Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change Relating to Listing and Trading of Shares of the Horizons S&P 500 Covered Call ETF, Horizons S&P Financial Select Sector Covered Call ETF, and Horizons S&P Energy Select Sector Covered Call ETF Under NYSE Arca Equities Rule 5.2(j)(3), 6161-6167 [2013-01811]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 19 (Tuesday, January 29, 2013)]
[Notices]
[Pages 6161-6167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01811]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68708; File No. SR-NYSEArca-2012-131]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to Listing and Trading of 
Shares of the Horizons S&P 500 Covered Call ETF, Horizons S&P Financial 
Select Sector Covered Call ETF, and Horizons S&P Energy Select Sector 
Covered Call ETF Under NYSE Arca Equities Rule 5.2(j)(3)

January 23, 2013.

I. Introduction

    On November 21, 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

[[Page 6162]]

thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the Horizons S&P 500 Covered Call ETF, Horizons S&P 
Financial Select Sector Covered Call ETF, and Horizons S&P Energy 
Select Sector Covered Call ETF (each, a ``Fund,'' and collectively, 
``Funds'') under NYSE Arca Equities Rule 5.2(j)(3). The proposed rule 
change was published in the Federal Register on December 10, 2012.\3\ 
The Commission received no comments on the proposal. 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. 68351 (December 4, 
2012), 77 FR 73500 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Funds 
under Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3), which 
governs the listing and trading of Investment Company Units. The Shares 
will be offered by Exchange Traded Concepts Trust II (``Trust''), which 
is organized as a Delaware statutory trust and is registered with the 
Commission as an open-end management investment company.\4\ The 
investment adviser to the Funds is Exchange Traded Concepts, LLC 
(``Adviser''), and the sub-adviser to the Funds is Horizons ETFs 
Management (USA) LLC (``Sub-Adviser'').\5\ Foreside Fund Services, LLC 
is the principal underwriter and distributor of the Funds' Shares. Citi 
Fund Services Ohio, Inc. will serve as administrator for the Funds; 
Citibank, NA will serve as custodian for the Funds; and Citi Fund 
Services Ohio, Inc. will serve as transfer agent for the Funds.
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On September 10, 2012, the Trust filed with the 
Commission an amendment to its Form N-1A under the Securities Act of 
1933 and under the 1940 Act relating to the Funds (File Nos. 333-
180871 and 811-22700) (``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. 
29065 (December 1, 2009) (File No. 812-13638).
    \5\ 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 portfolio holdings of 
the Funds. The Sub-Adviser is also affiliated with a broker-dealer 
and has implemented a fire wall with respect to its broker dealer 
affiliate regarding access to information concerning the portfolio 
holdings of the Funds. In the event (a) the Adviser or Sub-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 portfolio holdings of 
the Funds, and will be subject to procedures designed to prevent the 
use and dissemination of material, non-public information regarding 
such portfolios.
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    As described below, each Fund will seek investment results that, 
before fees and expenses, generally correspond to the performance of a 
specified index (each, an ``Underlying Index'') provided by S&P Dow 
Jones Indices LLC (``Index Provider'').\6\ Each Underlying Index is 
comprised of all the equity securities in one of the S&P 500 Index, S&P 
Financial Select Sector Index, or S&P Energy Select Sector Index (each, 
a ``Reference Index'') and short (written) call options on each of the 
option eligible securities in the relevant Reference Index that meet, 
among others, stock and option price criteria of the Underlying Index 
methodology.\7\
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    \6\ Each of the Underlying Indices is provided by the Index 
Provider, which is unaffiliated with the Funds, the Adviser, or the 
Sub-Adviser. The Index Provider maintains, calculates, and publishes 
information regarding each of the Underlying Indices. The Index 
Provider is not a broker-dealer and is not affiliated with a broker-
dealer and has implemented procedures designed to prevent the use 
and dissemination of material, non-public information regarding the 
Underlying Indices.
    \7\ The Underlying Index methodology is available at 
www.standardandpoors.com/indices. The Exchange provides that, as of 
October 26, 2012, such criteria include, among others, that no call 
options will be written if the equity security price is less than 
$10, and no call options will be written at prices below $0.15. The 
Index Provider may amend the methodology from time to time. In such 
case, the methodology would be updated accordingly on the Web site.
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    The Exchange submitted this proposed rule change because the 
Underlying Indices for the Funds do not meet all of the ``generic'' 
listing requirements of Commentary .01(a)(A) to NYSE Arca Equities Rule 
5.2(j)(3) applicable to the listing of Investment Company Units based 
upon an index of ``US Component Stocks.'' \8\ Specifically, Commentary 
.01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) \9\ sets forth the 
requirements to be met by components of an index or portfolio of US 
Component Stocks. As described further below, each of the Underlying 
Indices consists of all the equity securities in one of the Reference 
Indices and short (written) call options on each of the option eligible 
securities in the relevant Reference Index that meet, among others, the 
stock and option price criteria of the Underlying Index methodology. 
All securities in the Reference Indices are listed and traded on a U.S. 
national securities exchange and the options on the option eligible 
securities of companies in the Reference Indices are traded on a U.S. 
national options exchange. The market value of the call options will 
not represent more than 10% of the total weight of any of the 
Underlying Indices. The Exchange has represented that the Underlying 
Indices meet all requirements of NYSE Arca Equities Rule 5.2(j)(3) and 
Commentary .01(a)(A) thereto, except that the Underlying Indices 
include call options, which are not NMS Stocks as defined in Rule 600 
of Regulation NMS.\10\
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    \8\ NYSE Arca Equities Rule 5.2(j)(3) provides that the term 
``US Component Stock'' shall mean an equity security that is 
registered under Sections 12(b) or 12(g) of the Exchange Act or an 
American Depositary Receipt, the underlying equity security of which 
is registered under Sections 12(b) or 12(g) of the Exchange Act.
    \9\ Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) 
states, in part, that the components of an index of US Component 
Stocks, upon the initial listing of a series of Units pursuant to 
Rule 19b-4(e) under the Exchange Act shall be NMS Stocks as defined 
in Rule 600 of Regulation NMS under the Exchange Act. See 17 CFR 
242.600(b)(47) (defining ``NMS Stock'' as any NMS Security other 
than an option).
    \10\ See id.
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Horizons S&P 500 Covered Call ETF

    The Horizons S&P 500 Covered Call ETF will seek investment results 
that, before fees and expenses, generally correspond to the performance 
of the Fund's Underlying Index, which is the S&P 500 Stock Covered Call 
Index. The Fund seeks correlation of 0.95 or better between its 
performance and the performance of its Underlying Index. A figure of 
1.00 would represent perfect correlation. As described below, the 
Underlying Index is comprised of all the equity securities \11\ in the 
Fund's Reference Index, which is the S&P 500 Index, and short (written) 
call options on each of the option eligible securities in the Reference 
Index that meet, among others, the stock and option price criteria of 
the Underlying Index methodology.\12\ The Fund will invest at least 80% 
of its total assets in securities that comprise its Underlying Index.
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    \11\ ``Equity securities'' includes all U.S. common equities 
listed on the Exchange, the New York Stock Exchange, NYSE MKT, the 
NASDAQ Global Select Market, the NASDAQ Select Market, and the 
NASDAQ Capital Market. Business development companies and real 
estate investment trusts (``REITs'') are eligible for inclusion as 
equity securities, with the exception of mortgage REITs.
    \12\ See note 7, supra.
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    The Reference Index for the Fund is a float-adjusted market 
capitalization weighted index containing equity securities of 500 
industrial, information technology, utility, and financial companies 
amongst other Global Industry Classification Standard 
(``GICS[supreg]'') sectors, regarded as generally representative of the 
U.S. stock market. A float-adjusted market capitalization weighted 
index weights each index component according to its market 
capitalization, using the number of shares that are readily available 
for purchase on the open market.
    The Underlying Index for the Fund measures the performance of a

[[Page 6163]]

hypothetical portfolio that employs a covered call strategy. It 
consists of long positions in companies in the Reference Index and out-
of-the-money call options \13\ that are written (sold) systematically 
on the option eligible securities of companies in the Reference Index 
that meet, among others, the stock and option price criteria of the 
Underlying Index methodology.
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    \13\ An ``out-of-the-money'' call option is one in which the 
exercise (or ``strike'') price of the option is above the market 
price of the security.
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    The Fund will be an index fund that employs a ``passive 
management'' investment strategy in seeking to achieve its objective. 
The Adviser's strategy will consist of holding an equity portfolio 
indexed to the Reference Index and writing (selling) covered call 
options on these equity securities, which options will be indexed to 
the Underlying Index, generally one standard deviation ``out-of-the-
money.'' \14\ Options are written systematically ``out-of-the-money'' 
in accordance with the index methodology based on the prevailing 
individual level of volatility for each of the equity securities. The 
Underlying Index provides a benchmark measure of the total return of 
this hypothetical portfolio.
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    \14\ A covered call strategy is generally considered to be an 
investment strategy in which an investor buys a security, and sells 
a call option that corresponds to the security. In return for a 
premium, the Fund will give the purchaser of the option written by 
the Fund either the right to buy the security from the Fund at an 
exercise price or the right to receive a cash payment equal to the 
difference between the value of the security and the exercise (or 
``strike'') price, if the value is above the exercise price on or 
before the expiration date of the option. In addition, the covered 
call options hedge against a decline in the price of the securities 
on which they are written to the extent of the premium the Fund 
receives. A covered call strategy is generally used in a neutral-to-
bullish market environment, where a slow and steady rise in market 
prices is anticipated.
---------------------------------------------------------------------------

    Because a covered call strategy generates income in the form of 
premiums on the written options, the Underlying Index is generally 
expected to provide higher total returns with lower volatility than the 
Reference Index in most market environments, with the exception of when 
the equity market is rallying rapidly. The options in the Underlying 
Index will be traded on national securities exchanges. As of August 31, 
2012, the Reference Index and Underlying Index included common stocks 
of 500 companies, 499 of which are option eligible, with a market 
capitalization range of between approximately $1 billion and $622 
billion. As of that date, the Underlying Index also included short 
(written) call options on 434 option eligible securities of the 
Reference Index, representing 0.6% of the total weight \15\ of the 
Underlying Index.
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    \15\ This calculation is based on the absolute value of the 
short call option position which has a negative mark-to-market 
value.
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    The Fund will generally use a replication methodology, meaning it 
will invest in all of the securities comprising the Underlying Index in 
proportion to the weightings in the Underlying Index. However, the Fund 
may from time-to-time utilize a sampling methodology under various 
circumstances where it may not be possible or practicable to purchase 
all of the equity securities and write (sell) all of the call options 
comprising the Underlying Index.
    The Fund will concentrate its investments (i.e., hold 25% or more 
of its total assets) in a particular industry or group of industries to 
approximately the same extent that the Underlying Index is so 
concentrated. The Fund will be non-diversified under the 1940 Act and, 
therefore, may invest a greater percentage of its assets in a 
particular issue in comparison to a ``diversified'' fund. Moreover, in 
pursuing its objective, the Fund may hold the securities of a single 
issuer in an amount exceeding 10% of the outstanding voting securities 
of the issuer, subject to restrictions imposed by the Internal Revenue 
Code of 1986, as amended (``Code'').

Horizons S&P Financial Select Sector Covered Call ETF

    The Horizons S&P Financial Select Sector Covered Call ETF will seek 
investment results that, before fees and expenses, generally correspond 
to the performance of the Fund's Underlying Index, which is the S&P 500 
Financial Select Sector Stock Covered Call Index. The Fund seeks 
correlation of 0.95 or better between its performance and the 
performance of its Underlying Index. A figure of 1.00 would represent 
perfect correlation. As described below, the Underlying Index is 
comprised of all the equity securities \16\ in the Fund's Reference 
Index, which is the S&P Financial Select Sector Index, and short 
(written) call options on the option eligible securities of companies 
in the Reference Index that meet, among others, the stock and option 
price criteria of the Underlying Index methodology.\17\ The Fund will 
invest at least 80% of its total assets in the securities that comprise 
its Underlying Index.
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    \16\ See note 11, supra.
    \17\ See note 7, supra.
---------------------------------------------------------------------------

    The Reference Index for the Fund is a rules-based, modified market 
capitalization weighted index that is designed to track the movements 
of public companies that are components of the S&P 500 Index and are 
classified in the GICS[supreg] sector, Financials. A modified market 
capitalization weighted index first weights each index component 
according to its market capitalization, using the number of shares that 
are readily available for purchase on the open market, then imposes 
limits on the weight of individual index components and redistributes 
any excess weight across the remaining index components. A wide array 
of diversified financial service firms are featured in this sector with 
business lines ranging from investment management to commercial and 
investment banking.
    The Underlying Index for the Fund measures the performance of a 
hypothetical portfolio that employs a covered call strategy. It 
consists of long positions in companies in the Reference Index and out-
of-the-money call options \18\ that are written (sold) systematically 
on the option eligible securities of companies in the Reference Index 
that meet, among others, the stock and option price criteria of the 
Underlying Index methodology.
---------------------------------------------------------------------------

    \18\ See note 13, supra.
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    The Fund will be an index fund that employs a ``passive 
management'' investment strategy in seeking to achieve its objective. 
The Adviser's strategy will consist of holding an equity portfolio 
indexed to the Reference Index and writing (selling) covered call 
options on these equity securities indexed to the Underlying Index, 
which options will be generally one standard deviation ``out-of-the-
money.'' \19\ Options are written systematically ``out-of-the-money'' 
in accordance with the index methodology based on the prevailing 
individual level of volatility for each of the equity securities. The 
Underlying Index provides a benchmark measure of the total return of 
this hypothetical portfolio.
---------------------------------------------------------------------------

    \19\ See note 14, supra.
---------------------------------------------------------------------------

    Because a covered call strategy generates income in the form of 
premiums on the written options, the Underlying Index is generally 
expected to provide higher total returns with lower volatility than the 
Reference Index in most market environments, with the exception of when 
the equity market is rallying rapidly. The options in the Underlying 
Index will be traded on national securities exchanges. As of August 31, 
2012, the Reference Index and Underlying Index included common stocks 
of 81 companies, of

[[Page 6164]]

which all 81 are option eligible, with a market capitalization range of 
between approximately $2 billion and $181 billion. As of that date, the 
Underlying Index also included short (written) call options on 65 
option eligible securities of the Reference Index, representing 0.7% of 
the total weight \20\ of the Underlying Index.
---------------------------------------------------------------------------

    \20\ See note 15, supra.
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    The Fund will generally use a replication methodology, meaning it 
will invest in all of the securities comprising the Underlying Index in 
proportion to the weightings in the Underlying Index. However, the Fund 
may from time-to-time utilize a sampling methodology under various 
circumstances where it may not be possible or practicable to purchase 
all of the equity securities and write (sell) all of the call options 
comprising the Underlying Index.
    The Fund will concentrate its investments (i.e., hold 25% or more 
of its total assets) in a particular industry or group of industries to 
approximately the same extent that the Underlying Index is so 
concentrated. The Fund will be non-diversified under the 1940 Act and, 
therefore, may invest a greater percentage of its assets in a 
particular issue in comparison to a ``diversified'' fund. Moreover, in 
pursuing its objective, the Fund may hold the securities of a single 
issuer in an amount exceeding 10% of the outstanding voting securities 
of the issuer, subject to restrictions imposed by the Code.

Horizons S&P Energy Select Sector Covered Call ETF

    The Horizons S&P Energy Select Sector Covered Call ETF will seek 
investment results that, before fees and expenses, generally correspond 
to the performance of the Fund's Underlying Index, which is the S&P 500 
Energy Select Sector Stock Covered Call Index. The Fund seeks 
correlation of 0.95 or better between its performance and the 
performance of its Underlying Index. A figure of 1.00 would represent 
perfect correlation. As described below, the Underlying Index is 
comprised of all the equity securities \21\ in the Fund's Reference 
Index, which is the S&P Energy Select Sector Index, and short (written) 
call options on the option eligible securities of companies in the 
Reference Index that meet, among others, the stock and option price 
criteria of the Underlying Index methodology.\22\ The Fund will invest 
at least 80% of its total assets in the securities that comprise its 
Underlying Index.
---------------------------------------------------------------------------

    \21\ See note 11, supra.
    \22\ See note 7, supra.
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    The Reference Index for the Fund is a rules-based, modified market 
capitalization weighted index that is designed to track the movements 
of public companies that are components of the S&P 500 Index and are 
classified in the GICS[supreg] sector, Energy. A modified market 
capitalization weighted index first weights each index component 
according to its market capitalization, using the number of shares that 
are readily available for purchase on the open market, then imposes 
limits on the weight of individual index components and redistributes 
any excess weight across the remaining index components. Energy 
companies in this sector primarily develop and produce crude oil and 
natural gas, and provide drilling and other energy-related services.
    The Underlying Index for the Fund measures the performance of a 
hypothetical portfolio that employs a covered call strategy. It 
consists of long positions in companies in the Reference Index and out-
of-the-money call options \23\ that are written (sold) systematically 
on the option eligible securities of companies in the Reference Index 
that meet, among others, the stock and option price criteria of the 
Underlying Index methodology.
---------------------------------------------------------------------------

    \23\ See note 13, supra.
---------------------------------------------------------------------------

    The Fund will be an index fund that employs a ``passive 
management'' investment strategy in seeking to achieve its objective. 
The Adviser's strategy will consist of holding an equity portfolio 
indexed to the Reference Index and writing (selling) covered call 
options on these equity securities, which options will be indexed to 
the Underlying Index, generally one standard deviation ``out-of-the-
money.'' \24\ Options are written systematically ``out-of-the-money'' 
in accordance with the index methodology based on the prevailing 
individual level of volatility for each of the equity securities. The 
Underlying Index provides a benchmark measure of the total return of 
this hypothetical portfolio.
---------------------------------------------------------------------------

    \24\ See note 14, supra.
---------------------------------------------------------------------------

    Because a covered call strategy generates income in the form of 
premiums on the written options, the Underlying Index is generally 
expected to provide higher total returns with lower volatility than the 
Reference Index in most market environments, with the exception of when 
the equity market is rallying rapidly. The options in the Underlying 
Index will be traded on national securities exchanges. As of August 31, 
2012, the Reference Index and Underlying Index included common stocks 
of 45 companies, of which all 45 are option eligible, with a market 
capitalization range of between approximately $1 billion and $276 
billion. As of that date, the Underlying Index also included short 
(written) call options on 42 option eligible securities of the 
Reference Index, representing 0.6% of the total weight \25\ of the 
Underlying Index.
---------------------------------------------------------------------------

    \25\ See note 15, supra.
---------------------------------------------------------------------------

    The Fund generally will use a replication methodology, meaning it 
will invest in all of the securities comprising the Underlying Index in 
proportion to the weightings in the Underlying Index. However, the Fund 
may from time to time utilize a sampling methodology under various 
circumstances where it may not be possible or practicable to purchase 
all of the equity securities and write (sell) all of the call options 
comprising the Underlying Index.
    The Fund will concentrate its investments (i.e., hold 25% or more 
of its total assets) in a particular industry or group of industries to 
approximately the same extent that the Underlying Index is so 
concentrated. The Fund will be non-diversified under the 1940 Act and, 
therefore, may invest a greater percentage of its assets in a 
particular issue in comparison to a ``diversified'' fund. Moreover, in 
pursuing its objective, the Fund may hold the securities of a single 
issuer in an amount exceeding 10% of the outstanding voting securities 
of the issuer, subject to restrictions imposed by the Code.

Investment Guidelines

    Each Fund will write (sell) call options on the option eligible 
securities of companies in its Reference Index to the same extent as 
such short call options are included in its Underlying Index. The Funds 
will utilize options in accordance with Rule 4.5 of the Commodity 
Exchange Act (``CEA''). The Trust, on behalf of the Funds, has filed a 
notice of eligibility for exclusion from the definition of the term 
``commodity pool operator'' in accordance with Rule 4.5 so that the 
Funds are not subject to registration or regulation as a commodity pool 
operator under the CEA.

Other Investments

    Each Fund may invest in short-term instruments, including money 
market instruments, on an ongoing basis to provide liquidity for cash 
equitization, funding, or under abnormal market conditions. Money 
market instruments

[[Page 6165]]

are generally short-term investments that may include but are not 
limited to: (i) Shares of money market funds; (ii) obligations issued 
or guaranteed by the U.S. government, its agencies or instrumentalities 
(including government-sponsored enterprises); (iii) negotiable 
certificates of deposit, bankers' acceptances, fixed time deposits, and 
other obligations of U.S. and foreign banks (including foreign 
branches) and similar institutions; (iv) commercial paper rated at the 
date of purchase ``Prime-1'' by Moody's or ``A-1'' by S&P, or if 
unrated, of comparable quality as determined by the Sub-Adviser; (v) 
non-convertible corporate debt securities (e.g., bonds and debentures) 
with remaining maturities at the date of purchase of not more than 397 
days and that satisfy the rating requirements set forth in Rule 2a-7 
under the 1940 Act; and (vi) short-term U.S. dollar-denominated 
obligations of foreign banks (including U.S. branches) that, in the 
opinion of the Sub-Adviser, are of comparable quality to obligations of 
U.S. banks which may be purchased by a Fund. Any of these instruments 
may be purchased on a current or a forward-settled basis.
    Each Fund may invest in the securities of other investment 
companies, subject to applicable limitations under Section 12(d)(1) of 
the 1940 Act.
    A 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. The Funds will monitor their portfolio 
liquidity on an ongoing basis to determine whether, in the 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 a Fund's net assets are held 
in illiquid securities and other illiquid assets.
    Each Fund will seek to qualify for treatment as a regulated 
investment company under the Code.
    Additional information regarding the Trust, the Funds, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statement, as applicable.\26\
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    \26\ See Notice and Registration Statement, supra notes 3 and 4.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \27\ and the rules and regulations thereunder applicable to a 
national securities exchange.\28\ In particular, the Commission finds 
that the proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act,\29\ 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 Funds and the Shares 
must comply with the applicable requirements of NYSE Arca Equities 
Rules 5.2(j)(3) and 5.5(g)(2) to be listed and traded on the Exchange.
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    \27\ 15 U.S.C. 78f.
    \28\ 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).
    \29\ 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,\30\ 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. The intra-day, closing, and 
settlement prices of the portfolio securities held by the Funds will be 
readily available from the securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, or on-line information services such as Bloomberg or Reuters. 
The value of each Underlying Index will be widely disseminated by one 
or more major market data vendors at least every 15 seconds during the 
NYSE Arca Core Trading Session (9:30 a.m. to 4:00 p.m., Eastern Time), 
and information regarding the components of each Reference Index and 
Underlying Index and their percentage weightings will be available from 
the Index Provider and major market data vendors. In addition, 
quotation and last-sale information for the components of the 
Underlying Indices and Reference Indices will be available from the 
exchanges on which they trade. An indicative optimized portfolio value 
(``IOPV'') for the Shares for each Fund will be widely disseminated at 
least every 15 seconds during the NYSE Arca Core Trading Session by one 
or more major market data vendors.\31\ On each business day, prior to 
commencement of trading of the Shares in the Core Trading Session on 
the Exchange, the Funds will disclose on their Web site the securities 
and financial instruments in each Fund's portfolio that will form the 
basis for each Fund's calculation of net asset value (``NAV'') at the 
end of the business day.\32\ Each Fund's NAV will be determined as of 
the close of the New York Stock Exchange (``NYSE'') (normally 4:00 
p.m., Eastern Time) on each day the NYSE is open for trading. Each 
Fund, through the National Securities Clearing Corporation, will make 
publicly available on each business day, prior to the opening of 
business on the Exchange (currently 9:30 a.m., Eastern Time), a basket 
composition file for each Fund, which includes the security names and 
share quantities required to be delivered in exchange for that Fund's 
Shares, together with estimates and actual cash components, which 
basket will represent one Creation Unit of the relevant Fund.\33\ 
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, and 
information regarding the previous day's closing price and trading 
volume for the Shares will be published daily in the financial section 
of newspapers. The Adviser's

[[Page 6166]]

Web site will also include a form of the prospectus for the Funds, 
information relating to NAV (updated daily), and other quantitative and 
trading information.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \31\ See NYSE Arca Equities Rule 5.2(j)(3), Commentaries 
.01(b)(2) and .01(c). According to the Exchange, several major 
market data vendors widely disseminate IOPVs taken from the CTA or 
other data feeds. See Notice, supra note 3, at 73505.
    \32\ On a daily basis, each Fund will disclose for each 
portfolio security and other financial instrument of the Fund the 
following information on the Funds' Web site: ticker symbol (if 
applicable), name of securities and financial instruments, number of 
shares or dollar value of securities and financial instruments held 
in the portfolio, and percentage weighting of the securities and 
financial instruments in the portfolio. The Web site information 
will be publicly available at no charge.
    \33\ A Creation Unit of each Fund will consist of at least 
50,000 Shares, and will be issued and redeemed for securities in 
which the Fund invests, cash, or both securities and cash.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The 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 will be made available to all market 
participants at the same time.\34\ If the IOPV or the relevant 
Underlying Index value of a Fund is not being disseminated as required, 
the Exchange may halt trading during the day in which the disruption 
occurs. If the interruption to the dissemination of the applicable IOPV 
or Underlying Index value persists past the trading day in which it 
occurred, the Exchange will halt trading.\35\ In addition, if the 
Exchange becomes aware that the NAV of a Fund is not being disseminated 
to all market participants at the same time, it will halt trading in 
the Shares of such Fund on the Exchange until such time as the NAV is 
available to all market participants. The Exchange states that it has a 
general policy prohibiting the distribution of material, non-public 
information by its employees. The Exchange states that the Adviser and 
the Sub-Adviser are affiliated with broker-dealers and have implemented 
a fire wall with respect to their respective broker-dealer affiliates 
regarding access to information concerning the portfolio holdings of 
the Funds.\36\ The Exchange further states that the Index Provider is 
neither a broker-dealer nor affiliated with a broker-dealer, and has 
implemented procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Underlying Indices. The 
Commission notes that the Exchange would be able to obtain information 
with respect to the equity securities and options comprising the 
Underlying Indices and which will be held by the Funds because such 
equity securities and options will be listed and traded on U.S. 
national securities exchanges, all of which are members of the 
Intermarket Surveillance Group (``ISG'').
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    \34\ See NYSE Arca Equities Rule 5.2(j)(3)(A)(v).
    \35\ 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 a Fund. Trading in Shares of a 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. These may include: (1) the extent 
to which trading is not occurring in the securities and/or the 
financial instruments comprising the relevant Fund's portfolio; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.
    \36\ See notes 5 and 6, supra. The Commission also 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 Sub-Adviser and their 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 continued listing standards under NYSE Arca Equities Rules 
5.2(j)(3) and 5.5(g)(2) applicable to Investment Company Units shall 
apply to the 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 Investment Company Units, 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. All equity securities and options comprising 
the Underlying Indices are listed and traded on U.S. exchanges, which 
are members of ISG.
    (4) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders (``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 IOPV will not be calculated or publicly 
disseminated; (d) how information regarding the IOPV 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) The market value of the call options included in each 
Underlying Index will not represent more than 10% of the total weight 
of each Underlying Index. Each call option included in each Underlying 
Index must meet the criteria of the Underlying Index methodology, which 
methodology is publicly available.
    (6) Each Fund seeks a correlation over time of 0.95 or better 
between the Fund's performance and the performance of its Underlying 
Index. A figure of 1.00 would represent perfect correlation.
    (7) A Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities.
    (8) Each Fund will invest at least 80% of its total assets in 
securities that comprise its applicable Underlying Index.
    (9) A minimum of 100,000 Shares for each Fund will be outstanding 
as of the start of trading on the Exchange.
    (10) For initial and continued listing, each Fund will be in 
compliance with Rule 10A-3 under the Act,\37\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \37\ 17 CFR 240.10A-3.
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    The Exchange further represents that the Funds and the Shares will 
comply with all other requirements applicable to Investment Company 
Units including, but not limited to, requirements relating to the 
dissemination of key information such as the value of the Underlying 
Indices, IOPV, and NAV, rules governing the trading of equity 
securities, trading hours, trading halts, surveillance, information 
barriers, and Information Bulletin to ETP Holders (each as described in 
more detail herein and in the Notice), as set forth in Exchange rules 
applicable to Investment Company

[[Page 6167]]

Units and prior Commission orders approving the listing rules 
applicable to the listing and trading of Investment Company Units. This 
approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Funds.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \38\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \38\ 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,\39\ that the proposed rule change (SR-NYSEArca2012-131) be, and it 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).
    \40\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01811 Filed 1-28-13; 8:45 am]
BILLING CODE 8011-01-P