayman Islands 
(``Subsidiary''). Should the Fund invest in the Subsidiary, that 
investment may not exceed 25% of the Fund's total assets at the end of 
each tax year quarter. The Subsidiary would be wholly-owned and 
controlled by the Fund, and its investments would be consolidated into 
the Fund's financial statements. The Fund's and Subsidiary's 
investments would be disclosed on the Fund's Web site on a daily basis. 
Should the Fund invest in the Subsidiary, it would be expected to 
provide the Fund with exposure to investment returns from VIX Index 
futures contracts within the limits of the federal tax requirements 
applicable to investment companies, such as the Fund.
    The Subsidiary would be able to invest in VIX Index futures, as 
well as other investments that would serve as margin or collateral or 
otherwise support the Subsidiary's VIX Index futures positions. The 
Subsidiary would be subject to the same general investment policies and 
restrictions as the Fund, except that, unlike the Fund (which is 
subject to Rule 4.5 of the Commodity Exchange Act (``CEA'')), the 
Subsidiary would be able to invest without limitation in VIX Index 
futures and may use leveraged investment techniques. Otherwise, 
references to the investment strategies of the Fund for non-equity 
investments include the investment strategies of the Subsidiary.
    The Fund may utilize the Subsidiary, but is not required to do so. 
If it is utilized, the Subsidiary will not be registered under the 1940 
Act. The Fund, as the sole shareholder of the Subsidiary, will not have 
the protections offered to investors in registered investment 
companies. However, because the Fund wholly owns and controls the 
Subsidiary, and the Fund and the Subsidiary will be managed by the 
Adviser, it is unlikely that the Subsidiary will take action contrary 
to the interests of the Fund or the Fund's shareholders. The Board of 
Trustees of the Trust (``Board'') will have oversight responsibility 
for the investment activities of the Fund, including its investment in 
the Subsidiary, and the Fund's role as the sole shareholder of the 
Subsidiary. Also, in managing the Subsidiary's portfolio, the Adviser 
will be subject to the same investment restrictions and operational 
guidelines that apply to the management of the Fund.

Other Investments

    In addition to the VIX Index futures contracts and E-mini S&P 500 
Futures that are part of its primary investments, the Fund may enter 
into other U.S.-listed futures contracts on the S&P 500 Index. The Fund 
will not use futures for speculative purposes. The Fund will only enter 
into futures contracts that are traded on U.S. exchanges.
    The Fund may invest in stock index contracts, in addition to the E-
mini S&P 500 Futures. Stock index contracts are futures based on 
indices that reflect the market value of common stock of the firms 
included in the indices. The Fund may enter into U.S.-listed futures 
contracts to purchase security indices when the Adviser anticipates 
purchasing the underlying securities and believes prices will rise 
before the purchase will be made.
    To the extent the Fund uses futures it will do so only in 
accordance with Rule 4.5 of the CEA.\12\ Under recently adopted 
amendments to Rule 4.5, an investment adviser of a registered 
investment company may claim exclusion from registration as a commodity 
pool operator (``CPO'') only if the registered investment company it 
advises uses futures contracts solely for ``bona fide hedging 
purposes'' or limits its use of futures contracts for non-bona fide 
hedging purposes in specified ways. Because the Fund does not expect to 
use futures contracts solely for ``bona fide hedging purposes,'' 
effective December 31, 2012, the Fund will be subject to rules that 
will require it to limit its use of positions in futures contracts in 
accordance with the requirements of amended Rule 4.5, unless it 
otherwise complies with CPO regulation.
---------------------------------------------------------------------------

    \12\ The Trust, on behalf of the Fund, has filed a notice of 
eligibility for exclusion from the definition of the term 
``commodity pool operator'' in accordance with Rule 4.5 of the CEA 
so that the Fund is not subject to registration or regulation as a 
CPO under the CEA.
---------------------------------------------------------------------------

    The Fund may enter into repurchase agreements, which are agreements 
pursuant to which securities are acquired by the Fund from a third 
party with the understanding that they will be repurchased by the 
seller at a fixed price on an agreed date. These agreements may be made 
with respect to any of the portfolio securities in which the Fund is 
authorized to invest. Repurchase agreements may be characterized as 
loans secured by the underlying securities. The Fund may enter into 
repurchase agreements with: (i) Member banks of the Federal Reserve 
System having total assets in excess of $500 million; and (ii) 
securities dealers (``Qualified Institutions''). The Adviser will 
monitor the continued creditworthiness of Qualified Institutions.
    The Fund may enter into reverse repurchase agreements, which 
involve the sale of securities with an agreement to repurchase the 
securities at an agreed-upon price, date, and interest payment and have 
the characteristics of borrowing. The securities purchased with the 
funds obtained from the agreement and securities collateralizing

[[Page 67415]]

the agreement will have maturity dates no later than the repayment 
date.
    In addition to the ETFs and ETNs that are listed on U.S. exchanges 
and provide exposure to the VIX Index, the Fund may invest in the 
securities of other investment companies (including money market funds) 
to the extent permitted under the 1940 Act. The Fund also may purchase 
warrants.
    The Fund does not expect to invest in options or enter into swap 
agreements, including credit default swaps, but may do so if such 
investments are in the best interests of the Fund's shareholders.

Investment Limitations

    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage. The Fund 
will not invest in equities that are traded over-the-counter (``OTC'') 
or equities listed on a non-U.S. exchange, or enter into futures that 
are not traded on a U.S. exchange.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including 144A Securities. 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 securities and other illiquid assets.
    The Fund may not concentrate its investments (i.e., invest more 
than 25% of the value of its total assets in securities of issuers in 
any one industry or group of industries). This restriction does not 
apply to obligations issued or guaranteed by the U.S. Government, its 
agencies, or instrumentalities. The Fund intends to qualify for and to 
elect to be treated as a separate regulated investment company under 
Subchapter M of the Internal Revenue Code.\13\
---------------------------------------------------------------------------

    \13\ See 26 U.S.C. 851.
---------------------------------------------------------------------------

    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, net asset value (``NAV''), fees, portfolio holdings 
disclosure policies, distributions, and taxes, among other things, is 
included in the Notice and Registration Statement, as applicable.\14\
---------------------------------------------------------------------------

    \14\ See Notice and Registration Statement, supra notes 3 and 4, 
respectively.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \15\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\16\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\17\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Commission notes that 
the Fund and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.600 to be listed and traded on the Exchange.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f.
    \16\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\18\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. In addition, the Portfolio 
Indicative Value, 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.\19\ On each 
business day, before commencement of trading in Shares in the Core 
Trading Session on the Exchange, the Fund will disclose on its Web site 
the Disclosed Portfolio, as defined in NYSE Arca Equities Rule 
8.600(c)(2), held by the Fund and the Subsidiary that will form the 
basis for the Fund's calculation of NAV at the end of the business 
day.\20\ The NAV of the Fund will be determined at the close of regular 
trading (ordinarily 4:00 p.m. Eastern Time) every day the New York 
Stock Exchange is open. Information regarding market price and trading 
volume of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services. Information regarding the previous day's closing price and 
trading volume information for the Shares will be published daily in 
the financial section of newspapers. The intra-day, closing and 
settlement prices of the portfolio investments (e.g., futures 
contracts, equity securities, ETFs, and ETNs) are also readily 
available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, or on-line information services such as Bloomberg or Reuters. 
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.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \19\ According to the Exchange, several major market data 
vendors widely disseminate Portfolio Indicative Values taken from 
CTA or other data feeds.
    \20\ On a daily basis, the Adviser will disclose for each 
portfolio security and other financial instrument of the Fund and 
the Subsidiary, if applicable, the following information on the 
Fund's Web site: Ticker symbol (if applicable); name of security and 
financial instrument; number of shares or dollar value of each 
security and financial instrument held in the portfolio; and 
percentage weighting of the security and financial instrument in the 
portfolio. The Web site information will be publicly available at no 
charge.
---------------------------------------------------------------------------

    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that 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.\21\ 
In addition, trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted. The Exchange may halt trading 
in the Shares if trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund, 
or if other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly

[[Page 67416]]

market are present.\22\ Further, the Commission notes that the 
Reporting Authority that provides the Disclosed Portfolio must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the actual components of the portfolio.\23\ All equity 
securities, ETFs, and ETNs in which the Fund invests will be listed on 
a U.S. securities exchange. The Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges that are 
members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. In addition, the Exchange could obtain 
information from the U.S. futures exchanges, all of which are ISG 
members, on which futures held by the Fund are listed and traded. The 
Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. The 
Exchange also states that the Adviser is affiliated with a broker-
dealer, and the Adviser has implemented a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio.\24\
---------------------------------------------------------------------------

    \21\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \22\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing 
additional considerations for the suspension of trading in or 
removal from listing of Managed Fund Shares on the Exchange). With 
respect to trading halts, the Exchange may consider other relevant 
factors in exercising its discretion to halt or suspend trading in 
the Shares of the Fund. Trading in Shares of the Fund will be halted 
if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 
have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
    \23\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \24\ See supra note 5. The Commission 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.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will be subject to NYSE Arca Equities Rule 8.600, 
which sets forth the initial and continued listing criteria applicable 
to Managed Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures applicable to derivative 
products, which include Managed Fund Shares, are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.
    (4) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Information Bulletin will discuss the 
following: (a) The procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due 
diligence on its ETP Holders to learn the essential facts relating to 
every customer prior to trading the Shares; (c) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated Portfolio Indicative Value will not be calculated or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value is disseminated; (e) the requirement that ETP Holders deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (5) For initial and/or continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Exchange Act,\25\ as provided by 
NYSE Arca Equities Rule 5.3.
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    \25\ 17 CFR 240.10A-3.
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    (6) All of the equities and VIX Index Related Instruments will be 
listed on a U.S. exchange. The Fund will not enter into futures that 
are not traded on a U.S. exchange. In addition, the Fund does not 
expect to invest in options or enter into swap agreements, including 
credit default swaps, but may do so if such investments are in the best 
interests of the Fund's shareholders. The Fund's investments will be 
consistent with its investment objective and will not be used to 
enhance leverage.
    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities.
    (8) Should the Fund invest in the Subsidiary, that investment may 
not exceed 25% of the Fund's total assets at the end of each tax year 
quarter.
    (9) A minimum of 100,000 Shares of the Fund will be outstanding at 
the commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations and description of the Fund, including those set forth 
above and in the Notice.\26\
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    \26\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions, which is the 
responsibility of the Commodity Futures Trading Commission 
(``CFTC''). The CFTC has the authority to set limits on the 
positions that any person may take in futures. These limits may be 
directly set by the CFTC or by the markets on which the futures are 
traded. The Commission has no role in establishing position limits 
on futures even though such limits could impact an exchange-traded 
product that is under the jurisdiction of the Commission.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \27\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \27\ 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,\28\ that the proposed rule change (SR-NYSEArca-2012-101) be, and 
it hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27364 Filed 11-8-12; 8:45 am]
BILLING CODE 8011-01-P

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