Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change To List and Trade First Trust Preferred Securities and Income ETF Under NYSE Arca Equities Rule 8.600, 11245-11249 [2013-03489]
Download as PDF
<![CDATA[
Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2013–018 on the
subject line.
Paper Comments
mstockstill on DSK4VPTVN1PROD with NOTICES
• 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–CBOE–2013–018. 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
filing also will be available for
inspection and copying at CBOE’s
principal office. 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–CBOE–
2013–018, and should be submitted on
or before March 8, 2013
VerDate Mar<15>2010
19:09 Feb 14, 2013
Jkt 229001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–03570 Filed 2–14–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68870; File No. SR–
NYSEArca–2012–139]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change To List and
Trade First Trust Preferred Securities
and Income ETF Under NYSE Arca
Equities Rule 8.600
February 8, 2013.
I. Introduction
On December 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’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the First Trust Preferred
Securities and Income ETF (‘‘Fund’’)
under NYSE Arca Equities Rule 8.600.
The proposed rule change was
published in the Federal Register on
December 26, 2012.3 The Commission
received no comments on the proposal.
This order grants approval of the
proposed rule change.
II. Description of the Proposal
The Exchange proposes to list and
trade the 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 First Trust
Exchange-Traded Fund III (‘‘Trust’’),
which is organized as a Massachusetts
business trust and is registered with the
Commission as an open-end
management investment company.4 The
11 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. 68458
(December 18, 2012), 77 FR 76148 (‘‘Notice’’).
4 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). On September
23, 2011, the Trust filed with the Commission a
registration statement on Form N–1A under the
Securities Act of 1933 and under the 1940 Act
relating to the Fund (File Nos. 333–176976 and
811–22245) (‘‘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.
30029 (April 10, 2012) (File No. 812–13795)
(‘‘Exemptive Order’’).
1 15
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
11245
investment adviser to the Fund is First
Trust Advisors L.P. (‘‘Adviser’’).
Stonebridge Advisors LLC will serve as
investment sub-adviser to the Fund
(‘‘Sub-Adviser’’) and will provide dayto-day portfolio management of the
Fund. First Trust Portfolios L.P.
(‘‘Distributor’’) will be the principal
underwriter and distributor of the
Fund’s Shares. Brown Brothers
Harriman & Co. will serve as
administrator, custodian, and transfer
agent for the Fund. The Exchange states
that each of the Adviser and SubAdviser is affiliated with a broker-dealer
and represents that each such Adviser
and Sub-Adviser has implemented a fire
wall with respect to its respective
broker-dealer affiliate regarding access
to information concerning the
composition of and changes to the
Fund’s portfolio.5
Description of the Fund
The Fund’s objective will be to
provide current income and total return.
Under normal market conditions,6 the
Fund will invest at least 80% of its net
assets (including investment
borrowings) in preferred securities
(‘‘Preferred Securities’’) and incomeproducing debt securities (‘‘Income
Securities’’).7 The Adviser represents
5 See Commentary .06 to NYSE Arca Equities
Rule 8.600. The Exchange represents that, in the
event (a) the Adviser or the 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 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 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the equity
markets or the financial markets generally;
operational issues causing dissemination of
inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
7 The Exchange states that the risks and potential
rewards of investing in the Fund may at times be
similar to the risks and potential rewards of
investing in both equity funds and bond funds.
Certain of the Preferred Securities in which the
Fund will invest will be traditional preferred stocks
that issue dividends that qualify for the dividend
received deduction under which ‘‘qualified’’
domestic corporations are able to exclude a
percentage of the dividends received from their
taxable income. Certain of the Preferred Securities
in which the Fund will invest will be preferred
stock that does not issue dividends that qualify for
the dividends received deduction for eligible
investors (‘‘non-DRD preferred stock’’) that do not
qualify for the dividends received deduction or
issue qualified dividend income. As described in
the Registration Statement, hybrid preferred
securities, another type of Preferred Securities, are
typically junior and fully subordinated liabilities of
E:\FR\FM\15FEN1.SGM
Continued
15FEN1
11246
Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Notices
mstockstill on DSK4VPTVN1PROD with NOTICES
that initially at least 50% of the Fund’s
net assets invested in Preferred
Securities and 50% of the Income
Securities held by the Fund will be
exchange-listed.8 However, the Fund
reserves the right to reduce the
percentage of assets that are exchangelisted. Preferred Securities held by the
Fund generally pay fixed or adjustablerate distributions to investors and have
preference over common stock in the
payment of distributions and the
liquidation of a company’s assets, but
are generally junior to all forms of the
company’s debt, including both senior
and subordinated debt. For purposes of
the 80% test set forth above, Income
Securities consist of both foreign and
domestic debt instruments, including
corporate bonds, high yield bonds,
convertible securities, and contingent
convertible capital securities. In
addition, for purposes of the 80% test
set forth above, securities of other openend funds, closed-end funds, or
exchange-traded funds (‘‘ETFs’’)
registered under the 1940 Act 9 that
invest primarily in Preferred Securities
or Income Securities will be deemed to
be Preferred Securities or Income
Securities, respectively. The Adviser
represents that at least 80% of the
Preferred Securities and Income
Securities held by the Fund will have a
minimum original principal amount
outstanding of $100 million or more. In
addition, the Fund’s portfolio will
comprise a minimum of 13 nonaffiliated issuers.
As stated above, the Fund may invest
in a variety of debt securities, including
corporate debt securities.10 The broad
an issuer or the beneficiary of a guarantee that is
junior and fully subordinated to the other liabilities
of the guarantor.
8 The foreign equity securities, including
preferred, hybrid-preferred, and contingent
convertible capital, securities in which the Fund
may invest will be limited to securities that trade
in markets that are members of the Intermarket
Surveillance Group (‘‘ISG’’), which includes all U.S.
national securities exchanges and certain foreign
exchanges, or are parties to a comprehensive
surveillance sharing agreement with the Exchange.
9 For purposes of this filing, ETFs, which will be
listed on a national securities exchange, include the
following: Investment Company Units (as described
in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); and Managed Fund Shares (as
described in NYSE Arca Equities Rule 8.600). The
Fund may invest in the securities of ETFs in excess
of the limits imposed under the 1940 Act pursuant
to exemptive orders obtained by certain ETFs and
their sponsors from the Commission. The Exchange
states that the Fund will not invest in leveraged,
inverse, or leveraged inverse ETFs.
10 As described in the Registration Statement,
corporate debt securities are fixed-income securities
issued by businesses to finance their operations.
Notes, bonds, debentures, and commercial paper
are the most common types of corporate debt
securities, with the primary difference being their
VerDate Mar<15>2010
19:09 Feb 14, 2013
Jkt 229001
category of corporate debt securities
includes debt issued by U.S. and nonU.S. companies of all kinds, including
those with small-, mid-, and largecapitalizations.11 Corporate debt may
carry fixed or floating rates of interest.
Initially, the Fund will invest at least
80% of the Fund’s net assets in Income
Securities of issuing firms (‘‘issuers’’)
that have a long-term issuer credit rating
of investment grade at the time of the
investment. However, the Fund reserves
the right to reduce the percentage of
assets invested in investment grade
issuers. ‘‘Investment grade’’ is defined
as those issuers that have a long-term
credit rating of ‘‘BBB¥’’ or higher by
Standard & Poor’s Rating Group, a
division of McGraw Hill Companies,
Inc. (‘‘S&P’’); ‘‘Baa3’’ or higher by
Moody’s Investors Service, Inc.
(‘‘Moody’s’’); or a comparable rating by
another nationally recognized statistical
rating organization (‘‘NRSRO’’). The
Fund may also invest in securities that
are unrated by an NRSRO if such
securities are of comparable credit
quality. Comparable credit quality of
securities that are unrated by an NRSRO
will be determined by the Sub-Adviser
based on fundamental credit analysis of
the unrated issuer and comparable
NRSRO-rated peer issuers of the same
industry sector. On a best efforts basis,
the Sub-Adviser will attempt to make a
rating determination based on publicly
available data. Factors taken into
consideration in determining the
comparable credit quality of the unrated
issuer will be company leverage, capital
structure, liquidity, funding,
sustainability of cash flows, earnings
quality, market position, and asset
quality. In the event that a security is
rated by multiple NRSROs and receives
divergent ratings, the Fund will treat the
issuer as being rated in the highest
rating category received from an
NRSRO.
Initially, the Fund may invest up to
20% of the Fund’s net assets in Income
Securities issued by below-investmentgrade issuers if such securities have
acceptable credit quality and attractive
relative value. However, the Fund
maturities and secured or unsecured status. Certain
debt securities held by the Fund may include debt
instruments that are similar in many respects to
preferred securities.
11 Under normal market conditions, at least 80%
of the Fund’s investments in U.S. corporate bonds
must have $100 million or more par amount
outstanding to be considered as an eligible
investment and a non-U.S. corporate bond must
have $200 million or more par amount outstanding
and significant par value traded to be considered as
an eligible investment. Economic and other
conditions may, from time to time, lead to a
decrease in the average par amount outstanding of
bond issuances.
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
reserves the right to increase the
percentage of assets invested in belowinvestment-grade securities. ‘‘Below
investment grade’’ is defined as those
issuers that have a long-term credit
rating of ‘‘BBB ¥ or lower by ‘‘S&P,’’
‘‘Baa3’’ or lower by Moody’s, or a
comparable rating by another NRSRO.
The Fund may also invest in securities
that are unrated by an NRSRO if such
securities are of comparable credit
quality as determined by the SubAdviser.
The Fund intends to invest at least
25% of its assets in securities of
financial companies. Financial
companies include, but are not limited
to, companies involved in activities
such as banking, mortgage finance,
consumer finance, specialized finance,
investment banking and brokerage, asset
management and custody, corporate
lending, insurance and financial
investment, and real estate, including
but not limited to real estate investment
trusts.
Other Investments of the Fund
While the Fund, under normal market
conditions, will invest at least 80% of
its net assets (including investment
borrowings) in Preferred Securities and
Income Securities, the Fund also may
invest the remainder of its assets in
other investments, as described below.
Normally, the Fund may invest up to
15% of its net assets in securities with
maturities of less than one year or cash
equivalents, or it may hold cash. The
percentage of the Fund invested in such
holdings will vary and depend on
several factors, including market
conditions. For temporary defensive
purposes and during periods of high
cash inflows or outflows, the Fund may
depart from its principal investment
strategies and invest part or all of its
assets in these securities or it may hold
cash. During such periods, the Fund
may not be able to achieve its
investment objective. The Fund may
adopt a defensive strategy when the
Sub-Adviser or the Adviser believes
securities in which the Fund normally
invests have elevated risks due to
political or economic factors and in
other extraordinary circumstances.
The Fund may also invest in U.S.
government securities 12 or short-term
12 U.S. government securities include U.S.
Treasury obligations and securities issued or
guaranteed by various agencies of the U.S.
government, or by various instrumentalities which
have been established or sponsored by the U.S.
government. U.S. treasury obligations are backed by
the ‘‘full faith and credit’’ of the U.S. government.
Securities issued or guaranteed by federal agencies
and U.S. government sponsored instrumentalities
may or may not be backed by the full faith and
credit of the U.S. government.
E:\FR\FM\15FEN1.SGM
15FEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Notices
debt securities to keep cash on hand
fully invested or for temporary
defensive purposes. The use of
temporary investments is not a part of
the principal investment strategy of the
Fund. Short-term debt securities are
securities from issuers having a longterm debt rating of at least A by S&P,
Moody’s, or Fitch, Inc. and having a
maturity of one year or less. Short-term
debt securities are defined to include,
without limitation, the following:
(1) U.S. government securities,
including bills, notes, and bonds
differing as to maturity and rates of
interest, which are either issued or
guaranteed by the U.S. treasury or by
U.S. government agencies or
instrumentalities.
(2) Certificates of deposit issued
against funds deposited in a bank or
savings and loan association. Such
certificates are for a definite period of
time, earn a specified rate of return, and
are normally negotiable. If such
certificates of deposit are nonnegotiable, they will be considered
illiquid securities and be subject to the
Fund’s 15% restriction on investments
in illiquid securities.
(3) Bankers’ acceptances, which are
short-term credit instruments used to
finance commercial transactions.
(4) Repurchase agreements, which
involve purchases of debt securities. In
such an action, at the time the Fund
purchases the security, it
simultaneously agrees to resell and
redeliver the security to the seller, who
also simultaneously agrees to buy back
the security at a fixed price and time.
(5) Bank time deposits, which are
monies kept on deposit with banks or
savings and loan associations for a
stated period of time at a fixed rate of
interest.
(6) Commercial paper, which are
short-term unsecured promissory notes,
including variable rate master demand
notes issued by corporations to finance
their current operations. Master demand
notes are direct lending arrangements
between the Fund and a corporation.
There is no secondary market for the
notes, and they will be considered
illiquid securities and be subject to the
Fund’s 15% restriction on investments
in illiquid securities. However, they are
redeemable by the Fund at any time.
The Fund’s Sub-Adviser will consider
the financial condition of the
corporation (e.g., earning power, cash
flow, and other liquidity ratios) and will
continuously monitor the corporation’s
ability to meet all of its financial
obligations, because the Fund’s liquidity
might be impaired if the corporation
were unable to pay principal and
interest on demand. The Fund may only
VerDate Mar<15>2010
19:09 Feb 14, 2013
Jkt 229001
invest in commercial paper rated A–2 or
higher by S&P, Prime-2 or higher by
Moody’s, or F2 or higher by Fitch, Inc.
The Fund may also invest in senior
loans, second lien loans, loan
participations, payment-in-kind
securities, zero coupon bonds, bank
certificates of deposit, fixed-time
deposits, bankers’ acceptances, U.S.
government securities, or fixed income
securities issued by non-U.S.
governments denominated in U.S.
dollars.
The Fund may invest in warrants.
Warrants acquired by the Fund entitle it
to buy common stock from the issuer at
a specified price and time. They do not
represent ownership of the securities
but only the right to buy them. Warrants
are subject to the same market risks as
stocks, but may be more volatile in
price. The Fund’s investment in
warrants will not entitle it to receive
dividends or exercise voting rights and
will become worthless if the warrants
cannot be profitably exercised before
their expiration date.
The Fund may invest in other pooled
investment vehicles and business
development companies that are
exchange listed and that invest
primarily in securities of the types in
which the Fund may invest directly.
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 (1) nonnegotiable certificates of deposit and
master demand notes, (2) Rule 144A
securities, and (3) senior loans, second
lien loans, and loan participation
interests. 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. Illiquid securities
include securities subject to contractual
or other restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund will be classified as ‘‘nondiversified’’ under the 1940 Act and as
a result may invest a relatively high
percentage of its assets in a limited
number of issuers. The Fund will only
be limited as to the percentage of its
assets which may be invested in the
securities of any one issuer by the
diversification requirements imposed by
the Internal Revenue Code of 1986, as
amended (‘‘Code’’). Other than financial
companies, the Fund may not invest
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
11247
25% or more 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. In addition, the Fund
intends to qualify annually and to elect
to be treated as a regulated investment
company under the Code.
Consistent with the Exemptive Order,
the Fund will not invest in options
contracts, futures contracts, or swap
agreements. The Fund will not take
short positions in securities. The Fund’s
investments will be consistent with the
Fund’s investment objective and will
not be used to enhance leverage.
The Exchange represents that that the
Shares will conform to the initial and
continued listing criteria under NYSE
Arca Equities Rule 8.600. The Exchange
further represents that, for initial and/or
continued listing, the Fund will be in
compliance with Rule 10A–3 under the
Act,13 as provided by NYSE Arca
Equities Rule 5.3. A minimum of
100,000 Shares will be outstanding at
the commencement of trading on the
Exchange. The Exchange will obtain a
representation from the issuer of the
Shares that the net asset value (‘‘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.
Additional information regarding the
Trust, the Fund, 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.14
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 15
and the rules and regulations
thereunder applicable to a national
securities exchange.16 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,17 which requires, among other
things, that the Exchange’s rules be
designed to promote just and equitable
principles of trade, to remove
13 17
CFR 240.10A–3.
Notice and Registration Statement, supra
notes 3 and 4, respectively.
15 15 U.S.C. 78f.
16 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
17 15 U.S.C. 78f(b)(5).
14 See
E:\FR\FM\15FEN1.SGM
15FEN1
11248
Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Notices
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’ 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, information regarding
the intra-day value of the Shares
(‘‘indicative optimized portfolio value’’
or ‘‘IOPV’’), which is the Portfolio
Indicative Value, as defined in NYSE
Arca Equities Rule 8.600(c)(3), will be
widely disseminated by one or more
major market data vendors at least every
15 seconds during the Core Trading
Session.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), that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.20 The Fund’s
NAV will be determined as of the close
of trading (normally 4:00 p.m., Eastern
Time) on each day the New York Stock
Exchange (‘‘NYSE’’) is open for
business.21 A basket composition file,
18 15
U.S.C. 78k–1(a)(1)(C)(iii).
to the Exchange, several major
market data vendors display and/or make widely
available IOPVs published on the CTA or other data
feeds.
20 On a daily basis, the Adviser will disclose for
each portfolio security or other financial instrument
of the Fund the following information: Ticker
symbol (if applicable); name of security and
financial instrument; number of shares or dollar
value of securities and financial instruments held
in the portfolio; and percentage weighting of the
security and financial instrument in the portfolio.
21 The Exchange states that the price of a non-U.S.
security that is primarily traded on a non-U.S.
exchange shall be updated, using the last sale price,
every 15 seconds throughout the trading day,
provided, that upon the closing of such non-U.S.
exchange, the closing price of the security, after
being converted to U.S. dollars, will be used.
Furthermore, in calculating the IOPV of the Fund’s
Shares, exchange rates may be used throughout the
day (9:00 a.m. to 4:15 p.m., Eastern Time) that may
differ from those used to calculate the NAV per
Share of the Fund and consequently may result in
differences between the NAV and the IOPV.
mstockstill on DSK4VPTVN1PROD with NOTICES
19 According
VerDate Mar<15>2010
19:09 Feb 14, 2013
Jkt 229001
which includes the security names and
share quantities required to be delivered
in exchange for the Fund’s Shares,
together with estimates and actual cash
components, will be publicly
disseminated daily prior to the opening
of the NYSE via the National Securities
Clearing Corporation. 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
information for the Shares will be
published daily in the financial section
of newspapers. The intra-day, closing,
and settlement prices of the portfolio
securities and other instruments also
will be 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 also include a form
of the prospectus for the Fund,
information relating to NAV (updated
daily), and other quantitative and
trading 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.22 In
addition, the Exchange will halt trading
in the Shares under the specific
circumstances set forth in NYSE Arca
Equities Rule 8.600(d)(2)(D) and 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
market are present.23 Further, the
22 See
NYSE Arca Equities Rule 8.600(d)(1)(B).
NYSE Arca Equities Rules 8.600(d)(2)(C)
and 8.600(d)(2)(D). 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
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
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.24 The Exchange states that it
has a general policy prohibiting the
distribution of material, non-public
information by its employees. Moreover,
the Exchange states that the Adviser and
Sub-Adviser are each affiliated with a
broker-dealer, and represents that each
such Adviser and Sub-Adviser has
implemented a fire wall with respect to
its respective broker-dealer affiliate
regarding access to information
concerning the composition and/or
changes to the Fund’s portfolio.25 The
Exchange further represents that it is
able to obtain information via the ISG
from other exchanges that are ISG
members, including all U.S. national
securities exchanges, or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.26
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
24 See
NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
supra note 5 and accompanying text. 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.
26 As noted above, the foreign equity securities,
including preferred, hybrid-preferred, and
contingent convertible capital, securities in which
the Fund may invest will be limited to securities
that trade in markets that are members of ISG,
which includes all U.S. national securities
exchanges and certain foreign exchanges, or are
parties to a comprehensive surveillance sharing
agreement with the Exchange. See supra note 8. In
addition, ETFs in which the Fund may invest will
be listed on a national securities exchange. See
supra note 9.
25 See
E:\FR\FM\15FEN1.SGM
15FEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Notices
equity securities. In support of this
proposal, the Exchange has made
representations, including:
(1) The Shares will conform to the
initial and continued listing criteria
under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange’s surveillance
procedures 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 Unit aggregations (and that
Shares are not individually redeemable);
(b) NYSE Arca Equities Rule 9.2(a),
which imposes a duty of due diligence
on its ETP Holders to learn the essential
facts relating to every customer prior to
trading the Shares; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated 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) For initial and/or continued
listing, the Fund will be in compliance
with Rule 10A–3 under the Act,27 as
provided by NYSE Arca Equities Rule
5.3.
(6) Initially, at least 50% of the Fund’s
net assets invested in Preferred
Securities and Income Securities will be
exchange-listed.28 In addition, at least
80% of the Preferred Securities and
Income Securities held by the Fund will
have a minimum original principal
amount outstanding of $100 million or
more. Specifically with respect to
corporate bonds, under normal market
conditions, at least 80% of the Fund’s
investments in U.S. corporate bonds
must have $100 million or more par
amount outstanding to be considered as
an eligible investment, and a non-U.S.
corporate bond must have $200 million
or more par amount outstanding and
significant par value traded to be
considered as an eligible investment.
Further, the Fund’s portfolio will
comprise a minimum of 13 nonaffiliated issuers.
(7) The Fund will invest at least 80%
of its net assets in Income Securities of
issuing firms having a long-term issuer
credit rating of investment grade at the
time of investment.
(8) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities, including
non-negotiable certificates of deposit
and master demand notes; Rule 144A
securities; and senior loans, second lien
loans, and loan participation interests.
(9) The Fund will not: (a) Take short
positions in securities; and (b) pursuant
to the terms of the Exemptive Order,
invest in options contracts, futures
contracts, or swap agreements. In
addition, the Fund’s investments will be
consistent with its investment objective
and will not be used to enhance
leverage.
(10) 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.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 29 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,30 that the
proposed rule change (SR–NYSEArca–
2012–139) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–03489 Filed 2–14–13; 8:45 am]
BILLING CODE 8011–01–P
17 CFR 240.10A–3.
28 See supra note 26 and accompanying text.
VerDate Mar<15>2010
19:09 Feb 14, 2013
Jkt 229001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68879; File No. SR–CBOE–
2012–124]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change To Amend
Various CBOE Rules Governing
Letters of Guarantee and Authorization
February 8, 2013.
On December 14, 2012, the Chicago
Board Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’)1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend various CBOE Rules governing
letters of guarantee and authorization.
The proposed rule change was
published for comment in the Federal
Register on December 27, 2012.3 The
Commission did not receive any
comment letters on the proposal. This
order approves the proposed rule
change.
I. Description of the Proposal
As further described below, each
Trading Permit Holder (‘‘TPH’’) that has
trading functions on CBOE currently is
required to submit to CBOE a letter of
guarantee or authorization for its trading
activities on CBOE from a Clearing
Trading Permit Holder (‘‘Clearing
TPH’’). Typically, by a letter of
guarantee, the Clearing TPH guarantees
any trades made its TPH customer and,
by a letter of authorization, a Clearing
TPH accepts financial responsibility for
all transactions on CBOE made by a
guaranteed Floor Broker.
The purpose of the proposal is to
amend various CBOE rules governing
letters of guarantee and authorization to:
• Give CBOE the ability to prevent
access to its marketplace if a TPH does
not have an effective letter of guarantee
or authorization on file with the
Exchange;
• Provide that any written revocation
of a letter of guarantee or authorization
will be given effect as quickly as CBOE
can process it;
• Give CBOE the ability to take any
action necessary to give effect to actions
1 15
29 15
27 See
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
31 17 CFR 200.30–3(a)(12).
30 15
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
11249
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 68487
(December 20, 2012), 77 FR 76320
(‘‘Notice’’).
2 17
E:\FR\FM\15FEN1.SGM
15FEN1
]]>Agencies
[Federal Register Volume 78, Number 32 (Friday, February 15, 2013)]
[Notices]
[Pages 11245-11249]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03489]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68870; File No. SR-NYSEArca-2012-139]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change To List and Trade First Trust
Preferred Securities and Income ETF Under NYSE Arca Equities Rule 8.600
February 8, 2013.
I. Introduction
On December 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'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the First
Trust Preferred Securities and Income ETF (``Fund'') under NYSE Arca
Equities Rule 8.600. The proposed rule change was published in the
Federal Register on December 26, 2012.\3\ The Commission received no
comments on the proposal. This order grants approval of the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68458 (December 18,
2012), 77 FR 76148 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to list and trade the 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 First Trust Exchange-Traded Fund III (``Trust''), which is
organized as a Massachusetts business trust and is registered with the
Commission as an open-end management investment company.\4\ The
investment adviser to the Fund is First Trust Advisors L.P.
(``Adviser''). Stonebridge Advisors LLC will serve as investment sub-
adviser to the Fund (``Sub-Adviser'') and will provide day-to-day
portfolio management of the Fund. First Trust Portfolios L.P.
(``Distributor'') will be the principal underwriter and distributor of
the Fund's Shares. Brown Brothers Harriman & Co. will serve as
administrator, custodian, and transfer agent for the Fund. The Exchange
states that each of the Adviser and Sub-Adviser is affiliated with a
broker-dealer and represents that each such Adviser and Sub-Adviser has
implemented a fire wall with respect to its respective broker-dealer
affiliate regarding access to information concerning the composition of
and changes to the Fund's portfolio.\5\
---------------------------------------------------------------------------
\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). On September 23, 2011, the Trust filed with the
Commission a registration statement on Form N-1A under the
Securities Act of 1933 and under the 1940 Act relating to the Fund
(File Nos. 333-176976 and 811-22245) (``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. 30029 (April 10, 2012) (File No. 812-13795)
(``Exemptive Order'').
\5\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The
Exchange represents that, in the event (a) the Adviser or the 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 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.
---------------------------------------------------------------------------
Description of the Fund
The Fund's objective will be to provide current income and total
return. Under normal market conditions,\6\ the Fund will invest at
least 80% of its net assets (including investment borrowings) in
preferred securities (``Preferred Securities'') and income-producing
debt securities (``Income Securities'').\7\ The Adviser represents
[[Page 11246]]
that initially at least 50% of the Fund's net assets invested in
Preferred Securities and 50% of the Income Securities held by the Fund
will be exchange-listed.\8\ However, the Fund reserves the right to
reduce the percentage of assets that are exchange-listed. Preferred
Securities held by the Fund generally pay fixed or adjustable-rate
distributions to investors and have preference over common stock in the
payment of distributions and the liquidation of a company's assets, but
are generally junior to all forms of the company's debt, including both
senior and subordinated debt. For purposes of the 80% test set forth
above, Income Securities consist of both foreign and domestic debt
instruments, including corporate bonds, high yield bonds, convertible
securities, and contingent convertible capital securities. In addition,
for purposes of the 80% test set forth above, securities of other open-
end funds, closed-end funds, or exchange-traded funds (``ETFs'')
registered under the 1940 Act \9\ that invest primarily in Preferred
Securities or Income Securities will be deemed to be Preferred
Securities or Income Securities, respectively. The Adviser represents
that at least 80% of the Preferred Securities and Income Securities
held by the Fund will have a minimum original principal amount
outstanding of $100 million or more. In addition, the Fund's portfolio
will comprise a minimum of 13 non-affiliated issuers.
---------------------------------------------------------------------------
\6\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\7\ The Exchange states that the risks and potential rewards of
investing in the Fund may at times be similar to the risks and
potential rewards of investing in both equity funds and bond funds.
Certain of the Preferred Securities in which the Fund will invest
will be traditional preferred stocks that issue dividends that
qualify for the dividend received deduction under which
``qualified'' domestic corporations are able to exclude a percentage
of the dividends received from their taxable income. Certain of the
Preferred Securities in which the Fund will invest will be preferred
stock that does not issue dividends that qualify for the dividends
received deduction for eligible investors (``non-DRD preferred
stock'') that do not qualify for the dividends received deduction or
issue qualified dividend income. As described in the Registration
Statement, hybrid preferred securities, another type of Preferred
Securities, are typically junior and fully subordinated liabilities
of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor.
\8\ The foreign equity securities, including preferred, hybrid-
preferred, and contingent convertible capital, securities in which
the Fund may invest will be limited to securities that trade in
markets that are members of the Intermarket Surveillance Group
(``ISG''), which includes all U.S. national securities exchanges and
certain foreign exchanges, or are parties to a comprehensive
surveillance sharing agreement with the Exchange.
\9\ For purposes of this filing, ETFs, which will be listed on a
national securities exchange, include the following: Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Equities
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca
Equities Rule 8.600). The Fund may invest in the securities of ETFs
in excess of the limits imposed under the 1940 Act pursuant to
exemptive orders obtained by certain ETFs and their sponsors from
the Commission. The Exchange states that the Fund will not invest in
leveraged, inverse, or leveraged inverse ETFs.
---------------------------------------------------------------------------
As stated above, the Fund may invest in a variety of debt
securities, including corporate debt securities.\10\ The broad category
of corporate debt securities includes debt issued by U.S. and non-U.S.
companies of all kinds, including those with small-, mid-, and large-
capitalizations.\11\ Corporate debt may carry fixed or floating rates
of interest.
---------------------------------------------------------------------------
\10\ As described in the Registration Statement, corporate debt
securities are fixed-income securities issued by businesses to
finance their operations. Notes, bonds, debentures, and commercial
paper are the most common types of corporate debt securities, with
the primary difference being their maturities and secured or
unsecured status. Certain debt securities held by the Fund may
include debt instruments that are similar in many respects to
preferred securities.
\11\ Under normal market conditions, at least 80% of the Fund's
investments in U.S. corporate bonds must have $100 million or more
par amount outstanding to be considered as an eligible investment
and a non-U.S. corporate bond must have $200 million or more par
amount outstanding and significant par value traded to be considered
as an eligible investment. Economic and other conditions may, from
time to time, lead to a decrease in the average par amount
outstanding of bond issuances.
---------------------------------------------------------------------------
Initially, the Fund will invest at least 80% of the Fund's net
assets in Income Securities of issuing firms (``issuers'') that have a
long-term issuer credit rating of investment grade at the time of the
investment. However, the Fund reserves the right to reduce the
percentage of assets invested in investment grade issuers. ``Investment
grade'' is defined as those issuers that have a long-term credit rating
of ``BBB-'' or higher by Standard & Poor's Rating Group, a division of
McGraw Hill Companies, Inc. (``S&P''); ``Baa3'' or higher by Moody's
Investors Service, Inc. (``Moody's''); or a comparable rating by
another nationally recognized statistical rating organization
(``NRSRO''). The Fund may also invest in securities that are unrated by
an NRSRO if such securities are of comparable credit quality.
Comparable credit quality of securities that are unrated by an NRSRO
will be determined by the Sub-Adviser based on fundamental credit
analysis of the unrated issuer and comparable NRSRO-rated peer issuers
of the same industry sector. On a best efforts basis, the Sub-Adviser
will attempt to make a rating determination based on publicly available
data. Factors taken into consideration in determining the comparable
credit quality of the unrated issuer will be company leverage, capital
structure, liquidity, funding, sustainability of cash flows, earnings
quality, market position, and asset quality. In the event that a
security is rated by multiple NRSROs and receives divergent ratings,
the Fund will treat the issuer as being rated in the highest rating
category received from an NRSRO.
Initially, the Fund may invest up to 20% of the Fund's net assets
in Income Securities issued by below-investment-grade issuers if such
securities have acceptable credit quality and attractive relative
value. However, the Fund reserves the right to increase the percentage
of assets invested in below-investment-grade securities. ``Below
investment grade'' is defined as those issuers that have a long-term
credit rating of ``BBB - or lower by ``S&P,'' ``Baa3'' or lower by
Moody's, or a comparable rating by another NRSRO. The Fund may also
invest in securities that are unrated by an NRSRO if such securities
are of comparable credit quality as determined by the Sub-Adviser.
The Fund intends to invest at least 25% of its assets in securities
of financial companies. Financial companies include, but are not
limited to, companies involved in activities such as banking, mortgage
finance, consumer finance, specialized finance, investment banking and
brokerage, asset management and custody, corporate lending, insurance
and financial investment, and real estate, including but not limited to
real estate investment trusts.
Other Investments of the Fund
While the Fund, under normal market conditions, will invest at
least 80% of its net assets (including investment borrowings) in
Preferred Securities and Income Securities, the Fund also may invest
the remainder of its assets in other investments, as described below.
Normally, the Fund may invest up to 15% of its net assets in
securities with maturities of less than one year or cash equivalents,
or it may hold cash. The percentage of the Fund invested in such
holdings will vary and depend on several factors, including market
conditions. For temporary defensive purposes and during periods of high
cash inflows or outflows, the Fund may depart from its principal
investment strategies and invest part or all of its assets in these
securities or it may hold cash. During such periods, the Fund may not
be able to achieve its investment objective. The Fund may adopt a
defensive strategy when the Sub-Adviser or the Adviser believes
securities in which the Fund normally invests have elevated risks due
to political or economic factors and in other extraordinary
circumstances.
The Fund may also invest in U.S. government securities \12\ or
short-term
[[Page 11247]]
debt securities to keep cash on hand fully invested or for temporary
defensive purposes. The use of temporary investments is not a part of
the principal investment strategy of the Fund. Short-term debt
securities are securities from issuers having a long-term debt rating
of at least A by S&P, Moody's, or Fitch, Inc. and having a maturity of
one year or less. Short-term debt securities are defined to include,
without limitation, the following:
---------------------------------------------------------------------------
\12\ U.S. government securities include U.S. Treasury
obligations and securities issued or guaranteed by various agencies
of the U.S. government, or by various instrumentalities which have
been established or sponsored by the U.S. government. U.S. treasury
obligations are backed by the ``full faith and credit'' of the U.S.
government. Securities issued or guaranteed by federal agencies and
U.S. government sponsored instrumentalities may or may not be backed
by the full faith and credit of the U.S. government.
---------------------------------------------------------------------------
(1) U.S. government securities, including bills, notes, and bonds
differing as to maturity and rates of interest, which are either issued
or guaranteed by the U.S. treasury or by U.S. government agencies or
instrumentalities.
(2) Certificates of deposit issued against funds deposited in a
bank or savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are non-
negotiable, they will be considered illiquid securities and be subject
to the Fund's 15% restriction on investments in illiquid securities.
(3) Bankers' acceptances, which are short-term credit instruments
used to finance commercial transactions.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time the Fund purchases the
security, it simultaneously agrees to resell and redeliver the security
to the seller, who also simultaneously agrees to buy back the security
at a fixed price and time.
(5) Bank time deposits, which are monies kept on deposit with banks
or savings and loan associations for a stated period of time at a fixed
rate of interest.
(6) Commercial paper, which are short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for the notes, and they will be considered
illiquid securities and be subject to the Fund's 15% restriction on
investments in illiquid securities. However, they are redeemable by the
Fund at any time. The Fund's Sub-Adviser will consider the financial
condition of the corporation (e.g., earning power, cash flow, and other
liquidity ratios) and will continuously monitor the corporation's
ability to meet all of its financial obligations, because the Fund's
liquidity might be impaired if the corporation were unable to pay
principal and interest on demand. The Fund may only invest in
commercial paper rated A-2 or higher by S&P, Prime-2 or higher by
Moody's, or F2 or higher by Fitch, Inc.
The Fund may also invest in senior loans, second lien loans, loan
participations, payment-in-kind securities, zero coupon bonds, bank
certificates of deposit, fixed-time deposits, bankers' acceptances,
U.S. government securities, or fixed income securities issued by non-
U.S. governments denominated in U.S. dollars.
The Fund may invest in warrants. Warrants acquired by the Fund
entitle it to buy common stock from the issuer at a specified price and
time. They do not represent ownership of the securities but only the
right to buy them. Warrants are subject to the same market risks as
stocks, but may be more volatile in price. The Fund's investment in
warrants will not entitle it to receive dividends or exercise voting
rights and will become worthless if the warrants cannot be profitably
exercised before their expiration date.
The Fund may invest in other pooled investment vehicles and
business development companies that are exchange listed and that invest
primarily in securities of the types in which the Fund may invest
directly.
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 (1) non-negotiable certificates of deposit and master demand
notes, (2) Rule 144A securities, and (3) senior loans, second lien
loans, and loan participation interests. 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. Illiquid securities include securities subject
to contractual or other restrictions on resale and other instruments
that lack readily available markets as determined in accordance with
Commission staff guidance.
The Fund will be classified as ``non-diversified'' under the 1940
Act and as a result may invest a relatively high percentage of its
assets in a limited number of issuers. The Fund will only be limited as
to the percentage of its assets which may be invested in the securities
of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (``Code''). Other than
financial companies, the Fund may not invest 25% or more 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. In addition, the Fund intends to qualify annually
and to elect to be treated as a regulated investment company under the
Code.
Consistent with the Exemptive Order, the Fund will not invest in
options contracts, futures contracts, or swap agreements. The Fund will
not take short positions in securities. The Fund's investments will be
consistent with the Fund's investment objective and will not be used to
enhance leverage.
The Exchange represents that that the Shares will conform to the
initial and continued listing criteria under NYSE Arca Equities Rule
8.600. The Exchange further represents that, for initial and/or
continued listing, the Fund will be in compliance with Rule 10A-3 under
the Act,\13\ as provided by NYSE Arca Equities Rule 5.3. A minimum of
100,000 Shares will be outstanding at the commencement of trading on
the Exchange. The Exchange will obtain a representation from the issuer
of the Shares that the net asset value (``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.
---------------------------------------------------------------------------
\13\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
Additional information regarding the Trust, the Fund, 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.\14\
---------------------------------------------------------------------------
\14\ See Notice and Registration Statement, supra notes 3 and 4,
respectively.
---------------------------------------------------------------------------
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 \15\ and the rules and regulations thereunder applicable to a
national securities exchange.\16\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\17\
which requires, among other things, that the Exchange's rules be
designed to promote just and equitable principles of trade, to remove
[[Page 11248]]
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 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' 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, information
regarding the intra-day value of the Shares (``indicative optimized
portfolio value'' or ``IOPV''), which is the Portfolio Indicative
Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Core Trading Session.\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),
that will form the basis for the Fund's calculation of NAV at the end
of the business day.\20\ The Fund's NAV will be determined as of the
close of trading (normally 4:00 p.m., Eastern Time) on each day the New
York Stock Exchange (``NYSE'') is open for business.\21\ A basket
composition file, which includes the security names and share
quantities required to be delivered in exchange for the Fund's Shares,
together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the NYSE via the National
Securities Clearing Corporation. 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 information for the Shares will be
published daily in the financial section of newspapers. The intra-day,
closing, and settlement prices of the portfolio securities and other
instruments also will be 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 also include a form
of the prospectus for the Fund, information relating to NAV (updated
daily), and other quantitative and trading information.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\19\ According to the Exchange, several major market data
vendors display and/or make widely available IOPVs published on the
CTA or other data feeds.
\20\ On a daily basis, the Adviser will disclose for each
portfolio security or other financial instrument of the Fund the
following information: Ticker symbol (if applicable); name of
security and financial instrument; number of shares or dollar value
of securities and financial instruments held in the portfolio; and
percentage weighting of the security and financial instrument in the
portfolio.
\21\ The Exchange states that the price of a non-U.S. security
that is primarily traded on a non-U.S. exchange shall be updated,
using the last sale price, every 15 seconds throughout the trading
day, provided, that upon the closing of such non-U.S. exchange, the
closing price of the security, after being converted to U.S.
dollars, will be used. Furthermore, in calculating the IOPV of the
Fund's Shares, exchange rates may be used throughout the day (9:00
a.m. to 4:15 p.m., Eastern Time) that may differ from those used to
calculate the NAV per Share of the Fund and consequently may result
in differences between the NAV and the IOPV.
---------------------------------------------------------------------------
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.\22\
In addition, the Exchange will halt trading in the Shares under the
specific circumstances set forth in NYSE Arca Equities Rule
8.600(d)(2)(D) and 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
market are present.\23\ 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.\24\ The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. Moreover, the
Exchange states that the Adviser and Sub-Adviser are each affiliated
with a broker-dealer, and represents that each such Adviser and Sub-
Adviser has implemented a fire wall with respect to its respective
broker-dealer affiliate regarding access to information concerning the
composition and/or changes to the Fund's portfolio.\25\ The Exchange
further represents that it is able to obtain information via the ISG
from other exchanges that are ISG members, including all U.S. national
securities exchanges, or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\26\
---------------------------------------------------------------------------
\22\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\23\ See NYSE Arca Equities Rules 8.600(d)(2)(C) and
8.600(d)(2)(D). 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.
\24\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\25\ See supra note 5 and accompanying text. 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.
\26\ As noted above, the foreign equity securities, including
preferred, hybrid-preferred, and contingent convertible capital,
securities in which the Fund may invest will be limited to
securities that trade in markets that are members of ISG, which
includes all U.S. national securities exchanges and certain foreign
exchanges, or are parties to a comprehensive surveillance sharing
agreement with the Exchange. See supra note 8. In addition, ETFs in
which the Fund may invest will be listed on a national securities
exchange. See supra note 9.
---------------------------------------------------------------------------
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
[[Page 11249]]
equity securities. In support of this proposal, the Exchange has made
representations, including:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance procedures 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 Unit aggregations (and that Shares are not individually
redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated 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) For initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 under the Act,\27\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\27\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(6) Initially, at least 50% of the Fund's net assets invested in
Preferred Securities and Income Securities will be exchange-listed.\28\
In addition, at least 80% of the Preferred Securities and Income
Securities held by the Fund will have a minimum original principal
amount outstanding of $100 million or more. Specifically with respect
to corporate bonds, under normal market conditions, at least 80% of the
Fund's investments in U.S. corporate bonds must have $100 million or
more par amount outstanding to be considered as an eligible investment,
and a non-U.S. corporate bond must have $200 million or more par amount
outstanding and significant par value traded to be considered as an
eligible investment. Further, the Fund's portfolio will comprise a
minimum of 13 non-affiliated issuers.
---------------------------------------------------------------------------
\28\ See supra note 26 and accompanying text.
---------------------------------------------------------------------------
(7) The Fund will invest at least 80% of its net assets in Income
Securities of issuing firms having a long-term issuer credit rating of
investment grade at the time of investment.
(8) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities, including non-negotiable certificates of
deposit and master demand notes; Rule 144A securities; and senior
loans, second lien loans, and loan participation interests.
(9) The Fund will not: (a) Take short positions in securities; and
(b) pursuant to the terms of the Exemptive Order, invest in options
contracts, futures contracts, or swap agreements. In addition, the
Fund's investments will be consistent with its investment objective and
will not be used to enhance leverage.
(10) 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.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \29\ and the
rules and regulations thereunder applicable to a national securities
exchange.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule change (SR-NYSEArca-2012-139) be, and
it hereby is, approved.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03489 Filed 2-14-13; 8:45 am]
BILLING CODE 8011-01-P
