Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Listing and Trading of Shares of the NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund Under NYSE Arca Equities Rule 5.2(j)(3), 23601-23611 [2013-09193]

Download as PDF 23601 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices Form(s) submitted: G–251a and G– 251b. Type of request: Extension without change of a currently approved collection. Affected public: Business or other for profit. Abstract: The collection obtains information used by the Railroad Retirement Board (RRB) to assist in determining whether a railroad employee is disabled from his or her regular occupation. It provides, under certain conditions, railroad employers with the opportunity to provide information to the RRB regarding the employee applicant’s job duties. Changes proposed: The RRB proposes no changes to the forms in the information collection. The burden estimate for the ICR is as follows: Annual responses Form number Time (minutes) Burden (hours) G–251a ........................................................................................................................................ G–251b ........................................................................................................................................ 125 305 20 20 42 102 Total ...................................................................................................................................... 430 ........................ 144 Additional Information or Comments: Copies of the forms and supporting documents can be obtained from Dana Hickman at (312) 751–4981 or Dana.Hickman@RRB.GOV. Comments regarding the information collection should be addressed to Charles Mierzwa, Railroad Retirement Board, 844 North Rush Street, Chicago, Illinois 60611–2092 or Charles.Mierzwa@RRB.GOV and to the OMB Desk Officer for the RRB, Fax: 202–395–6974, Email address: OIRA_Submission@omb.eop.gov. Charles Mierzwa, Chief of Information Resources Management. [FR Doc. 2013–09209 Filed 4–18–13; 8:45 am] BILLING CODE 7905–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69373; File No. SR– NYSEArca–2012–108] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Listing and Trading of Shares of the NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund Under NYSE Arca Equities Rule 5.2(j)(3) mstockstill on DSK4VPTVN1PROD with NOTICES April 15, 2013. I. Introduction On September 27, 2012, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 (‘‘Fund’’) under NYSE Arca Equities Rule 5.2(j)(3). On October 2, 2012, the Exchange submitted Amendment No. 1 to the proposed rule change.3 The proposed rule change, as modified by Amendment No. 1 thereto, was published in the Federal Register on October 18, 2012.4 On November 29, 2012, pursuant to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 On January 16, 2013, the Commission instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.7 The Commission thereafter received one comment letter on the proposal.8 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 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 issued by the ALPS ETF Trust (‘‘Trust’’).9 ALPS 3 In Amendment No. 1, the Exchange amended the filing to specify that a list of components of the Index (as defined below), with percentage weightings, will be available on the Exchange’s Web site, and that the Exchange may halt trading in the Shares (as defined below) if the Index value, or the value of the components of the Index, is not available or not disseminated as required. 4 See Securities Exchange Act Release No. 68043 (October 12, 2012), 77 FR 64153 (‘‘Notice’’). 5 15 U.S.C. 78s(b)(2). 6 Securities Exchange Act Release No. 68320, 77 FR 72429 (Dec. 5, 2012). 7 See Securities Exchange Act Release No. 68671, 78 FR 4919 (Jan. 23, 2013) (‘‘Order Instituting Proceedings’’). 8 See Letter from Kevin Rich, Rich Investment Solutions, LLC, dated February 12, 2013 (‘‘Rich Letter’’). 9 The Trust is registered under the Investment Company Act of 1940 (‘‘1940 Act’’). On June 22, PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 Advisors, Inc. will be the Fund’s investment adviser (‘‘Adviser’’), and Rich Investment Solutions, LLC will be the Fund’s investment sub-adviser (‘‘Sub-Adviser’’).10 The Bank of New York Mellon (‘‘BNY’’) will serve as custodian, fund accounting agent, and transfer agent for the Fund. ALPS Distributors, Inc. will be the Fund’s distributor (‘‘Distributor’’). NYSE Arca will be the ‘‘Index Provider’’ for the Fund.11 Description of the Fund The Fund will seek investment results that correspond generally to the performance, before the Fund’s fees and expenses, of the NYSE Arca U.S. Equity Synthetic Reverse Convertible Index (‘‘Index’’). The Index reflects the performance of a portfolio consisting of over-the-counter (‘‘OTC’’) ‘‘down-andin’’ put options that have been written on 20 of the most volatile U.S. stocks that also have market capitalization of at least $5 billion. In seeking to replicate, before expenses, the performance of the Index, 2012, the Trust filed with the Commission an amendment to its registration statement on Form N– 1A (‘‘Registration Statement’’) under the Securities Act of 1933 and under the 1940 Act relating to the Fund (File Nos. 333–148826 and 811–22175). 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. 28262 (May 1, 2008) (File No. 812–13430). 10 The Adviser is affiliated with a broker-dealer and will implement and maintain procedures designed to prevent the use and dissemination of material, non-public information regarding the Fund’s portfolio. The Sub-Adviser is not affiliated with a broker-dealer. In the event (a) the SubAdviser becomes newly affiliated with a brokerdealer, or (b) any new adviser or sub-adviser becomes affiliated with a broker-dealer, it will implement and maintain procedures designed to prevent the use and dissemination of material, nonpublic information regarding the Fund’s portfolio. 11 NYSE Arca is not affiliated with the Trust, the Adviser, the Sub-Adviser, or the Distributor. NYSE Arca is affiliated with a broker-dealer and will implement a fire wall and maintain procedures designed to prevent the use and dissemination of material, non-public information regarding the Index. E:\FR\FM\19APN1.SGM 19APN1 23602 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices the Fund will generally sell (i.e., write) 90-day OTC down-and-in put options, as described below, in proportion to their weightings in the Index on economic terms which mirror those of the Index. Each option written by the Fund will be covered through investments in three-month Treasury bills (‘‘T-bills’’) at least equal to the Fund’s maximum liability under the option (i.e., the strike price). The SubAdviser will seek a correlation over time of 0.95 or better between the Fund’s performance and the performance of the Index. A figure of 1.00 would represent perfect correlation.12 The Exchange submitted this proposed rule change because the Index for the Fund does 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 ‘‘U.S. Component Stocks.’’ 13 Specifically, Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) sets forth the requirements to be met by components of an index or portfolio of U.S. Component Stocks. Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) states, in relevant part, that the components of an index of U.S. Component Stocks, upon the initial listing of a series of Investment Company Units pursuant to Rule 19b4(e) under the Exchange Act, shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Exchange Act.14 As described further below, the Index consists of OTC down-and-in put options. The Exchange has represented that the Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except that the Index includes OTC down-and-in put options, which are not NMS Stocks as defined in Rule 600 of Regulation NMS. mstockstill on DSK4VPTVN1PROD with NOTICES Index Methodology and Construction The Index measures the return of a hypothetical portfolio consisting of OTC down-and-in put options which have 12 While the Fund will not invest in traditional reverse convertible securities (i.e., those which convert into the underlying stock), the down-andin put options written by the Fund will have the effect of exposing the Fund to the return of reverse convertible securities (based on equity securities) as if the Fund owned such reverse convertible securities directly. 13 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. 14 See 17 CFR 242.600(b)(47) (defining ‘‘NMS Stock’’ as any NMS Security other than an option). VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 been written on each of 20 stocks and a cash position calculated as described below. The 20 stocks that will underlie the options in the Index are those 20 stocks from a selection of the largest capitalized (over $5 billion in market capitalization) stocks which also have listed options and which have the highest volatility, as determined by the Index Provider. These stocks will be required to be NMS stocks, as defined in Rule 600 of Regulation NMS. A down-and-in option is a contract that becomes a typical option (i.e., the option ‘‘knocks in’’ at a predetermined strike price) once the underlying stock declines to a specified price (‘‘barrier price’’). These types of options have the same return as ‘‘reverse convertible’’ securities, which convert into the underlying stock (or settle in cash) only upon a decline in the value of the underlying stock rather than a rise (as is the case with typical convertible instruments). Each option included in the Index will be a ‘‘European-style’’ option (i.e., an option which can only be exercised at its expiration) with a 90-day term. The strike prices of the option positions included in the Index will be determined based on the closing prices of the options’ underlying stocks as of the beginning of each 90-day period. The barrier price of each such option will be 80% of the strike price. At the expiration of each 90-day period, if an underlying stock closes at or below its respective barrier price, a cash settlement payment in an amount equal to the difference between the strike price and the closing price of the stock will be deemed to be made, and the Index value will be correspondingly reduced. If the underlying stock does not close at or below the barrier price, then the option expires worthless and the entire amount of the premium payment will be retained within the Index. The components of the Index will be OTC down-and-in put options written on 20 NMS stocks selected based on the following screening parameters: 1. U.S. listing of U.S. companies; 2. Publicly listed and traded options available; 3. Market capitalization greater than $5 billion; 4. Top 20 stocks when ranked by 3month implied volatility; 5. Each underlying NMS stock will have a minimum trading volume of at least 50 million shares for the preceding six months; and 6. Each underlying NMS stock will have a minimum average daily trading volume of at least one million shares and a minimum average daily trading PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 value of at least $10 million for the preceding six months. The selection of the 20 underlying NMS stocks will occur each quarter (March, June, September, and December) two days prior to the third Friday of the month, in line with option expiration for listed options. The selection of the 20 underlying stocks will not, however, be limited to those with listed options expiring in March, June, September, or December. The Index value will reflect a cash amount invested in on-the-run threemonth T-Bills, plus the premium collected on the short position in the 20 down-and-in put options written by the Index each quarter. The notional amount of each of the 20 down-and-in put options will be equal to 1/20th of the cash amount in the Index at the beginning of each quarter. The cash amount (initially 1,000 for the origination date of the Index) will be incremented by premiums generated each quarter from the 20 down-and-in put options sold, then decremented by cash settlements of any down-and-in put options expiring in-the-money and the distribution amount (as described below). The cash amount will be invested in T-Bills and will accrete by interest earned on the T-Bills. The End of Day Index Value will be calculated as follows: End of Day Index Value = Beginning of Quarter Index Value + Premium Generated—Option Values + Accrued Interest—distribution amount, where: • Beginning of Quarter Index Value is 1,000 for the origination date of the Index; thereafter, it is the previous quarter-end End of Day Index Value; • Premium Generated is the sum of Option Values for each of the 20 downand-in put options sold by the Index at the end of the previous quarter; • Option Value is the settlement value of each of the 20 down-and-in put options written by the Index at the end of each quarter. The notional amount of each down-and-in put option sold by the Index for the current quarter is 1/ 20th of the Beginning of Quarter Index Value; • Accrued Interest is the daily interest earned on the cash amount held by the Index and invested in T-Bills; • Cash amount of the Index for any quarter is the Beginning of Quarter Index Value plus the Premium Generated for that quarter; and • Distribution amount for any quarter and paid out at the beginning of the next quarter is 2.5% of the End of Day Index Value for the final day of the quarter. If such an amount exceeds the amount of the Premium Generated, then the E:\FR\FM\19APN1.SGM 19APN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices distribution amount will equal the Premium Generated. A total return level for the Index will be calculated and published at the end of each day. The total return calculation will assume the quarterly index distribution is invested directly in the Index at the beginning of the quarter in which it is paid. The Exchange has provided the following example. Stock ‘‘ABC’’ trades at $50 per share at the start of the 90day period, and a down-and-in 90-day put option was written at an 80% barrier (resulting in a strike price of $50 per share and a barrier price of $40 per share) for a premium of $4 per share: • Settlement above the barrier price: If at the end of 90 days the ABC stock closed at any value above the barrier price of $40, then the option would expire worthless and the Index’s value would reflect the retention of the $4 per share premium. The Index’s value thus would be increased by $4 per share on the ABC option position. • Settlement at the barrier price: If at the end of 90 days ABC closed at the barrier price of $40, then the option would settle in cash at the closing price of $40, and the Index’s value would be reduced by $10 per share to reflect the settlement of the option. However, the Index’s value would reflect the retention of the $4 per share premium, so the net loss to the Index’s value would be $6 per share on the ABC option position. • Settlement below the barrier price: If at the end of 90 days, ABC closed at $35, then the option would settle in cash at the closing price of $35, and the Index’s value would be reduced by $15 per share to reflect the settlement of the option. However, the Index’s value would reflect the retention of the $4 per share premium, so the net loss to the Index’s value would be $11 per share on the ABC option position. As discussed above, the Index’s value is equal to the value of the options positions comprising the Index, plus a cash position. The cash position starts at a base of 1,000. The cash position is increased by option premiums generated by the option positions comprising the Index and interest on the cash position at an annual rate equal to the three month T-Bill rate. The cash position is decreased by cash settlement on options which ‘‘knock in’’ (i.e., where the closing price of the underlying stock at the end of the 90day period is at or below the barrier price). The cash position is also decreased by a deemed quarterly cash distribution, currently targeted at the rate of 2.5% of the value of the Index. However, if the option premiums generated during the quarter are less VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 than 2.5%, the deemed distribution will be reduced by the amount of the shortfall. The Fund’s Investments The Fund, under normal circumstances,15 will invest at least 80% of its total assets in component securities that comprise the Index and in T-Bills which will be collateral for the options positions. The Fund will enter into the option positions determined by the Index Provider by writing (i.e., selling) OTC 90-day downand-in put options in proportion to their weightings in the Index on economic terms which mirror those of the Index. By writing an option, the Fund will receive premiums from the buyer of the option, which will increase the Fund’s return if the option does not ‘‘knock in’’ and thus expires worthless. However, if the option’s underlying stock declines by a specified amount (or more), the option will ‘‘knock in’’ and the Fund will be required to pay the buyer the difference between the option’s strike price and the closing price. Therefore, by writing a down-and-in put option, the Fund will be exposed to the amount by which the price of the underlying is less than the strike price. Accordingly, the potential return to the Fund will be limited to the amount of option premiums it receives, while the Fund can potentially lose up to the entire strike price of each option it sells. Further, if the value of the stocks underlying the options sold by the Fund increases, the Fund’s returns will not increase accordingly. Typically, the writer of a put option incurs an obligation to buy the underlying instrument from the purchaser of the option at the option’s exercise price, upon exercise by the option purchaser. However, the downand-in put options to be sold by the Fund will be settled in cash only. The Fund may need to sell down-and-in put options on stocks other than those underlying the option positions contained in the Index if the Fund is unable to obtain a competitive market from OTC option dealers on a stock underlying a particular option position in the Index, thus preventing the Fund from writing an option on that stock.16 15 The term ‘‘under normal circumstances’’ includes, but is not limited to, the absence of extreme volatility or trading halts in the equities or options 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. 16 The Fund will transact only with OTC options dealers that have in place an International Swaps PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 23603 Every 90 days, the options included within the Index are cash settled or expire, and new option positions are established. The Fund will enter into new option positions accordingly. This 90-day cycle likely will cause the Fund to have frequent and substantial portfolio turnover. If the Fund receives additional inflows (and issues more Shares accordingly in large numbers known as ‘‘Creation Units’’) during a 90day period, the Fund will sell additional OTC down-and-in put options which will be exercised or expire at the end of such 90-day period. Conversely, if the Fund redeems Shares in Creation Unit size during a 90-day period, the Fund will terminate the appropriate portion of the options it has sold accordingly. Secondary Investment Strategies The Fund may invest its remaining assets in money market instruments,17 including repurchase agreements 18 or other funds which invest exclusively in money market instruments, convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors, such as the movement of a particular stock or stock index), forward foreign currency exchange and Derivatives Association agreement with the Fund. 17 The Fund may invest a portion of its assets in high-quality money market instruments on an ongoing basis to provide liquidity. The instruments in which the Fund may invest include: (i) Shortterm obligations issued by the U.S. Government; (ii) negotiable certificates of deposit (‘‘CDs’’), fixed time deposits, and bankers’ acceptances of U.S. and foreign banks and similar institutions; (iii) commercial paper rated at the date of purchase ‘‘Prime-1’’ by Moody’s Investors Service, Inc. or ‘‘A–1+’’ or ‘‘A–1’’ by Standard & Poor’s or, if unrated, of comparable quality as determined by the Adviser; (iv) repurchase agreements; and (v) money market mutual funds. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker’s acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions. 18 Repurchase agreements are agreements pursuant to which securities are acquired by the Fund from a third party with the understanding that they will be repurchased by the seller at a fixed price on an agreed date. These agreements may be made with respect to any of the portfolio securities in which the Fund is authorized to invest. Repurchase agreements may be characterized as loans secured by the underlying securities. The Fund may enter into repurchase agreements with (i) member banks of the Federal Reserve System having total assets in excess of $500 million and (ii) securities dealers (‘‘Qualified Institutions’’). The Adviser will monitor the continued creditworthiness of Qualified Institutions. The Fund also may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date, and interest payment and have the characteristics of borrowing. E:\FR\FM\19APN1.SGM 19APN1 23604 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES contracts, and in swaps,19 options (other than options the Fund principally will write), and futures contracts.20 Swaps, options (other than options the Fund principally will write), and futures contracts (and convertible securities and structured notes) may be used by the Fund in seeking performance that corresponds to the Index and in managing cash flows.21 The Fund will not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines. The Adviser anticipates that it may take approximately three business days (i.e., each day the New York Stock Exchange (‘‘NYSE’’) is open) for additions and deletions to the Index to be reflected in the portfolio composition of the Fund. The Fund may invest in the securities of other investment companies (including money market funds). Under the 1940 Act, the Fund’s investment in investment companies is limited to, subject to certain exceptions, (i) 3% of the total outstanding voting stock of any one investment company, (ii) 5% of the Fund’s total assets with respect to any one investment company, and (iii) 10% of the Fund’s total assets of investment companies in the aggregate. The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities. The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of 19 Swap agreements are contracts between parties in which one party agrees to make periodic payments to the other party (‘‘counterparty’’) based on the change in market value or level of a specified rate, index, or asset. In return, the counterparty agrees to make periodic payments to the first party based on the return of a different specified rate, index, or asset. Swap agreements will usually be done on a net basis, the Fund receiving or paying only the net amount of the two payments. The net amount of the excess, if any, of the Fund’s obligations over its entitlements with respect to each swap will be accrued on a daily basis and an amount of cash or highly liquid securities having an aggregate value at least equal to the accrued excess will be maintained in an account at the Trust’s custodian bank. 20 The Fund may utilize U.S. listed exchangetraded futures. In connection with its management of the Trust, the Adviser has claimed an exclusion from registration as a commodity pool operator under the Commodity Exchange Act (‘‘CEA’’). Therefore, it is not subject to the registration and regulatory requirements of the CEA, and there are no limitations on the extent to which the Fund may engage in non-hedging transactions involving futures and options thereon, except as set forth in the Registration Statement. 21 Swaps, options (other than options the Fund principally will write), and futures contracts will not be included in the Fund’s investment, under normal market circumstances, of at least 80% of its total assets in component securities that comprise the Index and in T-Bills, as described above. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 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 intends to qualify for and to elect to be treated as a separate regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended The Fund will not invest in non-U.S. equity securities. The Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. Pricing Fund Shares The Fund’s OTC down-and-in put options on equity securities will be valued pursuant to a third-party option pricing model. Debt securities will be valued at the mean between the last available bid and ask prices for such securities or, if such prices are not available, at prices for securities of comparable maturity, quality, and type. Securities for which market quotations are not readily available, including restricted securities, will be valued by a method that the Fund’s Board of Trustees believe accurately reflects fair value. Securities will be valued at fair value when market quotations are not readily available or are deemed unreliable, such as when a security’s value or meaningful portion of the Fund’s portfolio is believed to have been materially affected by a significant event. Such events may include a natural disaster, an economic event like a bankruptcy filing, trading halt in a security, an unscheduled early market close, or a substantial fluctuation in domestic and foreign markets that has occurred between the close of the principal exchange and the NYSE. In such a case, the value for a security is likely to be different from the last quoted market price. In addition, due to the subjective and variable nature of fair market value pricing, it is possible that the value determined for a particular asset may be materially different from the value realized upon such asset’s sale. Creations and Redemptions of Shares The Trust will issue and sell Shares of the Fund only in ‘‘Creation Units’’ of 100,000 Shares each on a continuous basis through the Distributor, without a sales load, at its net asset value (‘‘NAV’’) PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 next determined after receipt, on any business day, of an order in proper form. Creation Units of the Fund generally will be sold for cash only, calculated based on the NAV per Share multiplied by the number of Shares representing a Creation Unit (‘‘Deposit Cash’’), plus a transaction fee. The Custodian, through the National Securities Clearing Corporation (‘‘NSCC’’), will make available on each business day, prior to the opening of business on NYSE Arca (currently 9:30 a.m. Eastern Time (‘‘E.T.’’)), the amount of the Deposit Cash to be deposited in exchange for a Creation Unit of the Fund. To be eligible to place orders with the Distributor and to create a Creation Unit of the Fund, an entity must be (i) a ‘‘Participating Party,’’ i.e., a brokerdealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC; or (ii) a Depository Trust Company (‘‘DTC’’) participant, and, in each case, must have executed an agreement with the Distributor, with respect to creations and redemptions of Creation Units. All orders to create Creation Units, whether through a Participating Party or a DTC participant, must be received by the Distributor no later than the closing time of the regular trading session on the NYSE (ordinarily 4:00 p.m. E.T.) in each case on the date such order is placed in order for creation of Creation Units to be effected based on the NAV of Shares of the Fund as next determined on such date after receipt of the order in proper form. Fund Shares may be redeemed only in Creation Units at the NAV next determined after receipt of a redemption request in proper form by the Fund through BNY and only on a business day. The Fund will not redeem Shares in amounts less than a Creation Unit. With respect to the Fund, BNY, through the NSCC, will make available prior to the opening of business on NYSE Arca (currently 9:30 a.m. E.T.) on each business day, the amount of cash that will be paid (subject to possible amendment or correction) in respect of redemption requests received in proper form on that day (‘‘Redemption Cash’’). The redemption proceeds for a Creation Unit generally will consist of the Redemption Cash, as announced on the business day of the request for redemption received in proper form, less a redemption transaction fee. Initial and Continued Listing The Exchange represents that the Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rules 5.2(j)(3) and E:\FR\FM\19APN1.SGM 19APN1 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices 5.5(g)(2), except that the Index is comprised of down-and-in put options based on ‘‘U.S. Component Stocks’’ 22 rather than U.S. Component Stocks themselves. The Exchange further represents that, for initial and/or continued listing, the Fund will be in compliance with Rule 10A–3 under the Exchange Act,23 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 NAV will be calculated daily and made available to all market participants at the same time. mstockstill on DSK4VPTVN1PROD with NOTICES Availability of Information The Fund’s Web site (www.alpsetfs.com), which will be publicly available prior to the public offering of the Shares, will include a form of the prospectus for the Fund that may be downloaded. The Fund’s Web site will include additional quantitative information updated on a daily basis, including, for the Fund, (1) daily trading volume, the prior business day’s reported closing price, NAV and midpoint of the bid/ask spread at the time of calculation of such NAV (‘‘Bid/Ask Price’’),24 and a calculation of the premium and discount of the Bid/Ask Price against the NAV, and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters.25 On a daily basis, the Adviser will disclose for each portfolio security and other financial instrument of the Fund the following information: ticker symbol (if applicable), name of security and financial instrument, number of securities or dollar value of financial instruments held in the portfolio, and percentage weighting of the security and 22 NYSE Arca Equities Rule 5.2(j)(3) defines the term ‘‘U.S. Component Stock’’ to 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. 23 17 CFR 240.10A–3. 24 The Bid/Ask Price of the Fund would be determined using the mid-point of the highest bid and the lowest offer for Shares on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices would be retained by the Fund and its service providers. 25 Under accounting procedures followed by the Fund, trades made on the prior business day (‘‘T’’) would be booked and reflected in NAV on the current business day (‘‘T+1’’). Accordingly, the Fund would be able to disclose at the beginning of the business day the portfolio that would form the basis for the NAV calculation at the end of the business day. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 financial instrument in the portfolio. The Fund’s portfolio holdings, including information regarding its option positions, will be disclosed each day on the Fund’s Web site. The Web site information will be publicly available at no charge. The NAV per Share for the Fund will be determined once daily as of the close of the NYSE, usually 4:00 p.m. E.T., each day the NYSE is open for trading. NAV per Share will be determined by dividing the value of the Fund’s portfolio securities, cash and other assets (including accrued interest), less all liabilities (including accrued expenses), by the total number of Shares outstanding. As discussed above, the OTC down-and-in put options will be valued pursuant to a third-party option pricing model.26 Investors can also obtain the Trust’s Statement of Additional Information (‘‘SAI’’), the Fund’s Shareholder Reports, and its Form N–CSR and Form N–SAR, filed twice a year. The Trust’s SAI and Shareholder Reports will be available free upon request from the Trust, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen or downloaded from the Commission’s Web site at www.sec.gov. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information will be published daily in the financial section of newspapers. Quotation and last-sale information for the Shares will be available via the Consolidated Tape Association (‘‘CTA’’) high-speed line. The value of the Index and the values of the OTC down-and-in put options components in the Index (which will each be weighted at 1⁄20 of the Index value) will be published by one or more major market data vendors every 15 seconds during the NYSE Arca Core Trading Session of 9:30 a.m. E.T. to 4:00 p.m. E.T. A list of components of the Index, with percentage weightings, will be available on the Exchange’s Web site. Each of the stocks underlying the OTC down-and-in put options in the Index also will underlie standardized options contracts traded on U.S. options exchanges, which will disseminate quotation and last-sale information with respect to such contracts. In addition, the Intraday Indicative Value will be calculated and disseminated by the Exchange, and widely disseminated by one or more major market data vendors, 26 See PO 00000 ‘‘Pricing Fund Shares’’ supra. Frm 00069 Fmt 4703 Sfmt 4703 23605 at least every 15 seconds during the Core Trading Session.27 The Exchange states that the dissemination of the Intraday Indicative Value will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and to provide a close estimate of that value throughout the trading day. Trading Halts With respect to trading halts, the Exchange states that it may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund.28 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. These may include: (1) The extent to which trading is not occurring in the securities comprising the Fund’s portfolio holdings and/or the financial instruments of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. If the Intraday Indicative Value, the Index value, or the value of the components of the Index is not available or is not being disseminated as required, the Exchange may halt trading during the day in which the disruption occurs; if the interruption persists past the day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. The Exchange will obtain a representation from the Fund that the NAV for the Fund will be calculated daily and will be made available to all market participants at the same time. Under NYSE Arca Equities Rule 7.34(a)(5), if the Exchange becomes aware that the NAV for the Fund is not being disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading 27 Currently, it is the Exchange’s understanding that several major market data vendors display and/ or make widely available Intraday Indicative Values taken from the CTA or other data feeds. See Notice, supra note 4, at 64157. The IIV calculations are based on local market prices and may not reflect events that occur subsequent to the local market’s close. See Registration Statement, supra note 9, at 11. 28 See NYSE Arca Equities Rule 7.12, Commentary .04. E:\FR\FM\19APN1.SGM 19APN1 23606 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading Sessions). The Exchange states that it has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. mstockstill on DSK4VPTVN1PROD with NOTICES Surveillance The Exchange intends to utilize its existing surveillance procedures applicable to derivative products (which include Investment Company Units) to monitor trading in the Shares. The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange’s current trading surveillance focuses on detecting securities trading outside their normal patterns. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange may obtain information via the Intermarket Surveillance Group (‘‘ISG’’) from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement.29 In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Suitability Currently, NYSE Arca Equities Rule 9.2(a) (Diligence as to Accounts) provides that an Equity Trading Permit (‘‘ETP’’) Holder, before recommending a transaction in any security, must have reasonable grounds to believe that the recommendation is suitable for the customer based on any facts disclosed by the customer as to its other security 29 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the portfolio for the Fund may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 holdings and as to its financial situation and needs. Further, the rule provides, with a limited exception, that prior to the execution of a transaction recommended to a non-institutional customer, the ETP Holder must make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives, and any other information that such ETP Holder believes would be useful to make a recommendation. Prior to the commencement of trading, the Exchange will inform its ETP Holders of the suitability requirements of NYSE Arca Equities Rule 9.2(a) in an Information Bulletin (‘‘Information Bulletin’’ or ‘‘Bulletin’’). Specifically, ETP Holders will be reminded in the Information Bulletin that, in recommending transactions in these securities, they must have a reasonable basis to believe that (1) the recommendation is suitable for a customer given reasonable inquiry concerning the customer’s investment objectives, financial situation, needs, and any other information known by such member, and (2) the customer can evaluate the special characteristics, and is able to bear the financial risks, of an investment in the Shares. In connection with the suitability obligation, the Information Bulletin will also provide that members must make reasonable efforts to obtain the following information: (1) The customer’s financial status; (2) the customer’s tax status; (3) the customer’s investment objectives; and (4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer. In addition, FINRA has issued a regulatory notice relating to sales practice procedures applicable to recommendations to customers by FINRA members of reverse convertibles, as described in FINRA Regulatory Notice 10–09 (February 2010) (‘‘FINRA Regulatory Notice’’).30 As described above, while the Fund will not invest in traditional reverse convertible securities, the down-and-in put options written by the Fund will have the effect of exposing the Fund to the return of reverse convertible securities as if the Fund owned such reverse convertible securities directly. Therefore, the Bulletin will state that ETP Holders that carry customer accounts should follow 30 The Exchange notes that NASD Rule 2310 relating to suitability, referenced in the FINRA Regulatory Notice, has been superseded by FINRA Rule 2111. See FINRA Regulatory Notice 12–25 (May 2012). PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 the FINRA guidance set forth in the FINRA Regulatory Notice. The Registration Statement states that the Fund is designed for investors who seek to obtain income through selling options on select equity securities which the Index Provider determines to have the highest volatility. It further states that because of the high volatility of the stocks underlying the options sold by the Fund, it is possible that the value of such stocks would decline in sufficient magnitude to trigger the exercise of the options and cause a loss which may outweigh the income from selling such options. The Registration Statement states that, accordingly, the Fund should be considered a speculative trading instrument and is not necessarily appropriate for investors who seek to avoid or minimize their exposure to stock market volatility. The Exchange’s Information Bulletin regarding the Fund will provide information regarding the suitability of an investment in the Shares, as stated in the Registration Statement. Information Bulletin Prior to the commencement of trading, the Exchange will inform its ETP Holders in the Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) 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; (3) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated Intraday Indicative Value would not be calculated or publicly disseminated; (4) how information regarding the Intraday Indicative Value is disseminated; (5) 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 (6) trading information. In addition, the Bulletin will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Bulletin will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Exchange Act. The Bulletin will also disclose that the NAV for the Shares would be calculated after 4:00 p.m. E.T. each trading day. Additional information regarding the Trust, the Fund, and the Shares, E:\FR\FM\19APN1.SGM 19APN1 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices 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.31 mstockstill on DSK4VPTVN1PROD with NOTICES III. Summary of Comment Letters In the Order Instituting Proceedings, the Commission asked a number of detailed questions about the proposal, including questions related to the trading of the Shares of the Fund, such as the extent to which the down-and-in put options written by the Fund could be subject to manipulation as well as the extent to which market makers would be able to effectively arbitrage the Shares to help keep the intra-day market price in line with the intra-day NAV.32 The Commission did not receive any comment letters expressing concern about the Shares or the Fund. The Commission received one comment letter in support of the proposal from the Sub-Adviser.33 The commenter states that the Fund will provide the benefits of investing in reverse convertible notes while mitigating some negative features associated with reverse convertible notes, including that the Fund will offer diversification by selling options of twenty underlying issuers, rather than just one underlying issuer; the Fund’s structure will give investors a lower initial and ongoing cost due to the economies of scale rather than incurring deal by deal imbedded costs for privately placed reverse convertible notes; the Fund will not carry the credit risk of banks and financial firms imbedded into reverse convertible notes; and the Fund will sell options and collect premium upfront, thereby decreasing risks to the Fund as compared to a reverse convertible note.34 A. Disclosure Relating to the Shares In the Order Instituting Proceedings, the Commission requested comment on whether investors would be able to understand the strategy, risks and potential rewards, assumptions and expected performance of the Fund, including the effect of the Fund’s exposure to its down-and-in put options.35 In response, the commenter states its belief that investors in the 31 See Notice and Registration Statement, supra notes 4 and 9. 32 See Order Instituting Proceedings, supra note 7, at 4925–6. 33 See Rich Letter, supra note 8. 34 Id. at 3. 35 See Order Instituting Proceedings, supra note 7, at 4925. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 Fund will clearly under these characteristics of the Fund. First, the commenter states that the name of the Fund is very descriptive and will not be misleading to potential investors.36 In addition, the commenter states that the Fund’s prospectus clearly describes the Fund’s strategy and index methodology and construction, provides examples of how the options are structured and hypothetical scenarios regarding changes in stock prices, and contains a ‘‘Who Should Invest’’ section.37 In the Order Instituting Proceedings, the Commission requested comment on whether the Exchange’s rules governing sales practices are adequately designed to ensure the suitability of recommendations regarding the Fund’s Shares.38 In response, the commenter states its belief that the Exchange’s rules governing sales practices adequately ensure the suitability of recommendations regarding the Fund’s Shares, and that the Exchange’s rules governing sales practices should not be altered for the Fund.39 The commenter notes that NYSE Arca Equities Rule 9.2(a) (Diligence as to Accounts) imposes obligations on ETP Holders relating to suitability and due diligence, and that the Exchange has represented that, prior to the commencement of trading, it will provide ETP Holders with an Information Bulletin which will describe the suitability requirements of NYSE Arca Equities Rule 9.2(a) and will state that ETP Holders that carry customer accounts should follow the FINRA guidance set forth in the FINRA Regulatory Notice.40 In the Order Instituting Proceedings, the Commission requested comment on whether the proposed disclosure of the nature of, and the risks of investing in, the Shares is sufficient.41 The commenter states that such disclosure is sufficient, as the Exchange has provided a detailed description of the Fund and the Shares in the Notice, and the Fund is required to deliver a prospectus to investors pursuant to Commission rules which will contain key information relating to the Shares necessary to make informed investment decisions.42 36 See Rich Letter, supra note 8, at 6. at 7–9. 38 See Order Instituting Proceedings, supra note 7, at 4925. 39 See Rich Letter, supra note 8, at 9. 40 Id. at 9–10. See also ‘‘Suitability’’ supra. 41 See Order Instituting Proceedings, supra note 7, at 4925. 42 See Rich Letter, supra note 8, at 10. 37 Id. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 23607 B. Potential for Manipulation of the Down-and-in Put Options Written by the Fund In the Order Instituting Proceedings, the Commission requested comment on whether the discontinuous payoff structure of down-and-in put options could give rise to the potential for manipulation.43 The commenter responds that the down-and-in put options in which the Fund will invest do have the potential to provide an incentive for someone who has a position in an option sold by the Fund, or the Fund itself, to manipulate the price of the underlying stock when it is near the knock-in price on the expiration date, but argues that this potential is very limited because the diversification of the Fund greatly restricts gains from the manipulation of any one underlying stock.44 The commenter provides examples to illustrate that due to the diversification of the Fund and the market capitalization and daily trading volume requirements for the stock underlying the options positions written by the Fund, the cost of attempting to force a particular underlying stock either higher or lower is not proportional to the prospective gain.45 C. Valuation and Arbitrage Relating to the Shares In the Order Instituting Proceedings, the Commission requested comment on whether the market for OTC down-andin put options is sufficiently liquid and the pricing of those options is sufficiently transparent (1) for investors to be able to accurately value such options, and (2) for authorized participants and market makers to effectively arbitrage the OTC market and the market for the Shares throughout the trading day.46 The commenter responds that the market for OTC down-and-in put options is sufficiently liquid and pricing is sufficiently transparent so that the down-and-in put options can be priced uniformly by investors, market makers, and authorized participants.47 First, the commenter states that the down-and-in puts sold by the Fund are very short dated (with terms to expiration of only 3 months), Europeanstyle (meaning the down-and-in put will only knock in if the price of the underlying stock finishes at or below the knock-in price on the expiration 43 See Order Instituting Proceedings, supra note 7, at 4925. 44 See Rich Letter, supra note 8, at 10. 45 Id. at 11–12. 46 See Order Instituting Proceedings, supra note 7, at 4925–6. 47 See Rich Letter, supra note 8, at 12–16. E:\FR\FM\19APN1.SGM 19APN1 23608 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES date of the option), and have very liquid underlying stocks with exchange traded options on those underlying stocks.48 The commenter states that there is a well-known model for pricing European-style, very short dated downand-in puts using pricing inputs easily obtained from the listed option and stock markets.49 In addition, the commenter states that the down-and-in puts in the Fund may also be priced without an explicit model through the use of plain vanilla puts and put spreads.50 The commenter notes that the OTC market for barrier options is the largest exotic option OTC market.51 Furthermore, the commenter states that the Fund will provide to the public on its Web site the model used to calculate the down-and-in put option values used by the Index provider and its calculation agent, with detailed explanations of the formula calculation and inputs.52 In addition, with respect to the ability of market makers and authorized participants to engage in arbitrage, the commenter further states that initially, many market makers will be associated with the dealers buying and selling the down-and-in put options from and to the Fund, and therefore these market makers will have the necessary infrastructure and knowledge to price, make markets in, and hedge their positions in the Shares throughout the trading day.53 The commenter also states that authorized participants only clear the Shares when there are creates or redeems and do not arbitrage throughout the day to ensure that prices of the Shares closely track the NAV per Share of the Fund.54 The commenter states that the only situation in which significant discounts or premiums to the intraday NAV per Share of a Fund could develop is when a large number of the down-and-in put options in the Fund are close to maturity and the underlying stock price is very close to the knockin barrier.55 The commenter states that such a situation would cause market makers to widen bid and offer spreads for the Shares as a reflection of the economics of the down-and-in put option possible payout.56 In the Order Instituting Proceedings, the Commission requested comment on ways for market makers and authorized participants to arbitrage the value of a 48 Id. 49 Id. at 13–16. 50 Id. 51 Id. 52 Id. 53 Id. 54 Id. 55 Id. 56 Id. at 15. at 17. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 down-and-in put option against the price of the Shares.57 The commenter responds that in many cases, the purchase and sale of specific listed options would be an effective way for market makers to arbitrage the value of the down-and-in put options against the price of the Shares because the downand-in puts written by the Fund will be European-style.58 Therefore, the purchase or sale of the down-and-in puts written by the Fund may be efficiently hedged by selling or purchasing a static portfolio of listed puts and put spreads, and such a strategy would be most effective when the listed options have the same maturity date as the down-and-in put, option in the Fund, when the strike prices of the listed options are very close to the knock-in price of the downand-in put option in the Fund, and when the available listed options have strikes relatively close to one another 59 When this is not the case, however, the commenter states that hedging with a static portfolio of listed puts and put spreads may not be the most efficient hedging methodology, and using a dynamic portfolio of options and stock to hedge may be more efficient and effective.60 IV. Discussion and Commission’s Findings The Commission has carefully reviewed the proposed rule change, as modified by Amendment No. 1 thereto, and finds that it is consistent with the requirements of Section 6 of the Act 61 and the rules and regulations thereunder applicable to a national securities exchange.62 In particular, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act,63 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission notes that the Fund and the Shares must comply with the applicable requirements of NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2) 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,64 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 Index value and the values of the OTC put options components in the Index will be published by one or more major market data vendors every 15 seconds during the NYSE Arca Core Trading Session (9:30 a.m. to 4:00 p.m., Eastern Time). A list of components of the Index, with percentage weightings, will be available on the Exchange’s Web site. Each of the stocks underlying the OTC put options in the Index also will underlie standardized options contracts traded on U.S. options exchanges, which will disseminate quotation and last-sale information with respect to such options contracts. In addition, an Intraday Indicative Value (‘‘IIV’’) for the Shares will be widely disseminated at least every 15 seconds during the NYSE Arca Core Trading Session by one or more major market data vendors.65 The Fund’s portfolio holdings, including information regarding its options positions, will be disclosed each day on the Fund’s Web site, which Web site information will be publicly available at no charge.66 The Fund’s NAV per Share will be determined once daily as of the close of the NYSE (normally 4:00 p.m., Eastern Time) on each day the NYSE is open for trading. BNY, through the National Securities Clearing Corporation, will make available on each business day, prior to the opening of business on NYSE Arca (currently 64 15 U.S.C. 78k–1(a)(1)(C)(iii). 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 IIVs taken from the CTA or other data feeds. See Notice, supra note 4, at 64157. 66 On a daily basis, the Adviser will disclose for each portfolio security and other financial instrument of the Fund the following information: ticker symbol (if applicable), name of security and financial instrument, number of securities or dollar value of financial instruments held in the portfolio, and percentage weighting of the security and financial instrument in the portfolio. 65 See 57 See Order Instituting Proceedings, supra note 7, at 4925. 58 See Rich Letter, supra note 8, at 14. 59 Id. 60 Id. 61 15 U.S.C. 78f. 62 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). 63 15 U.S.C. 78f(b)(5). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 E:\FR\FM\19APN1.SGM 19APN1 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES 9:30 a.m., Eastern Time), the amount of cash to be deposited in exchange for a Creation Unit 67 and the amount of cash that will be paid by the Fund in respect of redemption requests. 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 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 will be calculated daily and will be made available to all market participants at the same time.68 If the IIV, the Index value, or the value of the components of the Index 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 IIV, Index value, or value of the components of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption.69 In addition, if the Exchange becomes aware that the NAV is not being disseminated to all market participants at the same time, it will halt trading in the Shares on the Exchange until such time as the NAV is available 67 Creation Units (100,000 Shares) of the Fund generally will be sold for cash only, calculated based on the NAV per Share, multiplied by the number of Shares representing a Creation Unit, plus a transaction fee. 68 See NYSE Arca Equities Rule 5.2(j)(3)(A)(v). 69 With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. 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. These may include: (1) The extent to which trading is not occurring in the securities and/or the financial instruments comprising the Fund’s portfolio; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 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 Index Provider is affiliated with a broker-dealer and will implement a firewall and maintain procedures designed to prevent the use and dissemination of material, non-public information regarding the Index. The Exchange further states that the Adviser is affiliated with a broker-dealer and will implement and maintain procedures designed to prevent the use and dissemination of material, nonpublic information regarding the Fund’s portfolio.70 The Exchange may obtain information via the ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. The Commission notes that, prior to the commencement of trading, the Exchange will inform its ETP Holders of the suitability requirements of NYSE Arca Equities Rule 9.2(a) in an Information Bulletin.71 Specifically, the Exchange will remind ETP Holders that, in recommending transactions in these 70 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 personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of nonpublic information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. 71 NYSE Arca Equities Rule 9.2(a) provides that an ETP Holder, before recommending a transaction in any security, must have reasonable grounds to believe that the recommendation is suitable for the customer based on any facts disclosed by the customer as to its other security holdings and as to its financial situation and needs. Further, the rule provides, with a limited exception, that prior to the execution of a transaction recommended to a noninstitutional customer, the ETP Holder must make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives, and any other information that such ETP Holder believes would be useful to make a recommendation. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 23609 securities, they must have a reasonable basis to believe that (1) the recommendation is suitable for a customer given reasonable inquiry concerning the customer’s investment objectives, financial situation, needs, and any other information known by such member, and (2) the customer can evaluate the special characteristics, and is able to bear the financial risks, of an investment in the Shares. In connection with the suitability obligation, the Information Bulletin will also provide that members must make reasonable efforts to obtain the following information: (a) The customer’s financial status; (b) the customer’s tax status; (c) the customer’s investment objectives; and (d) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer. As described above, the Fund will seek to track the performance of the Index by selling OTC 90-day down-andin put options in proportion to their weightings in the Index on economic terms which mirror those of the Index. If the option’s underlying stock declines by a specified amount (or more), the option will ‘‘knock in’’ and the Fund will be required to pay the buyer the difference between the option’s strike price and the closing price. Therefore, by writing a put option, the Fund will be exposed to the amount by which the price of the underlying stock is less than the strike price. FINRA has issued a regulatory notice relating to sales practice procedures applicable to recommendations to customers by FINRA members of reverse convertibles, as described in FINRA Regulatory Notice 10–09 (February 2010) (‘‘FINRA Regulatory Notice’’).72 While the Fund will not invest in traditional reverse convertible securities, the down-and-in put options written by the Fund will have the effect of exposing the Fund to the return of reverse convertible securities as if the Fund owned such reverse convertible securities directly. Therefore, the Information Bulletin will state that ETP Holders that carry customer accounts should follow the FINRA Regulatory Notice with respect to suitability. The Registration Statement states that the Fund is designed for investors who seek to obtain income through selling options on select equity securities which the Index Provider determines to have the highest volatility. It further 72 NASD Rule 2310 relating to suitability, referenced in the FINRA Regulatory Notice, has been superseded by FINRA Rule 2111. See FINRA Regulatory Notice 12–25 (May 2012). E:\FR\FM\19APN1.SGM 19APN1 mstockstill on DSK4VPTVN1PROD with NOTICES 23610 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices states that because of the high volatility of the stocks underlying the options sold by the Fund, it is possible that the value of such stocks will decline in sufficient magnitude to trigger the exercise of the options and cause a loss which may outweigh the income from selling such options. The Registration Statement states that, accordingly, the Fund should be considered as a speculative trading instrument and is not necessarily appropriate for investors who seek to avoid or minimize their exposure to stock market volatility. The Exchange’s Information Bulletin regarding the Fund will provide information regarding the suitability of an investment in the Shares, as stated in the Registration Statement. The Index will consist of 20 OTC down-and-in put options, selected in accordance with NYSE Arca’s rulesbased methodology, and the stocks underlying the put options must be U.S. exchange-listed and must also underlie exchange-listed and traded options. In addition, the stocks underlying the down-and-in put options contained in the Index must meet minimum market capitalization and trading volume requirements as described above. The diversification of the Index (20 components) and the nature of the market for the underlying securities (largest capitalized stocks with minimum trading volume requirements) should serve to mitigate concerns about manipulation. In addition, the Commission did not receive any comments or information questioning or expressing concern about manipulation or the ability of market makers to perform intraday arbitrage on a product whose underlying holdings include positions in down-and-in put options, such as the Fund. Furthermore, as stated by the Sub-Adviser, the availability of listed equity options on the securities underlying the down-and-in put options contained in the Index should mitigate concerns regarding the ability of market makers to arbitrage the value of the down-and-in put options against the price of the Shares.73 The Exchange represents that the Shares are deemed to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. In support of this proposal, the Exchange has made representations, including: (1) The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except that the Index is comprised of OTC put options. 73 See Rich Letter, supra note 8, at 12–16. VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 (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. The Exchange may obtain information via the ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. (4) Prior to the commencement of trading, the Exchange will inform its 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 IIV will not be calculated or publicly disseminated; (d) how information regarding the IIV 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. The Information Bulletin will also advise ETP Holders of their suitability obligations with respect to recommended transactions to customers in the Shares, and will state that ETP Holders that carry customer accounts should follow the FINRA Regulatory Notice with respect to suitability. (5) The Index will consist of 20 OTC put options, selected in accordance with NYSE Arca’s rules-based methodology, and the Fund, under normal circumstances, will invest at least 80% of its total assets in the components of the Index and in T-Bills. Each option written by the Fund will be covered through investments in three month TBills at least equal to the Fund’s maximum liability under the option (i.e., the strike price). A total return level for the Index will be calculated and published at the end of each day. The Fund will transact only with OTC options dealers that have in place an International Swaps and Derivatives Association agreement with the Fund. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 (6) The stocks underlying the Index Components must be U.S. exchange listed and must meet the following additional criteria: (a) The availability of publicly listed and traded options; (b) minimum market capitalization of greater than $5 billion; (c) minimum trading volume of at least 50 million shares during the preceding 6 months; (d) minimum average daily trading volume of at least one million shares during the preceding 6 months; and (e) minimum average daily trading value of at least $10 million during the preceding 6 months. (7) The Sub-Adviser will seek a correlation over time of 0.95 or better between the Fund’s performance and the performance of the Index. A figure of 1.00 would represent perfect correlation. (8) The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities. In addition, the Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. The Fund will not invest in non-U.S. equity securities. (9) Swaps, options (other than options in which the Fund principally will invest), and futures contracts will not be included in the Fund’s investment, under normal market circumstances, of at least 80% of its total assets in component securities that comprise the Index and in T-Bills. (10) A minimum of 100,000 Shares of the Fund will be outstanding as of the start of trading on the Exchange. (11) For initial and continued listing, the Fund will be in compliance with Rule 10A–3 under the Act,74 as provided by NYSE Arca Equities Rule 5.3. The Commission further notes that the Fund and the Shares must comply with all other requirements as set forth in Exchange rules applicable to Investment Company Units and prior Commission releases relating to, and orders approving, the generic listing rules (and amendments thereto) 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 Fund. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 1 thereto, is consistent with Section 6(b)(5) of the Act 75 and the rules and 74 17 75 15 E:\FR\FM\19APN1.SGM CFR 240.10A–3. U.S.C. 78f(b)(5). 19APN1 Federal Register / Vol. 78, No. 76 / Friday, April 19, 2013 / Notices regulations thereunder applicable to a national securities exchange. at the Commission’s Public Reference Room. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,76 that the proposed rule change (SR–NYSEArca– 2012–108) be, and it hereby is, approved. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8011–01–P In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. SECURITIES AND EXCHANGE COMMISSION A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change [Release No. 34–69376; File No. SR– NASDAQ–2013–063] 1. Purpose For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.77 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–09193 Filed 4–18–13; 8:45 am] Designated Retail Orders Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 7014 and 7018 April 15, 2013. mstockstill on DSK4VPTVN1PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 2 thereunder, notice is hereby given that on April 1, 2013, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ is proposing changes to its schedule of fees and rebates for execution of orders for securities priced at $1 or more under Rule 7018, as well as changes to its Qualified Market Maker (‘‘QMM’’) and NBBO Setter Incentive Programs under Rule 7014. The changes pursuant to this proposal are effective upon filing, and the Exchange will implement the proposed rule changes on April 1, 2013. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and 76 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 77 17 VerDate Mar<15>2010 17:11 Apr 18, 2013 Jkt 229001 In March 2013,3 NASDAQ introduced new liquidity provider credit tiers for orders designated by a member as Designated Retail Orders. The change was part of an ongoing effort by NASDAQ to use financial incentives to encourage greater participation in NASDAQ by members that represent retail customers.4 For purposes of the new tiers and credits, a Designated Retail Order is defined as an agency or riskless principal 5 order that originates from a natural person and is submitted to NASDAQ by a member that designates it pursuant to Rule 7018, 3 Securities Exchange Act Release No. 69133 (March 14, 2013), 78 FR 17272 (March 20, 2013) (SR–NASDAQ–2013–042). 4 The Commission has expressed concern that a significant percentage of the orders of individual investors are executed in over-the-counter markets, that is, at off-exchange markets. Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (Concept Release on Equity Market Structure, ‘‘Concept Release’’). In the Concept Release, the Commission recognized the strong policy preference under the Act in favor of price transparency and displayed markets. See also Mary L. Schapiro, Strengthening Our Equity Market Structure (Speech at the Economic Club of New York, Sept. 7, 2010) (‘‘Schapiro Speech,’’ available on the Commission Web site) (comments of former Commission Chairman on what she viewed as a troubling trend of reduced participation in the equity markets by individual investors, and that a significant percentage of volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public). 5 To qualify as a Designated Retail Order, a riskless principal order must satisfy the criteria set forth in FINRA Rule 5320.03. These criteria include that that the member maintain supervisory systems to reconstruct, in a time-sequenced manner, all orders that are entered on a riskless principal basis; and the member submits a report, contemporaneously with the execution of the facilitated order, that identifies the trade as riskless principal. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 23611 provided that no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology. As originally adopted, if a member enters Designated Retail Orders through a market participant identifier (‘‘MPID’’) through which (i) at least 90% of the shares of liquidity provided during the month are provided through Designated Retail Orders, and (ii) the member accesses, provides, or routes shares of liquidity that represent at least 0.10% of Consolidated Volume 6 during the month, the member would receive a credit of $0.0034 per share executed for Designated Retail Orders that provide liquidity if they are displayed orders. NASDAQ is proposing to modify the criteria for this tier in two respects. First, NASDAQ is removing the 0.10% of Consolidated Volume requirement, such that any member that satisfies the requirement to provide 90% of the shares of liquidity provided through a particular MPID using Designated Retail Orders will be eligible for the $0.0034 per share executed rate. In addition, NASDAQ is proposing an additional means by which a member may receive the $0.0034 per share executed rate. If the member provides shares of liquidity through Designated Retail Orders that represent at least 0.30% of Consolidated Volume, and the member also qualifies for the Penny Pilot Tier 4 Customer and Professional Rebate to Add Liquidity under Chapter XV, Section 2 of the NASDAQ Options Market (‘‘NOM’’) rules during the month through one or more of its NOM MPIDs, it will also qualify for the $0.0034 rate. Under a proposed rule change for NOM being filed contemporaneously,7 a NOM Participant qualifies for the Tier 4 Customer and Professional Rebate if it adds a number of contracts of Customer and Professional 8 liquidity that equals or exceeds 0.5% of total industry customer equity and ETF option average daily volume (‘‘ADV’’) during the month. As is currently the case, Designated Retail Orders not qualifying for the 6 ‘‘Consolidated Volume’’ is defined as the total consolidated volume reported to all consolidated transaction plans by all exchanges and trade reporting facilities. 7 SR–NASDAQ–2013–062 (April 1, 2013). 8 The term ‘‘Customer’’ applies to any transaction that is identified by a Participant for clearing in the Customer range at The Options Clearing Corporation (‘‘OCC’’) which is not for the account of a broker or dealer or for the account of a Professional. The term ‘‘Professional’’ means any person or entity that (i) is not a broker or dealer in securities, and (ii) places more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s) pursuant to Chapter I, Section 1(a)(48) of the NOM Rules. E:\FR\FM\19APN1.SGM 19APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 76 (Friday, April 19, 2013)]
[Notices]
[Pages 23601-23611]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09193]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69373; File No. SR-NYSEArca-2012-108]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to the Listing and Trading of Shares of the NYSE Arca 
U.S. Equity Synthetic Reverse Convertible Index Fund Under NYSE Arca 
Equities Rule 5.2(j)(3)

April 15, 2013.

I. Introduction

    On September 27, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the NYSE Arca U.S. Equity Synthetic Reverse Convertible 
Index Fund (``Fund'') under NYSE Arca Equities Rule 5.2(j)(3). On 
October 2, 2012, the Exchange submitted Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change, as modified by Amendment No. 
1 thereto, was published in the Federal Register on October 18, 
2012.\4\ On November 29, 2012, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
either approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ On January 16, 2013, the Commission instituted 
proceedings to determine whether to approve or disapprove the proposed 
rule change, as modified by Amendment No. 1.\7\ The Commission 
thereafter received one comment letter on the proposal.\8\ 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\ In Amendment No. 1, the Exchange amended the filing to 
specify that a list of components of the Index (as defined below), 
with percentage weightings, will be available on the Exchange's Web 
site, and that the Exchange may halt trading in the Shares (as 
defined below) if the Index value, or the value of the components of 
the Index, is not available or not disseminated as required.
    \4\ See Securities Exchange Act Release No. 68043 (October 12, 
2012), 77 FR 64153 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 68320, 77 FR 72429 (Dec. 
5, 2012).
    \7\ See Securities Exchange Act Release No. 68671, 78 FR 4919 
(Jan. 23, 2013) (``Order Instituting Proceedings'').
    \8\ See Letter from Kevin Rich, Rich Investment Solutions, LLC, 
dated February 12, 2013 (``Rich Letter'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Fund 
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 issued by the ALPS ETF Trust (``Trust'').\9\ ALPS Advisors, 
Inc. will be the Fund's investment adviser (``Adviser''), and Rich 
Investment Solutions, LLC will be the Fund's investment sub-adviser 
(``Sub-Adviser'').\10\
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    \9\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On June 22, 2012, the Trust filed with the 
Commission an amendment to its registration statement on Form N-1A 
(``Registration Statement'') under the Securities Act of 1933 and 
under the 1940 Act relating to the Fund (File Nos. 333-148826 and 
811-22175). 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. 28262 (May 1, 2008) (File No. 
812-13430).
    \10\ The Adviser is affiliated with a broker-dealer and will 
implement and maintain procedures designed to prevent the use and 
dissemination of material, non-public information regarding the 
Fund's portfolio. The Sub-Adviser is not affiliated with a broker-
dealer. In the event (a) 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 and maintain 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio.
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    The Bank of New York Mellon (``BNY'') will serve as custodian, fund 
accounting agent, and transfer agent for the Fund. ALPS Distributors, 
Inc. will be the Fund's distributor (``Distributor''). NYSE Arca will 
be the ``Index Provider'' for the Fund.\11\
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    \11\ NYSE Arca is not affiliated with the Trust, the Adviser, 
the Sub-Adviser, or the Distributor. NYSE Arca is affiliated with a 
broker-dealer and will implement a fire wall and maintain procedures 
designed to prevent the use and dissemination of material, non-
public information regarding the Index.
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Description of the Fund

    The Fund will seek investment results that correspond generally to 
the performance, before the Fund's fees and expenses, of the NYSE Arca 
U.S. Equity Synthetic Reverse Convertible Index (``Index''). The Index 
reflects the performance of a portfolio consisting of over-the-counter 
(``OTC'') ``down-and-in'' put options that have been written on 20 of 
the most volatile U.S. stocks that also have market capitalization of 
at least $5 billion.
    In seeking to replicate, before expenses, the performance of the 
Index,

[[Page 23602]]

the Fund will generally sell (i.e., write) 90-day OTC down-and-in put 
options, as described below, in proportion to their weightings in the 
Index on economic terms which mirror those of the Index. Each option 
written by the Fund will be covered through investments in three-month 
Treasury bills (``T-bills'') at least equal to the Fund's maximum 
liability under the option (i.e., the strike price). The Sub-Adviser 
will seek a correlation over time of 0.95 or better between the Fund's 
performance and the performance of the Index. A figure of 1.00 would 
represent perfect correlation.\12\
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    \12\ While the Fund will not invest in traditional reverse 
convertible securities (i.e., those which convert into the 
underlying stock), the down-and-in put options written by the Fund 
will have the effect of exposing the Fund to the return of reverse 
convertible securities (based on equity securities) as if the Fund 
owned such reverse convertible securities directly.
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    The Exchange submitted this proposed rule change because the Index 
for the Fund does 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 
``U.S. Component Stocks.'' \13\ Specifically, Commentary .01(a)(A) to 
NYSE Arca Equities Rule 5.2(j)(3) sets forth the requirements to be met 
by components of an index or portfolio of U.S. Component Stocks. 
Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) states, in 
relevant part, that the components of an index of U.S. Component 
Stocks, upon the initial listing of a series of Investment Company 
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.\14\ As described further below, the Index consists of OTC down-
and-in put options. The Exchange has represented that the Shares will 
conform to the initial and continued listing criteria under NYSE Arca 
Equities Rules 5.2(j)(3) and 5.5(g)(2), except that the Index includes 
OTC down-and-in put options, which are not NMS Stocks as defined in 
Rule 600 of Regulation NMS.
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    \13\ 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.
    \14\ See 17 CFR 242.600(b)(47) (defining ``NMS Stock'' as any 
NMS Security other than an option).
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Index Methodology and Construction

    The Index measures the return of a hypothetical portfolio 
consisting of OTC down-and-in put options which have been written on 
each of 20 stocks and a cash position calculated as described below. 
The 20 stocks that will underlie the options in the Index are those 20 
stocks from a selection of the largest capitalized (over $5 billion in 
market capitalization) stocks which also have listed options and which 
have the highest volatility, as determined by the Index Provider. These 
stocks will be required to be NMS stocks, as defined in Rule 600 of 
Regulation NMS.
    A down-and-in option is a contract that becomes a typical option 
(i.e., the option ``knocks in'' at a predetermined strike price) once 
the underlying stock declines to a specified price (``barrier price''). 
These types of options have the same return as ``reverse convertible'' 
securities, which convert into the underlying stock (or settle in cash) 
only upon a decline in the value of the underlying stock rather than a 
rise (as is the case with typical convertible instruments).
    Each option included in the Index will be a ``European-style'' 
option (i.e., an option which can only be exercised at its expiration) 
with a 90-day term. The strike prices of the option positions included 
in the Index will be determined based on the closing prices of the 
options' underlying stocks as of the beginning of each 90-day period. 
The barrier price of each such option will be 80% of the strike price. 
At the expiration of each 90-day period, if an underlying stock closes 
at or below its respective barrier price, a cash settlement payment in 
an amount equal to the difference between the strike price and the 
closing price of the stock will be deemed to be made, and the Index 
value will be correspondingly reduced. If the underlying stock does not 
close at or below the barrier price, then the option expires worthless 
and the entire amount of the premium payment will be retained within 
the Index.
    The components of the Index will be OTC down-and-in put options 
written on 20 NMS stocks selected based on the following screening 
parameters:
    1. U.S. listing of U.S. companies;
    2. Publicly listed and traded options available;
    3. Market capitalization greater than $5 billion;
    4. Top 20 stocks when ranked by 3-month implied volatility;
    5. Each underlying NMS stock will have a minimum trading volume of 
at least 50 million shares for the preceding six months; and
    6. Each underlying NMS stock will have a minimum average daily 
trading volume of at least one million shares and a minimum average 
daily trading value of at least $10 million for the preceding six 
months.
    The selection of the 20 underlying NMS stocks will occur each 
quarter (March, June, September, and December) two days prior to the 
third Friday of the month, in line with option expiration for listed 
options. The selection of the 20 underlying stocks will not, however, 
be limited to those with listed options expiring in March, June, 
September, or December.
    The Index value will reflect a cash amount invested in on-the-run 
three-month T-Bills, plus the premium collected on the short position 
in the 20 down-and-in put options written by the Index each quarter. 
The notional amount of each of the 20 down-and-in put options will be 
equal to 1/20th of the cash amount in the Index at the beginning of 
each quarter. The cash amount (initially 1,000 for the origination date 
of the Index) will be incremented by premiums generated each quarter 
from the 20 down-and-in put options sold, then decremented by cash 
settlements of any down-and-in put options expiring in-the-money and 
the distribution amount (as described below). The cash amount will be 
invested in T-Bills and will accrete by interest earned on the T-Bills.
    The End of Day Index Value will be calculated as follows: End of 
Day Index Value = Beginning of Quarter Index Value + Premium 
Generated--Option Values + Accrued Interest--distribution amount, 
where:
     Beginning of Quarter Index Value is 1,000 for the 
origination date of the Index; thereafter, it is the previous quarter-
end End of Day Index Value;
     Premium Generated is the sum of Option Values for each of 
the 20 down-and-in put options sold by the Index at the end of the 
previous quarter;
     Option Value is the settlement value of each of the 20 
down-and-in put options written by the Index at the end of each 
quarter. The notional amount of each down-and-in put option sold by the 
Index for the current quarter is 1/20th of the Beginning of Quarter 
Index Value;
     Accrued Interest is the daily interest earned on the cash 
amount held by the Index and invested in T-Bills;
     Cash amount of the Index for any quarter is the Beginning 
of Quarter Index Value plus the Premium Generated for that quarter; and
     Distribution amount for any quarter and paid out at the 
beginning of the next quarter is 2.5% of the End of Day Index Value for 
the final day of the quarter. If such an amount exceeds the amount of 
the Premium Generated, then the

[[Page 23603]]

distribution amount will equal the Premium Generated.
    A total return level for the Index will be calculated and published 
at the end of each day. The total return calculation will assume the 
quarterly index distribution is invested directly in the Index at the 
beginning of the quarter in which it is paid.
    The Exchange has provided the following example. Stock ``ABC'' 
trades at $50 per share at the start of the 90-day period, and a down-
and-in 90-day put option was written at an 80% barrier (resulting in a 
strike price of $50 per share and a barrier price of $40 per share) for 
a premium of $4 per share:
     Settlement above the barrier price: If at the end of 90 
days the ABC stock closed at any value above the barrier price of $40, 
then the option would expire worthless and the Index's value would 
reflect the retention of the $4 per share premium. The Index's value 
thus would be increased by $4 per share on the ABC option position.
     Settlement at the barrier price: If at the end of 90 days 
ABC closed at the barrier price of $40, then the option would settle in 
cash at the closing price of $40, and the Index's value would be 
reduced by $10 per share to reflect the settlement of the option. 
However, the Index's value would reflect the retention of the $4 per 
share premium, so the net loss to the Index's value would be $6 per 
share on the ABC option position.
     Settlement below the barrier price: If at the end of 90 
days, ABC closed at $35, then the option would settle in cash at the 
closing price of $35, and the Index's value would be reduced by $15 per 
share to reflect the settlement of the option. However, the Index's 
value would reflect the retention of the $4 per share premium, so the 
net loss to the Index's value would be $11 per share on the ABC option 
position.
    As discussed above, the Index's value is equal to the value of the 
options positions comprising the Index, plus a cash position. The cash 
position starts at a base of 1,000. The cash position is increased by 
option premiums generated by the option positions comprising the Index 
and interest on the cash position at an annual rate equal to the three 
month T-Bill rate. The cash position is decreased by cash settlement on 
options which ``knock in'' (i.e., where the closing price of the 
underlying stock at the end of the 90-day period is at or below the 
barrier price). The cash position is also decreased by a deemed 
quarterly cash distribution, currently targeted at the rate of 2.5% of 
the value of the Index. However, if the option premiums generated 
during the quarter are less than 2.5%, the deemed distribution will be 
reduced by the amount of the shortfall.

The Fund's Investments

    The Fund, under normal circumstances,\15\ will invest at least 80% 
of its total assets in component securities that comprise the Index and 
in T-Bills which will be collateral for the options positions. The Fund 
will enter into the option positions determined by the Index Provider 
by writing (i.e., selling) OTC 90-day down-and-in put options in 
proportion to their weightings in the Index on economic terms which 
mirror those of the Index. By writing an option, the Fund will receive 
premiums from the buyer of the option, which will increase the Fund's 
return if the option does not ``knock in'' and thus expires worthless. 
However, if the option's underlying stock declines by a specified 
amount (or more), the option will ``knock in'' and the Fund will be 
required to pay the buyer the difference between the option's strike 
price and the closing price. Therefore, by writing a down-and-in put 
option, the Fund will be exposed to the amount by which the price of 
the underlying is less than the strike price. Accordingly, the 
potential return to the Fund will be limited to the amount of option 
premiums it receives, while the Fund can potentially lose up to the 
entire strike price of each option it sells. Further, if the value of 
the stocks underlying the options sold by the Fund increases, the 
Fund's returns will not increase accordingly.
---------------------------------------------------------------------------

    \15\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equities or options 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.
---------------------------------------------------------------------------

    Typically, the writer of a put option incurs an obligation to buy 
the underlying instrument from the purchaser of the option at the 
option's exercise price, upon exercise by the option purchaser. 
However, the down-and-in put options to be sold by the Fund will be 
settled in cash only. The Fund may need to sell down-and-in put options 
on stocks other than those underlying the option positions contained in 
the Index if the Fund is unable to obtain a competitive market from OTC 
option dealers on a stock underlying a particular option position in 
the Index, thus preventing the Fund from writing an option on that 
stock.\16\
---------------------------------------------------------------------------

    \16\ The Fund will transact only with OTC options dealers that 
have in place an International Swaps and Derivatives Association 
agreement with the Fund.
---------------------------------------------------------------------------

    Every 90 days, the options included within the Index are cash 
settled or expire, and new option positions are established. The Fund 
will enter into new option positions accordingly. This 90-day cycle 
likely will cause the Fund to have frequent and substantial portfolio 
turnover. If the Fund receives additional inflows (and issues more 
Shares accordingly in large numbers known as ``Creation Units'') during 
a 90-day period, the Fund will sell additional OTC down-and-in put 
options which will be exercised or expire at the end of such 90-day 
period. Conversely, if the Fund redeems Shares in Creation Unit size 
during a 90-day period, the Fund will terminate the appropriate portion 
of the options it has sold accordingly.

Secondary Investment Strategies

    The Fund may invest its remaining assets in money market 
instruments,\17\ including repurchase agreements \18\ or other funds 
which invest exclusively in money market instruments, convertible 
securities, structured notes (notes on which the amount of principal 
repayment and interest payments are based on the movement of one or 
more specified factors, such as the movement of a particular stock or 
stock index), forward foreign currency exchange

[[Page 23604]]

contracts, and in swaps,\19\ options (other than options the Fund 
principally will write), and futures contracts.\20\ Swaps, options 
(other than options the Fund principally will write), and futures 
contracts (and convertible securities and structured notes) may be used 
by the Fund in seeking performance that corresponds to the Index and in 
managing cash flows.\21\ The Fund will not invest in money market 
instruments as part of a temporary defensive strategy to protect 
against potential stock market declines. The Adviser anticipates that 
it may take approximately three business days (i.e., each day the New 
York Stock Exchange (``NYSE'') is open) for additions and deletions to 
the Index to be reflected in the portfolio composition of the Fund.
---------------------------------------------------------------------------

    \17\ The Fund may invest a portion of its assets in high-quality 
money market instruments on an ongoing basis to provide liquidity. 
The instruments in which the Fund may invest include: (i) Short-term 
obligations issued by the U.S. Government; (ii) negotiable 
certificates of deposit (``CDs''), fixed time deposits, and bankers' 
acceptances of U.S. and foreign banks and similar institutions; 
(iii) commercial paper rated at the date of purchase ``Prime-1'' by 
Moody's Investors Service, Inc. or ``A-1+'' or ``A-1'' by Standard & 
Poor's or, if unrated, of comparable quality as determined by the 
Adviser; (iv) repurchase agreements; and (v) money market mutual 
funds. CDs are short-term negotiable obligations of commercial 
banks. Time deposits are non-negotiable deposits maintained in 
banking institutions for specified periods of time at stated 
interest rates. Banker's acceptances are time drafts drawn on 
commercial banks by borrowers, usually in connection with 
international transactions.
    \18\ Repurchase agreements are agreements pursuant to which 
securities are acquired by the Fund from a third party with the 
understanding that they will be repurchased by the seller at a fixed 
price on an agreed date. These agreements may be made with respect 
to any of the portfolio securities in which the Fund is authorized 
to invest. Repurchase agreements may be characterized as loans 
secured by the underlying securities. The Fund may enter into 
repurchase agreements with (i) member banks of the Federal Reserve 
System having total assets in excess of $500 million and (ii) 
securities dealers (``Qualified Institutions''). The Adviser will 
monitor the continued creditworthiness of Qualified Institutions. 
The Fund also may enter into reverse repurchase agreements, which 
involve the sale of securities with an agreement to repurchase the 
securities at an agreed-upon price, date, and interest payment and 
have the characteristics of borrowing.
    \19\ Swap agreements are contracts between parties in which one 
party agrees to make periodic payments to the other party 
(``counterparty'') based on the change in market value or level of a 
specified rate, index, or asset. In return, the counterparty agrees 
to make periodic payments to the first party based on the return of 
a different specified rate, index, or asset. Swap agreements will 
usually be done on a net basis, the Fund receiving or paying only 
the net amount of the two payments. The net amount of the excess, if 
any, of the Fund's obligations over its entitlements with respect to 
each swap will be accrued on a daily basis and an amount of cash or 
highly liquid securities having an aggregate value at least equal to 
the accrued excess will be maintained in an account at the Trust's 
custodian bank.
    \20\ The Fund may utilize U.S. listed exchange-traded futures. 
In connection with its management of the Trust, the Adviser has 
claimed an exclusion from registration as a commodity pool operator 
under the Commodity Exchange Act (``CEA''). Therefore, it is not 
subject to the registration and regulatory requirements of the CEA, 
and there are no limitations on the extent to which the Fund may 
engage in non-hedging transactions involving futures and options 
thereon, except as set forth in the Registration Statement.
    \21\ Swaps, options (other than options the Fund principally 
will write), and futures contracts will not be included in the 
Fund's investment, under normal market circumstances, of at least 
80% of its total assets in component securities that comprise the 
Index and in T-Bills, as described above.
---------------------------------------------------------------------------

    The Fund may invest in the securities of other investment companies 
(including money market funds). Under the 1940 Act, the Fund's 
investment in investment companies is limited to, subject to certain 
exceptions, (i) 3% of the total outstanding voting stock of any one 
investment company, (ii) 5% of the Fund's total assets with respect to 
any one investment company, and (iii) 10% of the Fund's total assets of 
investment companies in the aggregate.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities. 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 intends to qualify for and to elect to be treated as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code of 1986, as amended
    The Fund will not invest in non-U.S. equity securities. The Fund's 
investments will be consistent with the Fund's investment objective and 
will not be used to enhance leverage.

Pricing Fund Shares

    The Fund's OTC down-and-in put options on equity securities will be 
valued pursuant to a third-party option pricing model. Debt securities 
will be valued at the mean between the last available bid and ask 
prices for such securities or, if such prices are not available, at 
prices for securities of comparable maturity, quality, and type. 
Securities for which market quotations are not readily available, 
including restricted securities, will be valued by a method that the 
Fund's Board of Trustees believe accurately reflects fair value. 
Securities will be valued at fair value when market quotations are not 
readily available or are deemed unreliable, such as when a security's 
value or meaningful portion of the Fund's portfolio is believed to have 
been materially affected by a significant event. Such events may 
include a natural disaster, an economic event like a bankruptcy filing, 
trading halt in a security, an unscheduled early market close, or a 
substantial fluctuation in domestic and foreign markets that has 
occurred between the close of the principal exchange and the NYSE. In 
such a case, the value for a security is likely to be different from 
the last quoted market price. In addition, due to the subjective and 
variable nature of fair market value pricing, it is possible that the 
value determined for a particular asset may be materially different 
from the value realized upon such asset's sale.

Creations and Redemptions of Shares

    The Trust will issue and sell Shares of the Fund only in ``Creation 
Units'' of 100,000 Shares each on a continuous basis through the 
Distributor, without a sales load, at its net asset value (``NAV'') 
next determined after receipt, on any business day, of an order in 
proper form. Creation Units of the Fund generally will be sold for cash 
only, calculated based on the NAV per Share multiplied by the number of 
Shares representing a Creation Unit (``Deposit Cash''), plus a 
transaction fee.
    The Custodian, through the National Securities Clearing Corporation 
(``NSCC''), will make available on each business day, prior to the 
opening of business on NYSE Arca (currently 9:30 a.m. Eastern Time 
(``E.T.'')), the amount of the Deposit Cash to be deposited in exchange 
for a Creation Unit of the Fund.
    To be eligible to place orders with the Distributor and to create a 
Creation Unit of the Fund, an entity must be (i) a ``Participating 
Party,'' i.e., a broker-dealer or other participant in the clearing 
process through the Continuous Net Settlement System of the NSCC; or 
(ii) a Depository Trust Company (``DTC'') participant, and, in each 
case, must have executed an agreement with the Distributor, with 
respect to creations and redemptions of Creation Units.
    All orders to create Creation Units, whether through a 
Participating Party or a DTC participant, must be received by the 
Distributor no later than the closing time of the regular trading 
session on the NYSE (ordinarily 4:00 p.m. E.T.) in each case on the 
date such order is placed in order for creation of Creation Units to be 
effected based on the NAV of Shares of the Fund as next determined on 
such date after receipt of the order in proper form.
    Fund Shares may be redeemed only in Creation Units at the NAV next 
determined after receipt of a redemption request in proper form by the 
Fund through BNY and only on a business day. The Fund will not redeem 
Shares in amounts less than a Creation Unit.
    With respect to the Fund, BNY, through the NSCC, will make 
available prior to the opening of business on NYSE Arca (currently 9:30 
a.m. E.T.) on each business day, the amount of cash that will be paid 
(subject to possible amendment or correction) in respect of redemption 
requests received in proper form on that day (``Redemption Cash'').
    The redemption proceeds for a Creation Unit generally will consist 
of the Redemption Cash, as announced on the business day of the request 
for redemption received in proper form, less a redemption transaction 
fee.

Initial and Continued Listing

    The Exchange represents that the Shares will conform to the initial 
and continued listing criteria under NYSE Arca Equities Rules 5.2(j)(3) 
and

[[Page 23605]]

5.5(g)(2), except that the Index is comprised of down-and-in put 
options based on ``U.S. Component Stocks'' \22\ rather than U.S. 
Component Stocks themselves. The Exchange further represents that, for 
initial and/or continued listing, the Fund will be in compliance with 
Rule 10A-3 under the Exchange Act,\23\ 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 NAV will be 
calculated daily and made available to all market participants at the 
same time.
---------------------------------------------------------------------------

    \22\ NYSE Arca Equities Rule 5.2(j)(3) defines the term ``U.S. 
Component Stock'' to 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.
    \23\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Availability of Information

    The Fund's Web site (www.alpsetfs.com), which will be publicly 
available prior to the public offering of the Shares, will include a 
form of the prospectus for the Fund that may be downloaded. The Fund's 
Web site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (``Bid/Ask 
Price''),\24\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters.\25\
---------------------------------------------------------------------------

    \24\ The Bid/Ask Price of the Fund would be determined using the 
mid-point of the highest bid and the lowest offer for Shares on the 
Exchange as of the time of calculation of the Fund's NAV. The 
records relating to Bid/Ask Prices would be retained by the Fund and 
its service providers.
    \25\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') would be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
would be able to disclose at the beginning of the business day the 
portfolio that would form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Adviser will disclose for each portfolio 
security and other financial instrument of the Fund the following 
information: ticker symbol (if applicable), name of security and 
financial instrument, number of securities or dollar value of financial 
instruments held in the portfolio, and percentage weighting of the 
security and financial instrument in the portfolio. The Fund's 
portfolio holdings, including information regarding its option 
positions, will be disclosed each day on the Fund's Web site. The Web 
site information will be publicly available at no charge.
    The NAV per Share for the Fund will be determined once daily as of 
the close of the NYSE, usually 4:00 p.m. E.T., each day the NYSE is 
open for trading. NAV per Share will be determined by dividing the 
value of the Fund's portfolio securities, cash and other assets 
(including accrued interest), less all liabilities (including accrued 
expenses), by the total number of Shares outstanding. As discussed 
above, the OTC down-and-in put options will be valued pursuant to a 
third-party option pricing model.\26\
---------------------------------------------------------------------------

    \26\ See ``Pricing Fund Shares'' supra.
---------------------------------------------------------------------------

    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports will be available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information will be published daily in the financial section of 
newspapers. Quotation and last-sale information for the Shares will be 
available via the Consolidated Tape Association (``CTA'') high-speed 
line. The value of the Index and the values of the OTC down-and-in put 
options components in the Index (which will each be weighted at \1/20\ 
of the Index value) will be published by one or more major market data 
vendors every 15 seconds during the NYSE Arca Core Trading Session of 
9:30 a.m. E.T. to 4:00 p.m. E.T. A list of components of the Index, 
with percentage weightings, will be available on the Exchange's Web 
site. Each of the stocks underlying the OTC down-and-in put options in 
the Index also will underlie standardized options contracts traded on 
U.S. options exchanges, which will disseminate quotation and last-sale 
information with respect to such contracts. In addition, the Intraday 
Indicative Value will be calculated and disseminated by the Exchange, 
and widely disseminated by one or more major market data vendors, at 
least every 15 seconds during the Core Trading Session.\27\ The 
Exchange states that the dissemination of the Intraday Indicative Value 
will allow investors to determine the value of the underlying portfolio 
of the Fund on a daily basis and to provide a close estimate of that 
value throughout the trading day.
---------------------------------------------------------------------------

    \27\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Intraday Indicative Values taken from the CTA or other data feeds. 
See Notice, supra note 4, at 64157. The IIV calculations are based 
on local market prices and may not reflect events that occur 
subsequent to the local market's close. See Registration Statement, 
supra note 9, at 11.
---------------------------------------------------------------------------

Trading Halts

    With respect to trading halts, the Exchange states that it may 
consider all relevant factors in exercising its discretion to halt or 
suspend trading in the Shares of the Fund.\28\ 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. These may include: 
(1) The extent to which trading is not occurring in the securities 
comprising the Fund's portfolio holdings and/or the financial 
instruments of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
---------------------------------------------------------------------------

    \28\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

    If the Intraday Indicative Value, the Index value, or the value of 
the components of the Index is not available or is not being 
disseminated as required, the Exchange may halt trading during the day 
in which the disruption occurs; if the interruption persists past the 
day in which it occurred, the Exchange will halt trading no later than 
the beginning of the trading day following the interruption. The 
Exchange will obtain a representation from the Fund that the NAV for 
the Fund will be calculated daily and will be made available to all 
market participants at the same time. Under NYSE Arca Equities Rule 
7.34(a)(5), if the Exchange becomes aware that the NAV for the Fund is 
not being disseminated to all market participants at the same time, it 
will halt trading in the Shares until such time as the NAV is available 
to all market participants.

Trading Rules

    The Exchange deems the Shares to be equity securities, thus 
rendering trading

[[Page 23606]]

in the Shares subject to the Exchange's existing rules governing the 
trading of equity securities. Shares will trade on the NYSE Arca 
Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in accordance with NYSE 
Arca Equities Rule 7.34 (Opening, Core, and Late Trading Sessions). The 
Exchange states that it has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.

Surveillance

    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products (which include Investment 
Company Units) to monitor trading in the Shares. The Exchange 
represents that these procedures are adequate to properly monitor 
Exchange trading of the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and applicable federal securities 
laws.
    The Exchange's current trading surveillance focuses on detecting 
securities trading outside their normal patterns. When such situations 
are detected, surveillance analysis follows and investigations are 
opened, where appropriate, to review the behavior of all relevant 
parties for all relevant trading violations.
    The Exchange may obtain information via the Intermarket 
Surveillance Group (``ISG'') from other exchanges that are members of 
ISG or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement.\29\
---------------------------------------------------------------------------

    \29\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
portfolio for the Fund may trade on markets that are members of ISG 
or with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.

Suitability

    Currently, NYSE Arca Equities Rule 9.2(a) (Diligence as to 
Accounts) provides that an Equity Trading Permit (``ETP'') Holder, 
before recommending a transaction in any security, must have reasonable 
grounds to believe that the recommendation is suitable for the customer 
based on any facts disclosed by the customer as to its other security 
holdings and as to its financial situation and needs. Further, the rule 
provides, with a limited exception, that prior to the execution of a 
transaction recommended to a non-institutional customer, the ETP Holder 
must make reasonable efforts to obtain information concerning the 
customer's financial status, tax status, investment objectives, and any 
other information that such ETP Holder believes would be useful to make 
a recommendation.
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders of the suitability requirements of NYSE Arca Equities Rule 
9.2(a) in an Information Bulletin (``Information Bulletin'' or 
``Bulletin''). Specifically, ETP Holders will be reminded in the 
Information Bulletin that, in recommending transactions in these 
securities, they must have a reasonable basis to believe that (1) the 
recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member, and (2) the 
customer can evaluate the special characteristics, and is able to bear 
the financial risks, of an investment in the Shares. In connection with 
the suitability obligation, the Information Bulletin will also provide 
that members must make reasonable efforts to obtain the following 
information: (1) The customer's financial status; (2) the customer's 
tax status; (3) the customer's investment objectives; and (4) such 
other information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.
    In addition, FINRA has issued a regulatory notice relating to sales 
practice procedures applicable to recommendations to customers by FINRA 
members of reverse convertibles, as described in FINRA Regulatory 
Notice 10-09 (February 2010) (``FINRA Regulatory Notice'').\30\ As 
described above, while the Fund will not invest in traditional reverse 
convertible securities, the down-and-in put options written by the Fund 
will have the effect of exposing the Fund to the return of reverse 
convertible securities as if the Fund owned such reverse convertible 
securities directly. Therefore, the Bulletin will state that ETP 
Holders that carry customer accounts should follow the FINRA guidance 
set forth in the FINRA Regulatory Notice.
---------------------------------------------------------------------------

    \30\ The Exchange notes that NASD Rule 2310 relating to 
suitability, referenced in the FINRA Regulatory Notice, has been 
superseded by FINRA Rule 2111. See FINRA Regulatory Notice 12-25 
(May 2012).
---------------------------------------------------------------------------

    The Registration Statement states that the Fund is designed for 
investors who seek to obtain income through selling options on select 
equity securities which the Index Provider determines to have the 
highest volatility. It further states that because of the high 
volatility of the stocks underlying the options sold by the Fund, it is 
possible that the value of such stocks would decline in sufficient 
magnitude to trigger the exercise of the options and cause a loss which 
may outweigh the income from selling such options. The Registration 
Statement states that, accordingly, the Fund should be considered a 
speculative trading instrument and is not necessarily appropriate for 
investors who seek to avoid or minimize their exposure to stock market 
volatility. The Exchange's Information Bulletin regarding the Fund will 
provide information regarding the suitability of an investment in the 
Shares, as stated in the Registration Statement.

Information Bulletin

    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in the Bulletin of the special characteristics and risks 
associated with trading the Shares. Specifically, the Bulletin will 
discuss the following: (1) The procedures for purchases and redemptions 
of Shares in Creation Units (and that Shares are not individually 
redeemable); (2) 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; (3) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated Intraday Indicative Value would not be 
calculated or publicly disseminated; (4) how information regarding the 
Intraday Indicative Value is disseminated; (5) 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 (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Exchange Act. 
The Bulletin will also disclose that the NAV for the Shares would be 
calculated after 4:00 p.m. E.T. each trading day.
    Additional information regarding the Trust, the Fund, and the 
Shares,

[[Page 23607]]

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.\31\
---------------------------------------------------------------------------

    \31\ See Notice and Registration Statement, supra notes 4 and 9.
---------------------------------------------------------------------------

III. Summary of Comment Letters

    In the Order Instituting Proceedings, the Commission asked a number 
of detailed questions about the proposal, including questions related 
to the trading of the Shares of the Fund, such as the extent to which 
the down-and-in put options written by the Fund could be subject to 
manipulation as well as the extent to which market makers would be able 
to effectively arbitrage the Shares to help keep the intra-day market 
price in line with the intra-day NAV.\32\ The Commission did not 
receive any comment letters expressing concern about the Shares or the 
Fund.
---------------------------------------------------------------------------

    \32\ See Order Instituting Proceedings, supra note 7, at 4925-6.
---------------------------------------------------------------------------

    The Commission received one comment letter in support of the 
proposal from the Sub-Adviser.\33\ The commenter states that the Fund 
will provide the benefits of investing in reverse convertible notes 
while mitigating some negative features associated with reverse 
convertible notes, including that the Fund will offer diversification 
by selling options of twenty underlying issuers, rather than just one 
underlying issuer; the Fund's structure will give investors a lower 
initial and ongoing cost due to the economies of scale rather than 
incurring deal by deal imbedded costs for privately placed reverse 
convertible notes; the Fund will not carry the credit risk of banks and 
financial firms imbedded into reverse convertible notes; and the Fund 
will sell options and collect premium upfront, thereby decreasing risks 
to the Fund as compared to a reverse convertible note.\34\
---------------------------------------------------------------------------

    \33\ See Rich Letter, supra note 8.
    \34\ Id. at 3.
---------------------------------------------------------------------------

A. Disclosure Relating to the Shares

    In the Order Instituting Proceedings, the Commission requested 
comment on whether investors would be able to understand the strategy, 
risks and potential rewards, assumptions and expected performance of 
the Fund, including the effect of the Fund's exposure to its down-and-
in put options.\35\ In response, the commenter states its belief that 
investors in the Fund will clearly under these characteristics of the 
Fund. First, the commenter states that the name of the Fund is very 
descriptive and will not be misleading to potential investors.\36\ In 
addition, the commenter states that the Fund's prospectus clearly 
describes the Fund's strategy and index methodology and construction, 
provides examples of how the options are structured and hypothetical 
scenarios regarding changes in stock prices, and contains a ``Who 
Should Invest'' section.\37\
---------------------------------------------------------------------------

    \35\ See Order Instituting Proceedings, supra note 7, at 4925.
    \36\ See Rich Letter, supra note 8, at 6.
    \37\ Id. at 7-9.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission requested 
comment on whether the Exchange's rules governing sales practices are 
adequately designed to ensure the suitability of recommendations 
regarding the Fund's Shares.\38\ In response, the commenter states its 
belief that the Exchange's rules governing sales practices adequately 
ensure the suitability of recommendations regarding the Fund's Shares, 
and that the Exchange's rules governing sales practices should not be 
altered for the Fund.\39\ The commenter notes that NYSE Arca Equities 
Rule 9.2(a) (Diligence as to Accounts) imposes obligations on ETP 
Holders relating to suitability and due diligence, and that the 
Exchange has represented that, prior to the commencement of trading, it 
will provide ETP Holders with an Information Bulletin which will 
describe the suitability requirements of NYSE Arca Equities Rule 9.2(a) 
and will state that ETP Holders that carry customer accounts should 
follow the FINRA guidance set forth in the FINRA Regulatory Notice.\40\
---------------------------------------------------------------------------

    \38\ See Order Instituting Proceedings, supra note 7, at 4925.
    \39\ See Rich Letter, supra note 8, at 9.
    \40\ Id. at 9-10. See also ``Suitability'' supra.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission requested 
comment on whether the proposed disclosure of the nature of, and the 
risks of investing in, the Shares is sufficient.\41\ The commenter 
states that such disclosure is sufficient, as the Exchange has provided 
a detailed description of the Fund and the Shares in the Notice, and 
the Fund is required to deliver a prospectus to investors pursuant to 
Commission rules which will contain key information relating to the 
Shares necessary to make informed investment decisions.\42\
---------------------------------------------------------------------------

    \41\ See Order Instituting Proceedings, supra note 7, at 4925.
    \42\ See Rich Letter, supra note 8, at 10.
---------------------------------------------------------------------------

B. Potential for Manipulation of the Down-and-in Put Options Written by 
the Fund

    In the Order Instituting Proceedings, the Commission requested 
comment on whether the discontinuous payoff structure of down-and-in 
put options could give rise to the potential for manipulation.\43\ The 
commenter responds that the down-and-in put options in which the Fund 
will invest do have the potential to provide an incentive for someone 
who has a position in an option sold by the Fund, or the Fund itself, 
to manipulate the price of the underlying stock when it is near the 
knock-in price on the expiration date, but argues that this potential 
is very limited because the diversification of the Fund greatly 
restricts gains from the manipulation of any one underlying stock.\44\ 
The commenter provides examples to illustrate that due to the 
diversification of the Fund and the market capitalization and daily 
trading volume requirements for the stock underlying the options 
positions written by the Fund, the cost of attempting to force a 
particular underlying stock either higher or lower is not proportional 
to the prospective gain.\45\
---------------------------------------------------------------------------

    \43\ See Order Instituting Proceedings, supra note 7, at 4925.
    \44\ See Rich Letter, supra note 8, at 10.
    \45\ Id. at 11-12.
---------------------------------------------------------------------------

C. Valuation and Arbitrage Relating to the Shares

    In the Order Instituting Proceedings, the Commission requested 
comment on whether the market for OTC down-and-in put options is 
sufficiently liquid and the pricing of those options is sufficiently 
transparent (1) for investors to be able to accurately value such 
options, and (2) for authorized participants and market makers to 
effectively arbitrage the OTC market and the market for the Shares 
throughout the trading day.\46\ The commenter responds that the market 
for OTC down-and-in put options is sufficiently liquid and pricing is 
sufficiently transparent so that the down-and-in put options can be 
priced uniformly by investors, market makers, and authorized 
participants.\47\
---------------------------------------------------------------------------

    \46\ See Order Instituting Proceedings, supra note 7, at 4925-6.
    \47\ See Rich Letter, supra note 8, at 12-16.
---------------------------------------------------------------------------

    First, the commenter states that the down-and-in puts sold by the 
Fund are very short dated (with terms to expiration of only 3 months), 
European-style (meaning the down-and-in put will only knock in if the 
price of the underlying stock finishes at or below the knock-in price 
on the expiration

[[Page 23608]]

date of the option), and have very liquid underlying stocks with 
exchange traded options on those underlying stocks.\48\ The commenter 
states that there is a well-known model for pricing European-style, 
very short dated down-and-in puts using pricing inputs easily obtained 
from the listed option and stock markets.\49\ In addition, the 
commenter states that the down-and-in puts in the Fund may also be 
priced without an explicit model through the use of plain vanilla puts 
and put spreads.\50\ The commenter notes that the OTC market for 
barrier options is the largest exotic option OTC market.\51\ 
Furthermore, the commenter states that the Fund will provide to the 
public on its Web site the model used to calculate the down-and-in put 
option values used by the Index provider and its calculation agent, 
with detailed explanations of the formula calculation and inputs.\52\
---------------------------------------------------------------------------

    \48\ Id.
    \49\ Id. at 13-16.
    \50\ Id.
    \51\ Id.
    \52\ Id.
---------------------------------------------------------------------------

    In addition, with respect to the ability of market makers and 
authorized participants to engage in arbitrage, the commenter further 
states that initially, many market makers will be associated with the 
dealers buying and selling the down-and-in put options from and to the 
Fund, and therefore these market makers will have the necessary 
infrastructure and knowledge to price, make markets in, and hedge their 
positions in the Shares throughout the trading day.\53\ The commenter 
also states that authorized participants only clear the Shares when 
there are creates or redeems and do not arbitrage throughout the day to 
ensure that prices of the Shares closely track the NAV per Share of the 
Fund.\54\ The commenter states that the only situation in which 
significant discounts or premiums to the intraday NAV per Share of a 
Fund could develop is when a large number of the down-and-in put 
options in the Fund are close to maturity and the underlying stock 
price is very close to the knock-in barrier.\55\ The commenter states 
that such a situation would cause market makers to widen bid and offer 
spreads for the Shares as a reflection of the economics of the down-
and-in put option possible payout.\56\
---------------------------------------------------------------------------

    \53\ Id.
    \54\ Id.
    \55\ Id. at 15.
    \56\ Id. at 17.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission requested 
comment on ways for market makers and authorized participants to 
arbitrage the value of a down-and-in put option against the price of 
the Shares.\57\ The commenter responds that in many cases, the purchase 
and sale of specific listed options would be an effective way for 
market makers to arbitrage the value of the down-and-in put options 
against the price of the Shares because the down-and-in puts written by 
the Fund will be European-style.\58\ Therefore, the purchase or sale of 
the down-and-in puts written by the Fund may be efficiently hedged by 
selling or purchasing a static portfolio of listed puts and put 
spreads, and such a strategy would be most effective when the listed 
options have the same maturity date as the down-and-in put, option in 
the Fund, when the strike prices of the listed options are very close 
to the knock-in price of the down-and-in put option in the Fund, and 
when the available listed options have strikes relatively close to one 
another \59\ When this is not the case, however, the commenter states 
that hedging with a static portfolio of listed puts and put spreads may 
not be the most efficient hedging methodology, and using a dynamic 
portfolio of options and stock to hedge may be more efficient and 
effective.\60\
---------------------------------------------------------------------------

    \57\ See Order Instituting Proceedings, supra note 7, at 4925.
    \58\ See Rich Letter, supra note 8, at 14.
    \59\ Id.
    \60\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change, as 
modified by Amendment No. 1 thereto, and finds that it is consistent 
with the requirements of Section 6 of the Act \61\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\62\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\63\ which requires, among other things, that the Exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The 
Commission notes that the Fund and the Shares must comply with the 
applicable requirements of NYSE Arca Equities Rules 5.2(j)(3) and 
5.5(g)(2) to be listed and traded on the Exchange.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f.
    \62\ 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).
    \63\ 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,\64\ 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 Index value and the 
values of the OTC put options components in the Index will be published 
by one or more major market data vendors every 15 seconds during the 
NYSE Arca Core Trading Session (9:30 a.m. to 4:00 p.m., Eastern Time). 
A list of components of the Index, with percentage weightings, will be 
available on the Exchange's Web site. Each of the stocks underlying the 
OTC put options in the Index also will underlie standardized options 
contracts traded on U.S. options exchanges, which will disseminate 
quotation and last-sale information with respect to such options 
contracts. In addition, an Intraday Indicative Value (``IIV'') for the 
Shares will be widely disseminated at least every 15 seconds during the 
NYSE Arca Core Trading Session by one or more major market data 
vendors.\65\ The Fund's portfolio holdings, including information 
regarding its options positions, will be disclosed each day on the 
Fund's Web site, which Web site information will be publicly available 
at no charge.\66\ The Fund's NAV per Share will be determined once 
daily as of the close of the NYSE (normally 4:00 p.m., Eastern Time) on 
each day the NYSE is open for trading. BNY, through the National 
Securities Clearing Corporation, will make available on each business 
day, prior to the opening of business on NYSE Arca (currently

[[Page 23609]]

9:30 a.m., Eastern Time), the amount of cash to be deposited in 
exchange for a Creation Unit \67\ and the amount of cash that will be 
paid by the Fund in respect of redemption requests. 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 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.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \65\ 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 IIVs taken from the CTA or 
other data feeds. See Notice, supra note 4, at 64157.
    \66\ On a daily basis, the Adviser will disclose for each 
portfolio security and other financial instrument of the Fund the 
following information: ticker symbol (if applicable), name of 
security and financial instrument, number of securities or dollar 
value of financial instruments held in the portfolio, and percentage 
weighting of the security and financial instrument in the portfolio.
    \67\ Creation Units (100,000 Shares) of the Fund generally will 
be sold for cash only, calculated based on the NAV per Share, 
multiplied by the number of Shares representing a Creation Unit, 
plus a transaction fee.
---------------------------------------------------------------------------

    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 will be 
calculated daily and will be made available to all market participants 
at the same time.\68\ If the IIV, the Index value, or the value of the 
components of the Index 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 IIV, 
Index value, or value of the components of the Index persists past the 
trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the 
interruption.\69\ In addition, if the Exchange becomes aware that the 
NAV is not being disseminated to all market participants at the same 
time, it will halt trading in the Shares 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 Index Provider is affiliated with a broker-dealer and will 
implement a firewall and maintain procedures designed to prevent the 
use and dissemination of material, non-public information regarding the 
Index. The Exchange further states that the Adviser is affiliated with 
a broker-dealer and will implement and maintain procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the Fund's portfolio.\70\ The Exchange may obtain information 
via the ISG from other exchanges that are members of ISG or with which 
the Exchange has entered into a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    \68\ See NYSE Arca Equities Rule 5.2(j)(3)(A)(v).
    \69\ With respect to trading halts, the Exchange may consider 
all relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. 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. These may include: 
(1) The extent to which trading is not occurring in the securities 
and/or the financial instruments comprising the Fund's portfolio; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.
    \70\ 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 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.
---------------------------------------------------------------------------

    The Commission notes that, prior to the commencement of trading, 
the Exchange will inform its ETP Holders of the suitability 
requirements of NYSE Arca Equities Rule 9.2(a) in an Information 
Bulletin.\71\ Specifically, the Exchange will remind ETP Holders that, 
in recommending transactions in these securities, they must have a 
reasonable basis to believe that (1) the recommendation is suitable for 
a customer given reasonable inquiry concerning the customer's 
investment objectives, financial situation, needs, and any other 
information known by such member, and (2) the customer can evaluate the 
special characteristics, and is able to bear the financial risks, of an 
investment in the Shares. In connection with the suitability 
obligation, the Information Bulletin will also provide that members 
must make reasonable efforts to obtain the following information: (a) 
The customer's financial status; (b) the customer's tax status; (c) the 
customer's investment objectives; and (d) such other information used 
or considered to be reasonable by such member or registered 
representative in making recommendations to the customer.
---------------------------------------------------------------------------

    \71\ NYSE Arca Equities Rule 9.2(a) provides that an ETP Holder, 
before recommending a transaction in any security, must have 
reasonable grounds to believe that the recommendation is suitable 
for the customer based on any facts disclosed by the customer as to 
its other security holdings and as to its financial situation and 
needs. Further, the rule provides, with a limited exception, that 
prior to the execution of a transaction recommended to a non-
institutional customer, the ETP Holder must make reasonable efforts 
to obtain information concerning the customer's financial status, 
tax status, investment objectives, and any other information that 
such ETP Holder believes would be useful to make a recommendation.
---------------------------------------------------------------------------

    As described above, the Fund will seek to track the performance of 
the Index by selling OTC 90-day down-and-in put options in proportion 
to their weightings in the Index on economic terms which mirror those 
of the Index. If the option's underlying stock declines by a specified 
amount (or more), the option will ``knock in'' and the Fund will be 
required to pay the buyer the difference between the option's strike 
price and the closing price. Therefore, by writing a put option, the 
Fund will be exposed to the amount by which the price of the underlying 
stock is less than the strike price. FINRA has issued a regulatory 
notice relating to sales practice procedures applicable to 
recommendations to customers by FINRA members of reverse convertibles, 
as described in FINRA Regulatory Notice 10-09 (February 2010) (``FINRA 
Regulatory Notice'').\72\ While the Fund will not invest in traditional 
reverse convertible securities, the down-and-in put options written by 
the Fund will have the effect of exposing the Fund to the return of 
reverse convertible securities as if the Fund owned such reverse 
convertible securities directly. Therefore, the Information Bulletin 
will state that ETP Holders that carry customer accounts should follow 
the FINRA Regulatory Notice with respect to suitability.
---------------------------------------------------------------------------

    \72\ NASD Rule 2310 relating to suitability, referenced in the 
FINRA Regulatory Notice, has been superseded by FINRA Rule 2111. See 
FINRA Regulatory Notice 12-25 (May 2012).
---------------------------------------------------------------------------

    The Registration Statement states that the Fund is designed for 
investors who seek to obtain income through selling options on select 
equity securities which the Index Provider determines to have the 
highest volatility. It further

[[Page 23610]]

states that because of the high volatility of the stocks underlying the 
options sold by the Fund, it is possible that the value of such stocks 
will decline in sufficient magnitude to trigger the exercise of the 
options and cause a loss which may outweigh the income from selling 
such options. The Registration Statement states that, accordingly, the 
Fund should be considered as a speculative trading instrument and is 
not necessarily appropriate for investors who seek to avoid or minimize 
their exposure to stock market volatility. The Exchange's Information 
Bulletin regarding the Fund will provide information regarding the 
suitability of an investment in the Shares, as stated in the 
Registration Statement.
    The Index will consist of 20 OTC down-and-in put options, selected 
in accordance with NYSE Arca's rules-based methodology, and the stocks 
underlying the put options must be U.S. exchange-listed and must also 
underlie exchange-listed and traded options. In addition, the stocks 
underlying the down-and-in put options contained in the Index must meet 
minimum market capitalization and trading volume requirements as 
described above. The diversification of the Index (20 components) and 
the nature of the market for the underlying securities (largest 
capitalized stocks with minimum trading volume requirements) should 
serve to mitigate concerns about manipulation. In addition, the 
Commission did not receive any comments or information questioning or 
expressing concern about manipulation or the ability of market makers 
to perform intraday arbitrage on a product whose underlying holdings 
include positions in down-and-in put options, such as the Fund. 
Furthermore, as stated by the Sub-Adviser, the availability of listed 
equity options on the securities underlying the down-and-in put options 
contained in the Index should mitigate concerns regarding the ability 
of market makers to arbitrage the value of the down-and-in put options 
against the price of the Shares.\73\
---------------------------------------------------------------------------

    \73\ See Rich Letter, supra note 8, at 12-16.
---------------------------------------------------------------------------

    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except 
that the Index is comprised of OTC put options.
    (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. The Exchange may obtain information via the 
ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.
    (4) Prior to the commencement of trading, the Exchange will inform 
its 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 IIV will 
not be calculated or publicly disseminated; (d) how information 
regarding the IIV 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. The Information Bulletin will also advise ETP 
Holders of their suitability obligations with respect to recommended 
transactions to customers in the Shares, and will state that ETP 
Holders that carry customer accounts should follow the FINRA Regulatory 
Notice with respect to suitability.
    (5) The Index will consist of 20 OTC put options, selected in 
accordance with NYSE Arca's rules-based methodology, and the Fund, 
under normal circumstances, will invest at least 80% of its total 
assets in the components of the Index and in T-Bills. Each option 
written by the Fund will be covered through investments in three month 
T-Bills at least equal to the Fund's maximum liability under the option 
(i.e., the strike price). A total return level for the Index will be 
calculated and published at the end of each day. The Fund will transact 
only with OTC options dealers that have in place an International Swaps 
and Derivatives Association agreement with the Fund.
    (6) The stocks underlying the Index Components must be U.S. 
exchange listed and must meet the following additional criteria: (a) 
The availability of publicly listed and traded options; (b) minimum 
market capitalization of greater than $5 billion; (c) minimum trading 
volume of at least 50 million shares during the preceding 6 months; (d) 
minimum average daily trading volume of at least one million shares 
during the preceding 6 months; and (e) minimum average daily trading 
value of at least $10 million during the preceding 6 months.
    (7) The Sub-Adviser will seek a correlation over time of 0.95 or 
better between the Fund's performance and the performance of the Index. 
A figure of 1.00 would represent perfect correlation.
    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities. In addition, the Fund's investments will 
be consistent with the Fund's investment objective and will not be used 
to enhance leverage. The Fund will not invest in non-U.S. equity 
securities.
    (9) Swaps, options (other than options in which the Fund 
principally will invest), and futures contracts will not be included in 
the Fund's investment, under normal market circumstances, of at least 
80% of its total assets in component securities that comprise the Index 
and in T-Bills.
    (10) A minimum of 100,000 Shares of the Fund will be outstanding as 
of the start of trading on the Exchange.
    (11) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\74\ as provided by NYSE Arca 
Equities Rule 5.3.
---------------------------------------------------------------------------

    \74\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    The Commission further notes that the Fund and the Shares must 
comply with all other requirements as set forth in Exchange rules 
applicable to Investment Company Units and prior Commission releases 
relating to, and orders approving, the generic listing rules (and 
amendments thereto) 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 Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Act \75\ and the rules and

[[Page 23611]]

regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\76\ that the proposed rule change (SR-NYSEArca-2012-108) be, and 
it hereby is, approved.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
---------------------------------------------------------------------------

    \77\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------


Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09193 Filed 4-18-13; 8:45 am]
BILLING CODE 8011-01-P

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