Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, to List and Trade Shares of the Franklin Short Duration U.S. Government ETF Under NYSE Arca Equities Rule 8.600, 66409-66413 [2013-26409]
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Federal Register / Vol. 78, No. 214 / Tuesday, November 5, 2013 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70773; File No. SR–
NYSEArca-2013–86]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, to List and
Trade Shares of the Franklin Short
Duration U.S. Government ETF Under
NYSE Arca Equities Rule 8.600
October 30, 2013.
I. Introduction
On August 27, 2013, 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
Franklin Short Duration U.S.
Government ETF (‘‘Fund’’) under NYSE
Arca Equities Rule 8.600. The proposed
rule change was published for comment
in the Federal Register on September
16, 2013.3 On October 28, 2013, the
Exchange submitted Amendment No. 1
to the proposed rule change.4 The
Commission received no comments on
the proposed rule change. This order
grants approval of the proposed rule
change, as modified by Amendment No.
1 thereto.
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade Shares of the Fund pursuant to
NYSE Arca Equities Rule 8.600, which
governs the listing and trading of
Managed Fund Shares on the Exchange.
The Shares will be offered by Franklin
ETF Trust (‘‘Trust’’). The Trust will be
registered with the Commission as an
open-end management investment
company.5 Franklin Advisers, Inc. will
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70356
(Sept. 10, 2013), 78 FR 56970 (‘‘Notice’’).
4 Amendment No. 1 amended the proposal to
provide that the Fund will issue and redeem Shares
on a continuous basis at net asset value in
aggregations of 25,000 Shares (‘‘Creation Units’’),
rather than 50,000 Shares. Because Amendment No.
1 does not materially affect the substance of the
proposed rule change, it does not require notice and
comment.
5 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). On February 7,
2013, the Trust filed a registration statement on
Form N–1A under the Securities Act of 1933
(‘‘Securities Act’’) and under the 1940 Act relating
to the Fund (File Nos. 333–186504 and 811–22801)
(‘‘Registration Statement’’). The Trust filed an
application on June 8, 2012, and amendments to the
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2 17
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66409
instrumentalities. The Fund currently
targets an estimated average portfolio
duration of three (3) years or less. The
Manager calculates the duration of the
portfolio by modeling the cash flows of
all the individual holdings, including
the impact of prepayment variability
and coupon adjustments where
applicable, to determine the duration of
each holding and then aggregating based
on the size of the position. In
performing this duration calculation,
the Manager utilizes third-party models
as adjusted based on the Manager’s
market expectations with respect to
interest rates, borrower-level factors
affecting credit availability, and the
condition of the housing market, as well
as broader economic factors, among
other things, consistent with industry
practice.
The Fund generally will invest a
substantial portion of its assets in
mortgage-backed securities 10 issued or
guaranteed by the U.S. government or
its agencies or instrumentalities,
including adjustable-rate mortgage
securities, but the Fund also will invest
Principal Investments
in direct obligations of the U.S.
The Fund’s investment goal is to
government (such as Treasury bonds,
provide a high level of current income,
bills, and notes) and in securities issued
consistent with prudent investing, while or guaranteed by the U.S. government or
seeking preservation of capital. The
its agencies or instrumentalities,
Fund will seek to achieve its investment including government sponsored
goal by investing, under normal market
entities. All of the Fund’s principal
conditions,9 at least 80% of its net assets investments will be debt securities,
in securities issued or guaranteed by the including bonds, notes, and debentures.
U.S. government or its agencies or
The mortgage-backed securities in
which the Fund will substantially invest
application on October 26, 2012 and December 18,
are issued or guaranteed by the U.S.
2012, requesting an Order under Section 6(c) of the
government or its agencies or
1940 Act for exemptions from various provisions of
instrumentalities, such as Ginnie Mae,
the 1940 Act and rules thereunder (File No. 812–
or by U.S. government-sponsored
14042) (‘‘Exemptive Application’’). The
Commission has issued an order granting certain
entities, such as Fannie Mae and
exemptive relief to the Trust under the 1940 Act.
Freddie Mac. Most mortgage-backed
See Investment Company Act Release No. 30350
securities are pass-through securities,
(Jan. 15, 2013) (‘‘Exemptive Order’’). The Exchange
which means that they provide
states that investments made by the Fund will
comply with the conditions set forth in the
investors with monthly payments
Exemptive Application and the Exemptive Order.
consisting of a pro rata share of both
See Notice, supra note 3, 78 FR at 56971, n. 5.
regular interest and principal payments
6 See id. The Exchange states that in the event (a)
and unscheduled prepayments on the
the Manager or any sub-adviser becomes newly
affiliated with a broker-dealer, or (b) any new
underlying mortgage loans. Because
adviser or sub-adviser is a registered broker-dealer
prepayment rates of individual mortgage
or becomes affiliated with a broker-dealer, it will
pools vary widely, the average life of a
implement a firewall with respect to its relevant
serve as the investment manager to the
Fund (‘‘Manager’’). Franklin Templeton
Distributors, Inc. will be the principal
underwriter and distributor of the
Fund’s Shares. Franklin Templeton
Services, LLC will serve as
administrator for the Fund and The
Bank of New York Mellon will serve as
sub-administrator for the Fund. The
Bank of New York Mellon will serve as
the custodian and transfer agent for the
Fund. The Exchange represents that the
Manager is not a broker-dealer but is
affiliated with a broker-dealer and has
implemented a firewall with respect to
its broker-dealer affiliate regarding
access to information concerning the
composition of or changes to the Fund’s
portfolio.6 The Exchange represents that
the Shares will conform to the initial
and continued listing criteria under
NYSE Arca Equities Rule 8.600 and that,
for initial and continued listing, the
Fund will be in compliance with Rule
10A–3 under the Exchange Act,7 as
provided by NYSE Arca Equities Rule
5.3.8
personnel or the broker-dealer affiliate regarding
access to information concerning the composition
of or changes to the portfolio, and will be subject
to procedures designed to prevent the use and
dissemination of material non-public information
regarding the portfolio. See id.
7 17 CFR 240.10A–3.
8 See Notice, supra note 3, 78 FR at 56973.
9 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the equity
markets or the financial markets generally;
operational issues causing dissemination of
inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
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10 Mortgage-backed securities represent an
interest in a pool of mortgage loans made by banks
and other financial institutions to finance purchases
of homes, commercial buildings, and other real
estate. The individual mortgage loans are packaged
or ‘‘pooled’’ together for sale to investors. As the
underlying mortgage loans are paid off, investors
receive principal and interest payments. These
securities may be fixed-rate or adjustable-rate
mortgage-backed securities (‘‘ARMS’’). Further,
these securities can also be categorized as
collateralized mortgage obligations (‘‘CMOs’’) or
real estate mortgage investment conduits
(‘‘REMICs’’) where they are divided into multiple
classes with each class being entitled to a different
share of the principal and interest payments
received from the pool of underlying assets.
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particular pool cannot be predicted
accurately. Adjustable-rate mortgagebacked securities include ARMS and
other mortgage-backed securities with
interest rates that adjust periodically to
reflect prevailing market interest rates.
The Fund may invest in securities
with various levels of credit support,11
including, but not limited to, those
issued or guaranteed by the Federal
Home Loan Banks, Veterans
Administration, Federal Housing
Authority, Export-Import Bank of the
United States, Overseas Private
Investment Corporation, Commodity
Credit Corporation, Small Business
Administration, U.S. Agency for
International Development, Tennessee
Valley Authority, and Farm Credit
System.
The Fund may invest in callable
agency securities, which give the issuer
(the U.S. government agency) the right
to redeem the security prior to maturity.
The Fund may also invest in U.S.
government inflation-indexed
securities.12 Additionally, the Fund may
invest in certain mortgage dollar rolls.13
The Fund will invest only in covered
mortgage dollar rolls, meaning that the
Fund establishes a segregated account
with liquid securities equal in value to
the securities it will repurchase. The
11 Government agency or instrumentality
securities have different levels of credit support.
For example, Ginnie Mae securities carry a
guarantee as to the timely repayment of principal
and interest that is backed by the full faith and
credit of the U.S. government. However, the full
faith and credit guarantee does not apply to the
market prices and yields of the Ginnie Mae
securities or to the net asset value (‘‘NAV’’), trading
price, or performance of the Fund, which will vary
with changes in interest rates and other market
conditions. Fannie Mae and Freddie Mac passthrough mortgage certificates are backed by the
credit of the respective instrumentality and are not
guaranteed by the U.S. government. Other securities
issued by government agencies or instrumentalities,
including government sponsored entities, may only
be backed by the credit worthiness of the issuing
institution, not the U.S. Government, or the issuers
may have the right to borrow from the U.S. Treasury
to meet their obligations.
12 Inflation-indexed securities are fixed-income
securities that are structured to provide protection
against inflation. The value of the security’s
principal or the interest income paid on the security
is adjusted to track changes in an official inflation
measure. The U.S. Treasury uses the Consumer
Price Index for Urban Consumers as the inflation
measure for the inflation-indexed securities it
issues.
13 In a mortgage dollar roll, the Fund will sell (or
buy) mortgage-backed securities for delivery on a
specified date and simultaneously contract to
repurchase (or sell) substantially similar (same type,
coupon, and maturity) securities on a future date.
During the period between a sale and repurchase,
the Fund will forgo principal and interest paid on
the mortgage-backed securities. The Fund will earn
or lose money on a mortgage dollar roll from any
difference between the sale price and the future
purchase price. In a sale and repurchase, the Fund
also earns money on the interest earned on the cash
proceeds of the initial sale.
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Fund intends to enter into mortgage
dollar rolls only with high quality
securities dealers and banks as
determined by the Manager under board
approved counterparty review
procedures.
Other Investments
When the Manager believes that
market or economic conditions are
unfavorable for investors, the Manager
may invest up to 100% of the Fund’s
assets in a temporary defensive manner
by holding all or a substantial portion of
its assets in cash, cash equivalents, or
other high quality short-term
investments. Temporary defensive
investments generally may include
short-term U.S. government securities,
high-grade commercial paper, bank
obligations, repurchase agreements,
money market fund shares (including
shares of an affiliated money market
fund), and other money market
instruments. The Manager also may
invest in these types of securities or
hold cash while looking for suitable
investment opportunities or to maintain
liquidity.14
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 deemed illiquid by the
Manager.15 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 may invest in other
investment companies to the extent
14 Circumstances under which the Fund may
temporarily depart from its normal investment
process include, but are not limited to, extreme
volatility or trading halts in the equity markets or
the financial markets generally; operational issues
causing dissemination of inaccurate market
information; or force majeure type events such as
systems failure, natural or man-made disaster, act
of God, armed conflict, act of terrorism, riot or labor
disruption, or any similar intervening circumstance.
15 In reaching liquidity decisions, the Manager
may consider the following factors: the frequency
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
the number of other potential purchasers; dealer
undertakings to make a market in the security; and
the nature of the security and the nature of the
marketplace in which it trades (e.g., the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
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Frm 00082
Fmt 4703
Sfmt 4703
permitted by the 1940 Act, Commission
rules thereunder, and exemptions
thereto. Section 12(d)(1)(A) of the 1940
Act requires that, as determined
immediately after a purchase is made,
(i) not more than 5% of the value of the
Fund’s total assets will be invested in
the securities of any one investment
company, (ii) not more than 10% of the
value of the Fund’s total assets will be
invested in securities of investment
companies as a group, and (iii) not more
than 3% of the outstanding voting stock
of any one investment company will be
owned by the Fund. Certain exceptions
to these limitations may apply, and the
Fund may also rely on any future
applicable Commission rules or orders
that provide exceptions to these
limitations.
The Fund may invest up to 20% of its
net assets in securities not issued or
guaranteed by the U.S. government or
its agencies or instrumentalities,
including mortgage backed securities.
These investments may include
investment-grade debt securities.16 The
Fund will not invest in non-investmentgrade debt securities. The Fund may
also lend a portfolio of securities up to
one-third of the value of its total assets
(measured at the time of the most recent
loan). In exchange, the Fund will
receive cash collateral from a borrower
at least equal to the value of the security
loaned by the Fund. Cash collateral
typically consists of any combination of
cash, securities issued by the U.S.
government or its agencies or
instrumentalities, and irrevocable letters
of credit. Securities will only be loaned
to parties that meet creditworthiness
standards approved by the Fund’s
board. The Fund may also invest in
multi-class pass-through securities;
when-issued, delayed delivery, and tobe-announced transactions; callable
securities; Franklin Templeton money
market funds; repurchase agreements;
U.S. Treasury rolls; unrated debt
securities deemed by the Manager to be
of comparable quality to investmentgrade debt securities; variable rate
securities; and zero coupon, deferred
interest, and pay-in-kind bonds.
The Fund will not invest in equity
securities other than possible
investments in shares of other
investment companies as noted above.
The Fund will be classified as a
‘‘diversified’’ investment company
under the 1940 Act.
The Fund will not invest more than
25% of the Fund’s net assets in
16 Debt securities that are rated Baa or higher by
Moody’s or rated BBB or higher by S&P, or that are
unrated securities deemed by the Manager to be of
comparable quality, are considered to be
‘‘investment grade.’’
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securities of issuers in any one industry
(other than securities issued or
guaranteed by the U.S. government or
any of its agencies or instrumentalities
or securities of other investment
companies, whether registered or
excluded from registration under
Section 3(c) of the 1940 Act).
Additionally, the Fund will not
purchase the securities of any one issuer
(other than the U.S. government or any
of its agencies or instrumentalities or
securities of other investment
companies, whether registered or
excluded from registration under
Section 3(c) of the 1940 Act) if
immediately after such an investment (i)
more than 5% of the value of the Fund’s
total assets would be invested in that
issuer or (ii) more than 10% of the
outstanding voting securities of that
issuer would be owned by the Fund,
except that up to 25% of the value of the
Fund’s total assets may be invested
without regard to these 5% and 10%
limitations.
The Fund intends to qualify for and
to elect treatment as a separate regulated
investment company under Subchapter
M of the Internal Revenue Code.
Consistent with the Exemptive Order,
to pursue its investment goal, the Fund
may invest in interest rate, fixed income
index, bond, and U.S. Treasury futures
contracts. The use of these derivative
transactions may allow the Fund to
obtain net long or short exposures to
selected interest rates or durations.
These derivatives may be used to hedge
risks associated with the Fund’s other
portfolio investments. The Fund expects
that no more than 20% of the value of
the Fund’s net assets will be invested in
derivative instruments. The Fund will
not otherwise invest in options, futures
contracts, or swap agreements. The
Fund’s investments will be consistent
with its investment goal and will not be
used to enhance leverage.
Additional information regarding the
Trust, Fund, and Shares, including
investment strategies, risks, creation and
redemption procedures, fees, portfolio
holdings, disclosure policies,
distributions and taxes, calculation of
net asset value per share (‘‘NAV’’),
availability of information, trading rules
and halts, and surveillance procedures,
among other things, can be found in the
Notice or the Registration Statement, as
applicable.17
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change is
17 See Notice and Registration Statement, supra
notes 3 and 5, respectively.
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consistent with the requirements of
Section 6 of the Act 18 and the rules and
regulations thereunder applicable to a
national securities exchange.19 In
particular, the Commission finds that
the proposed rule change is consistent
with the requirements of Section 6(b)(5)
of the Act,20 which requires, among
other things, that the Exchange’s rules
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission notes
that the Fund and the Shares must
comply with the requirements of NYSE
Arca Equities Rule 8.600 to be listed and
traded on the Exchange.
The Commission finds that the
proposal to list and trade the Shares on
the Exchange is consistent with Section
11A(a)(1)(C)(iii) of the Act,21 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.22 In addition, the Portfolio
Indicative Value, as defined in NYSE
Arca Equities Rule 8.600(c)(3), will be
widely disseminated by one or more
major market data vendors at least every
15 seconds during the NYSE Arca Core
Trading Session (9:30 a.m. Eastern time
to 4:00 p.m. Eastern time).23 On each
business day, before commencement of
trading in Shares in the Core Trading
Session on the Exchange, the Fund will
disclose on its Web site the Disclosed
Portfolio, as defined in NYSE Arca
Equities Rule 8.600(c)(2), that will form
the basis for the Fund’s calculation of
NAV at the end of the business day.24
18 15
U.S.C. 78f.
19 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).
20 15 U.S.C. 78f(b)(5).
21 15 U.S.C. 78k–1(a)(1)(C)(iii).
22 See Notice, supra note 3, 78 FR at 56975.
23 According to the Exchange, several major
market data vendors widely disseminate Portfolio
Indicative Values taken from the CTA or other data
feeds. See id.
24 See id. On a daily basis, the Manager will
disclose for each portfolio security or other
financial instrument of the Fund the following
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66411
The Fund will calculate the NAV each
business day normally as of the close of
regular trading on the New York Stock
Exchange (normally, 4:00 p.m. Eastern
time).25 Information regarding market
price and trading volume of the Shares
will be continually available on a realtime basis throughout the day on
brokers’ computer screens and other
electronic services.26 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.27
The intra-day, closing, and settlement
prices of the portfolio securities and
other Fund investments will also be
readily available from the national
securities exchanges trading those
securities, automated quotation systems,
published or other public sources, or
on-line information services such as
Bloomberg or Reuters.28 The Fund’s
Web site will include a form of the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.29
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 that the NAV
and the Disclosed Portfolio will be made
available to all market participants at
the same time.30 In addition, for in-kind
creations, the basket composition file
will be publicly disseminated daily
prior to the opening of the Exchange via
the National Securities Clearing
Corporation.31 Further, trading in the
Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which
trading in the Shares of the Fund may
be halted.32 The Exchange may halt
trading in the Shares if trading is not
occurring in the securities or the
information on the Fund’s Web site: ticker symbol
(if applicable), name of security or financial
instrument, number of shares or dollar value of
securities and financial instruments held in the
portfolio, and percentage weighting of the security
or financial instrument in the portfolio. The Web
site information will be publicly available at no
charge. See id.
25 See id. at 56974.
26 See id. at 56975.
27 See id.
28 See id.
29 See id. at 56974–75.
30 See id. at 56973.
31 See id. at 56975.
32 See id.
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financial instruments constituting the
Disclosed Portfolio of the Fund or if
other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present.33 Further, the
Commission notes that the Reporting
Authority that provides the Disclosed
Portfolio must implement and maintain,
or be subject to, procedures designed to
prevent the use and dissemination of
material, non-public information
regarding the actual components of the
portfolio.34 The Exchange states that it
has a general policy prohibiting the
distribution of material, non-public
information by its employees.35 The
Exchange also states that the Manager is
affiliated with a broker-dealer and has
implemented a firewall with respect to
its broker-dealer affiliate regarding
access to information concerning the
composition of or changes to the
portfolio.36 The Exchange states that, on
its behalf, the Financial Industry
Regulatory Authority (‘‘FINRA’’) will
communicate as needed regarding
trading in the Shares with other markets
that are members of the Intermarket
Surveillance Group (‘‘ISG’’) and that
33 See id. See also NYSE Arca Equities Rule
8.600(d)(2)(C) (providing additional considerations
for the suspension of trading in or removal from
listing of Managed Fund Shares on the Exchange).
With respect to trading halts, the Exchange may
consider 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. See Notice, supra
note 3, 78 FR at 56975.
34 See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
35 See Notice, supra note 3, 78 FR at 56976.
36 See supra note 6 and accompanying text. The
Commission notes that an investment adviser to an
open-end fund is required to be registered under the
Investment Advisers Act of 1940 (‘‘Advisers Act’’).
As a result, the Adviser and Sub-Adviser and their
related personnel are subject to the provisions of
Rule 204A–1 under the Advisers Act relating to
codes of ethics. This Rule requires investment
advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as
well as compliance with other applicable securities
laws. Accordingly, procedures designed to prevent
the communication and misuse of non-public
information by an investment adviser must be
consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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FINRA, on behalf of the Exchange, may
obtain trading information regarding
trading in the Shares from such markets
and other entities.37 In addition, the
Exchange may obtain information
regarding trading in the Shares from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.38
The Exchange further 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.39 In support of this
proposal, the Exchange has made
representations, including:
(1) The Shares will conform to the
initial and continued listing criteria
under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The trading surveillance
procedures administered by FINRA on
behalf of the Exchange are adequate to
properly monitor Exchange trading of
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws.
(4) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders (‘‘ETP
Holders’’) in an Information Bulletin of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Bulletin
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in Creation Unit
aggregations (and that Shares are not
individually redeemable); (b) NYSE
Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its
ETP Holders to learn the essential facts
relating to every customer prior to
trading the Shares; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated Portfolio Indicative
Value will not be calculated or publicly
disseminated; (d) how information
regarding the Portfolio Indicative Value
is disseminated; (e) the requirement that
ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information.
(5) For initial and continued listing,
the Fund will be in compliance with
Rule 10A–3 under the Exchange Act,40
37 See
Notice, supra note 3, 78 FR at 56976.
id.
39 See id. at 56975.
40 17 CFR 240.10A–3.
as provided by NYSE Arca Equities Rule
5.3.
(6) Under normal market conditions,
at least 80% of the Fund’s net assets
will be invested in securities issued or
guaranteed by the U.S. government or
its agencies or instrumentalities.
(7) The Fund will not invest in
options, futures contracts, or swap
agreements, other than investments in
interest rate, fixed income index, bond,
and U.S. Treasury futures contracts as
permitted by the Exemptive Order.
(8) No more than 20% of the value of
the Fund’s net assets will be invested in
derivative instruments, and any such
derivative investments will be
consistent with the Fund’s investment
goal and will not be used to enhance
leverage.
(9) 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 deemed illiquid by
the Manager; will monitor its portfolio
liquidity on an ongoing basis to
determine whether, in light of thencurrent 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.
(10) The Fund may lend a portfolio of
securities up to one-third of the value of
its total assets (measured at the time of
the most recent loan), and in exchange,
the Fund will receive from the borrower
or borrowers cash collateral at least
equal to the value of the securities
loaned by the Fund.
(11) A minimum of 100,000 Shares of
the Fund will be outstanding at the
commencement of trading on the
Exchange.
This 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 41 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,42 that the
proposed rule change (SR–NYSEArca–
2013–86), as modified by Amendment
38 See
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41 15
42 15
E:\FR\FM\05NON1.SGM
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
05NON1
Federal Register / Vol. 78, No. 214 / Tuesday, November 5, 2013 / Notices
No. 1 thereto, be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–26409 Filed 11–4–13; 8:45 am]
BILLING CODE 8011–01–P
SOCIAL SECURITY ADMINISTRATION
[Docket No. SSA–2013–0057]
Cost-of-Living Increase and Other
Determinations for 2014
Social Security Administration.
Notice.
AGENCY:
ACTION:
Under title II of the Social
Security Act (Act), there will be a 1.5
percent cost-of-living increase in Social
Security benefits effective December
2013. As a result of this increase, the
following items will increase for 2014:
(1) The maximum Federal
Supplemental Security Income (SSI)
monthly benefit amounts for 2014 under
title XVI of the Act will be $721 for an
eligible individual, $1,082 for an
eligible individual with an eligible
spouse, and $361 for an essential
person;
(2) The special benefit amount under
title VIII of the Act for certain World
War II veterans will be $540.75 for 2014;
(3) The student earned income
exclusion under title XVI of the Act will
be $1,750 per month in 2014, but not
more than $7,060 for all of 2014;
(4) The dollar fee limit for services
performed as a representative payee will
be $40 per month ($77 per month in the
case of a beneficiary who is disabled
and has an alcoholism or drug addiction
condition that leaves him or her
incapable of managing benefits) in 2014;
and
(5) The dollar limit on the
administrative-cost fee assessment
charged to an appointed representative
such as an attorney, agent, or other
person who represents claimants will be
$89 beginning in December 2013.
The national average wage index for
2012 is $44,321.67. This index affects
the following amounts:
(1) The Old-Age, Survivors, and
Disability Insurance (OASDI)
contribution and benefit base will be
$117,000 for remuneration paid in 2014
and self-employment income earned in
taxable years beginning in 2014;
(2) The monthly exempt amounts
under the OASDI retirement earnings
wreier-aviles on DSK5TPTVN1PROD with NOTICES
SUMMARY:
43 17
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
15:22 Nov 04, 2013
Jkt 232001
test for taxable years ending in calendar
year 2014 will be $1,290 for
beneficiaries who will attain their
Normal Retirement Age (NRA) (defined
below) after 2014 and $3,450 for those
who attain NRA in 2014;
(3) The dollar amounts (‘‘bend
points’’) used in the primary insurance
amount (PIA) benefit formula for
workers who become eligible for
benefits, or who die before becoming
eligible, in 2014 will be $816 and
$4,917;
(4) The bend points used in the
formula for computing maximum family
benefits for workers who become
eligible for benefits, or who die before
becoming eligible, in 2014 will be
$1,042, $1,505, and $1,962;
(5) The amount of taxable earnings a
person must have to be credited with a
quarter of coverage in 2014 will be
$1,200;
(6) The ‘‘old-law’’ contribution and
benefit base under title II of the Act will
be $87,000 for 2014;
(7) The monthly amount deemed to
constitute substantial gainful activity
(SGA) for statutorily blind individuals
in 2014 will be $1,800, and the
corresponding amount for non-blind
disabled persons will be $1,070;
(8) The earnings threshold
establishing a month as a part of a trial
work period will be $770 for 2014; and
(9) Coverage thresholds for 2014 will
be $1,900 for domestic workers and
$1,600 for election officials and election
workers.
FOR FURTHER INFORMATION CONTACT:
Susan C. Kunkel, Office of the Chief
Actuary, Social Security
Administration, 6401 Security
Boulevard, Baltimore, MD 21235, (410)
965–3000. Information relating to this
announcement is available on our
Internet site at www.socialsecurity.gov/
oact/cola/. For information
on eligibility or claiming benefits, call
1–800–772–1213, or visit our Internet
site at www.socialsecurity.gov.
SUPPLEMENTARY INFORMATION: In
accordance with the Act, we must
publish within 45 days after the close of
the third calendar quarter of 2013 the
benefit increase percentage and the
revised table of ‘‘special minimum’’
benefits (section 215(i)(2)(D)). Also, we
must publish on or before November 1
the national average wage index for
2012 (section 215(a)(1)(D)), the OASDI
fund ratio for 2013 (section
215(i)(2)(C)(ii)), the OASDI contribution
and benefit base for 2014 (section
230(a)), the amount of earnings required
to be credited with a quarter of coverage
in 2014 (section 213(d)(2)), the monthly
exempt amounts under the Social
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
66413
Security retirement earnings test for
2014 (section 203(f)(8)(A)), the formula
for computing a PIA for workers who
first become eligible for benefits or die
in 2014 (section 215(a)(1)(D)), and the
formula for computing the maximum
amount of benefits payable to the family
of a worker who first becomes eligible
for old-age benefits or dies in 2014
(section 203(a)(2)(C)).
Cost-of-Living Increases
General
The cost-of-living increase is 1.5
percent for benefits under titles II and
XVI of the Act. Under title II, OASDI
benefits will increase by 1.5 percent for
individuals eligible for December 2013
benefits, payable in January 2014. This
increase is based on the authority
contained in section 215(i) of the Act.
Pursuant to section 1617 of the Act,
Federal SSI payment levels will also
increase by 1.5 percent effective for
payments made for the month of
January 2014 but paid on December 31,
2013.
Computation
Section 215(i)(1)(B) of the Act defines
a ‘‘computation quarter’’ to be a third
calendar quarter in which the average
Consumer Price Index (CPI) for Urban
Wage Earners and Clerical Workers
exceeded the average CPI in the
previous computation quarter. The last
cost-of-living increase, effective for
those eligible to receive title II benefits
for December 2012, was based on the
CPI increase from the third quarter of
2011 to the third quarter of 2012.
Accordingly, the last computation
quarter is the third quarter of 2012. The
law stipulates that a cost-of-living
increase for benefits is determined
based on the percentage increase, if any,
in the CPI from the last computation
quarter to the third quarter of the
current year. Therefore, we compute the
increase in the CPI from the third
quarter of 2012 to the third quarter of
2013.
Section 215(i)(1) of the Act provides
that the CPI for a cost-of-living
computation quarter is the arithmetic
mean of this index for the 3 months in
that quarter. In accordance with 20 CFR
404.275, we round the arithmetic mean,
if necessary, to the nearest 0.001. The
CPI for Urban Wage Earners and Clerical
Workers for each month in the quarter
ending September 30, 2012, is: For July
2012, 225.568; for August 2012,
227.056; and for September 2012,
228.184. The arithmetic mean for that
calendar quarter is 226.936. The
corresponding CPI for each month in the
quarter ending September 30, 2013, is:
E:\FR\FM\05NON1.SGM
05NON1
]]>Agencies
[Federal Register Volume 78, Number 214 (Tuesday, November 5, 2013)]
[Notices]
[Pages 66409-66413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-26409]
[[Page 66409]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70773; File No. SR-NYSEArca-2013-86]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to List and Trade Shares of the Franklin Short Duration U.S.
Government ETF Under NYSE Arca Equities Rule 8.600
October 30, 2013.
I. Introduction
On August 27, 2013, 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
Franklin Short Duration U.S. Government ETF (``Fund'') under NYSE Arca
Equities Rule 8.600. The proposed rule change was published for comment
in the Federal Register on September 16, 2013.\3\ On October 28, 2013,
the Exchange submitted Amendment No. 1 to the proposed rule change.\4\
The Commission received no comments on the proposed rule change. This
order grants approval of the proposed rule change, as modified by
Amendment No. 1 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70356 (Sept. 10,
2013), 78 FR 56970 (``Notice'').
\4\ Amendment No. 1 amended the proposal to provide that the
Fund will issue and redeem Shares on a continuous basis at net asset
value in aggregations of 25,000 Shares (``Creation Units''), rather
than 50,000 Shares. Because Amendment No. 1 does not materially
affect the substance of the proposed rule change, it does not
require notice and comment.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to NYSE Arca Equities Rule 8.600, which governs the listing and trading
of Managed Fund Shares on the Exchange. The Shares will be offered by
Franklin ETF Trust (``Trust''). The Trust will be registered with the
Commission as an open-end management investment company.\5\ Franklin
Advisers, Inc. will serve as the investment manager to the Fund
(``Manager''). Franklin Templeton Distributors, Inc. will be the
principal underwriter and distributor of the Fund's Shares. Franklin
Templeton Services, LLC will serve as administrator for the Fund and
The Bank of New York Mellon will serve as sub-administrator for the
Fund. The Bank of New York Mellon will serve as the custodian and
transfer agent for the Fund. The Exchange represents that the Manager
is not a broker-dealer but is affiliated with a broker-dealer and has
implemented a firewall with respect to its broker-dealer affiliate
regarding access to information concerning the composition of or
changes to the Fund's portfolio.\6\ The Exchange represents that the
Shares will conform to the initial and continued listing criteria under
NYSE Arca Equities Rule 8.600 and that, for initial and continued
listing, the Fund will be in compliance with Rule 10A-3 under the
Exchange Act,\7\ as provided by NYSE Arca Equities Rule 5.3.\8\
---------------------------------------------------------------------------
\5\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). On February 7, 2013, the Trust filed a
registration statement on Form N-1A under the Securities Act of 1933
(``Securities Act'') and under the 1940 Act relating to the Fund
(File Nos. 333-186504 and 811-22801) (``Registration Statement'').
The Trust filed an application on June 8, 2012, and amendments to
the application on October 26, 2012 and December 18, 2012,
requesting an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14042) (``Exemptive Application''). The
Commission has issued an order granting certain exemptive relief to
the Trust under the 1940 Act. See Investment Company Act Release No.
30350 (Jan. 15, 2013) (``Exemptive Order''). The Exchange states
that investments made by the Fund will comply with the conditions
set forth in the Exemptive Application and the Exemptive Order. See
Notice, supra note 3, 78 FR at 56971, n. 5.
\6\ See id. The Exchange states that in the event (a) the
Manager or any sub-adviser becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser is a registered
broker-dealer or becomes affiliated with a broker-dealer, it will
implement a firewall with respect to its relevant personnel or the
broker-dealer affiliate regarding access to information concerning
the composition of or changes to the portfolio, and will be subject
to procedures designed to prevent the use and dissemination of
material non-public information regarding the portfolio. See id.
\7\ 17 CFR 240.10A-3.
\8\ See Notice, supra note 3, 78 FR at 56973.
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Principal Investments
The Fund's investment goal is to provide a high level of current
income, consistent with prudent investing, while seeking preservation
of capital. The Fund will seek to achieve its investment goal by
investing, under normal market conditions,\9\ at least 80% of its net
assets in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities. The Fund currently targets an estimated
average portfolio duration of three (3) years or less. The Manager
calculates the duration of the portfolio by modeling the cash flows of
all the individual holdings, including the impact of prepayment
variability and coupon adjustments where applicable, to determine the
duration of each holding and then aggregating based on the size of the
position. In performing this duration calculation, the Manager utilizes
third-party models as adjusted based on the Manager's market
expectations with respect to interest rates, borrower-level factors
affecting credit availability, and the condition of the housing market,
as well as broader economic factors, among other things, consistent
with industry practice.
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\9\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
---------------------------------------------------------------------------
The Fund generally will invest a substantial portion of its assets
in mortgage-backed securities \10\ issued or guaranteed by the U.S.
government or its agencies or instrumentalities, including adjustable-
rate mortgage securities, but the Fund also will invest in direct
obligations of the U.S. government (such as Treasury bonds, bills, and
notes) and in securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, including government sponsored
entities. All of the Fund's principal investments will be debt
securities, including bonds, notes, and debentures.
---------------------------------------------------------------------------
\10\ Mortgage-backed securities represent an interest in a pool
of mortgage loans made by banks and other financial institutions to
finance purchases of homes, commercial buildings, and other real
estate. The individual mortgage loans are packaged or ``pooled''
together for sale to investors. As the underlying mortgage loans are
paid off, investors receive principal and interest payments. These
securities may be fixed-rate or adjustable-rate mortgage-backed
securities (``ARMS''). Further, these securities can also be
categorized as collateralized mortgage obligations (``CMOs'') or
real estate mortgage investment conduits (``REMICs'') where they are
divided into multiple classes with each class being entitled to a
different share of the principal and interest payments received from
the pool of underlying assets.
---------------------------------------------------------------------------
The mortgage-backed securities in which the Fund will substantially
invest are issued or guaranteed by the U.S. government or its agencies
or instrumentalities, such as Ginnie Mae, or by U.S. government-
sponsored entities, such as Fannie Mae and Freddie Mac. Most mortgage-
backed securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share
of both regular interest and principal payments and unscheduled
prepayments on the underlying mortgage loans. Because prepayment rates
of individual mortgage pools vary widely, the average life of a
[[Page 66410]]
particular pool cannot be predicted accurately. Adjustable-rate
mortgage-backed securities include ARMS and other mortgage-backed
securities with interest rates that adjust periodically to reflect
prevailing market interest rates.
The Fund may invest in securities with various levels of credit
support,\11\ including, but not limited to, those issued or guaranteed
by the Federal Home Loan Banks, Veterans Administration, Federal
Housing Authority, Export-Import Bank of the United States, Overseas
Private Investment Corporation, Commodity Credit Corporation, Small
Business Administration, U.S. Agency for International Development,
Tennessee Valley Authority, and Farm Credit System.
---------------------------------------------------------------------------
\11\ Government agency or instrumentality securities have
different levels of credit support. For example, Ginnie Mae
securities carry a guarantee as to the timely repayment of principal
and interest that is backed by the full faith and credit of the U.S.
government. However, the full faith and credit guarantee does not
apply to the market prices and yields of the Ginnie Mae securities
or to the net asset value (``NAV''), trading price, or performance
of the Fund, which will vary with changes in interest rates and
other market conditions. Fannie Mae and Freddie Mac pass-through
mortgage certificates are backed by the credit of the respective
instrumentality and are not guaranteed by the U.S. government. Other
securities issued by government agencies or instrumentalities,
including government sponsored entities, may only be backed by the
credit worthiness of the issuing institution, not the U.S.
Government, or the issuers may have the right to borrow from the
U.S. Treasury to meet their obligations.
---------------------------------------------------------------------------
The Fund may invest in callable agency securities, which give the
issuer (the U.S. government agency) the right to redeem the security
prior to maturity. The Fund may also invest in U.S. government
inflation-indexed securities.\12\ Additionally, the Fund may invest in
certain mortgage dollar rolls.\13\ The Fund will invest only in covered
mortgage dollar rolls, meaning that the Fund establishes a segregated
account with liquid securities equal in value to the securities it will
repurchase. The Fund intends to enter into mortgage dollar rolls only
with high quality securities dealers and banks as determined by the
Manager under board approved counterparty review procedures.
---------------------------------------------------------------------------
\12\ Inflation-indexed securities are fixed-income securities
that are structured to provide protection against inflation. The
value of the security's principal or the interest income paid on the
security is adjusted to track changes in an official inflation
measure. The U.S. Treasury uses the Consumer Price Index for Urban
Consumers as the inflation measure for the inflation-indexed
securities it issues.
\13\ In a mortgage dollar roll, the Fund will sell (or buy)
mortgage-backed securities for delivery on a specified date and
simultaneously contract to repurchase (or sell) substantially
similar (same type, coupon, and maturity) securities on a future
date. During the period between a sale and repurchase, the Fund will
forgo principal and interest paid on the mortgage-backed securities.
The Fund will earn or lose money on a mortgage dollar roll from any
difference between the sale price and the future purchase price. In
a sale and repurchase, the Fund also earns money on the interest
earned on the cash proceeds of the initial sale.
---------------------------------------------------------------------------
Other Investments
When the Manager believes that market or economic conditions are
unfavorable for investors, the Manager may invest up to 100% of the
Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents, or other
high quality short-term investments. Temporary defensive investments
generally may include short-term U.S. government securities, high-grade
commercial paper, bank obligations, repurchase agreements, money market
fund shares (including shares of an affiliated money market fund), and
other money market instruments. The Manager also may invest in these
types of securities or hold cash while looking for suitable investment
opportunities or to maintain liquidity.\14\
---------------------------------------------------------------------------
\14\ Circumstances under which the Fund may temporarily depart
from its normal investment process include, but are not limited to,
extreme volatility or trading halts in the equity markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption, or any similar intervening circumstance.
---------------------------------------------------------------------------
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 deemed illiquid by the Manager.\15\ 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.
---------------------------------------------------------------------------
\15\ In reaching liquidity decisions, the Manager may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
---------------------------------------------------------------------------
The Fund may invest in other investment companies to the extent
permitted by the 1940 Act, Commission rules thereunder, and exemptions
thereto. Section 12(d)(1)(A) of the 1940 Act requires that, as
determined immediately after a purchase is made, (i) not more than 5%
of the value of the Fund's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the
value of the Fund's total assets will be invested in securities of
investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by
the Fund. Certain exceptions to these limitations may apply, and the
Fund may also rely on any future applicable Commission rules or orders
that provide exceptions to these limitations.
The Fund may invest up to 20% of its net assets in securities not
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including mortgage backed securities. These
investments may include investment-grade debt securities.\16\ The Fund
will not invest in non-investment-grade debt securities. The Fund may
also lend a portfolio of securities up to one-third of the value of its
total assets (measured at the time of the most recent loan). In
exchange, the Fund will receive cash collateral from a borrower at
least equal to the value of the security loaned by the Fund. Cash
collateral typically consists of any combination of cash, securities
issued by the U.S. government or its agencies or instrumentalities, and
irrevocable letters of credit. Securities will only be loaned to
parties that meet creditworthiness standards approved by the Fund's
board. The Fund may also invest in multi-class pass-through securities;
when-issued, delayed delivery, and to-be-announced transactions;
callable securities; Franklin Templeton money market funds; repurchase
agreements; U.S. Treasury rolls; unrated debt securities deemed by the
Manager to be of comparable quality to investment-grade debt
securities; variable rate securities; and zero coupon, deferred
interest, and pay-in-kind bonds.
---------------------------------------------------------------------------
\16\ Debt securities that are rated Baa or higher by Moody's or
rated BBB or higher by S&P, or that are unrated securities deemed by
the Manager to be of comparable quality, are considered to be
``investment grade.''
---------------------------------------------------------------------------
The Fund will not invest in equity securities other than possible
investments in shares of other investment companies as noted above.
The Fund will be classified as a ``diversified'' investment company
under the 1940 Act.
The Fund will not invest more than 25% of the Fund's net assets in
[[Page 66411]]
securities of issuers in any one industry (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies, whether
registered or excluded from registration under Section 3(c) of the 1940
Act).
Additionally, the Fund will not purchase the securities of any one
issuer (other than the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies, whether
registered or excluded from registration under Section 3(c) of the 1940
Act) if immediately after such an investment (i) more than 5% of the
value of the Fund's total assets would be invested in that issuer or
(ii) more than 10% of the outstanding voting securities of that issuer
would be owned by the Fund, except that up to 25% of the value of the
Fund's total assets may be invested without regard to these 5% and 10%
limitations.
The Fund intends to qualify for and to elect treatment as a
separate regulated investment company under Subchapter M of the
Internal Revenue Code.
Consistent with the Exemptive Order, to pursue its investment goal,
the Fund may invest in interest rate, fixed income index, bond, and
U.S. Treasury futures contracts. The use of these derivative
transactions may allow the Fund to obtain net long or short exposures
to selected interest rates or durations. These derivatives may be used
to hedge risks associated with the Fund's other portfolio investments.
The Fund expects that no more than 20% of the value of the Fund's net
assets will be invested in derivative instruments. The Fund will not
otherwise invest in options, futures contracts, or swap agreements. The
Fund's investments will be consistent with its investment goal and will
not be used to enhance leverage.
Additional information regarding the Trust, Fund, and Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings, disclosure policies,
distributions and taxes, calculation of net asset value per share
(``NAV''), availability of information, trading rules and halts, and
surveillance procedures, among other things, can be found in the Notice
or the Registration Statement, as applicable.\17\
---------------------------------------------------------------------------
\17\ See Notice and Registration Statement, supra notes 3 and 5,
respectively.
---------------------------------------------------------------------------
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \18\
and the rules and regulations thereunder applicable to a national
securities exchange.\19\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act,\20\ which requires, among other things, that the
Exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
The Commission notes that the Fund and the Shares must comply with the
requirements of NYSE Arca Equities Rule 8.600 to be listed and traded
on the Exchange.
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\18\ 15 U.S.C. 78f.
\19\ 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).
\20\ 15 U.S.C. 78f(b)(5).
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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,\21\ 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.\22\ In addition, the
Portfolio Indicative Value, as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the NYSE Arca Core
Trading Session (9:30 a.m. Eastern time to 4:00 p.m. Eastern time).\23\
On each business day, before commencement of trading in Shares in the
Core Trading Session on the Exchange, the Fund will disclose on its Web
site the Disclosed Portfolio, as defined in NYSE Arca Equities Rule
8.600(c)(2), that will form the basis for the Fund's calculation of NAV
at the end of the business day.\24\ The Fund will calculate the NAV
each business day normally as of the close of regular trading on the
New York Stock Exchange (normally, 4:00 p.m. Eastern time).\25\
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.\26\
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.\27\ The intra-day, closing, and
settlement prices of the portfolio securities and other Fund
investments will also be readily available from the national securities
exchanges trading those securities, automated quotation systems,
published or other public sources, or on-line information services such
as Bloomberg or Reuters.\28\ The Fund's Web site will include a form of
the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information.\29\
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\21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\22\ See Notice, supra note 3, 78 FR at 56975.
\23\ According to the Exchange, several major market data
vendors widely disseminate Portfolio Indicative Values taken from
the CTA or other data feeds. See id.
\24\ See id. On a daily basis, the Manager will disclose for
each portfolio security or other financial instrument of the Fund
the following information on the Fund's Web site: ticker symbol (if
applicable), name of security or financial instrument, number of
shares or dollar value of securities and financial instruments held
in the portfolio, and percentage weighting of the security or
financial instrument in the portfolio. The Web site information will
be publicly available at no charge. See id.
\25\ See id. at 56974.
\26\ See id. at 56975.
\27\ See id.
\28\ See id.
\29\ See id. at 56974-75.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares that the NAV will be
calculated daily and that the NAV and the Disclosed Portfolio will be
made available to all market participants at the same time.\30\ In
addition, for in-kind creations, the basket composition file will be
publicly disseminated daily prior to the opening of the Exchange via
the National Securities Clearing Corporation.\31\ Further, trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which trading in the Shares of the
Fund may be halted.\32\ The Exchange may halt trading in the Shares if
trading is not occurring in the securities or the
[[Page 66412]]
financial instruments constituting the Disclosed Portfolio of the Fund
or if other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.\33\ Further, the
Commission notes that the Reporting Authority that provides the
Disclosed Portfolio must implement and maintain, or be subject to,
procedures designed to prevent the use and dissemination of material,
non-public information regarding the actual components of the
portfolio.\34\ The Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees.\35\ The Exchange also states that the Manager is affiliated
with a broker-dealer and has implemented a firewall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition of or changes to the portfolio.\36\ The Exchange states
that, on its behalf, the Financial Industry Regulatory Authority
(``FINRA'') will communicate as needed regarding trading in the Shares
with other markets that are members of the Intermarket Surveillance
Group (``ISG'') and that FINRA, on behalf of the Exchange, may obtain
trading information regarding trading in the Shares from such markets
and other entities.\37\ In addition, the Exchange may obtain
information regarding trading in the Shares from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.\38\
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\30\ See id. at 56973.
\31\ See id. at 56975.
\32\ See id.
\33\ See id. See also NYSE Arca Equities Rule 8.600(d)(2)(C)
(providing additional considerations for the suspension of trading
in or removal from listing of Managed Fund Shares on the Exchange).
With respect to trading halts, the Exchange may consider 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. See Notice, supra
note 3, 78 FR at 56975.
\34\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\35\ See Notice, supra note 3, 78 FR at 56976.
\36\ See supra note 6 and accompanying text. The Commission
notes that an investment adviser to an open-end fund is required to
be registered under the Investment Advisers Act of 1940 (``Advisers
Act''). As a result, the Adviser and Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
\37\ See Notice, supra note 3, 78 FR at 56976.
\38\ See id.
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The Exchange further 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.\39\ In support of this proposal, the Exchange has made
representations, including:
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\39\ See id. at 56975.
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(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The trading surveillance procedures administered by FINRA on
behalf of the Exchange are adequate to properly monitor Exchange
trading of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit Holders (``ETP Holders'') in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares. Specifically, the Information Bulletin will discuss
the following: (a) The procedures for purchases and redemptions of
Shares in Creation Unit aggregations (and that Shares are not
individually redeemable); (b) NYSE Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its ETP Holders to learn the
essential facts relating to every customer prior to trading the Shares;
(c) the risks involved in trading the Shares during the Opening and
Late Trading Sessions when an updated Portfolio Indicative Value will
not be calculated or publicly disseminated; (d) how information
regarding the Portfolio Indicative Value is disseminated; (e) the
requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(5) For initial and continued listing, the Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\40\ as provided by
NYSE Arca Equities Rule 5.3.
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\40\ 17 CFR 240.10A-3.
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(6) Under normal market conditions, at least 80% of the Fund's net
assets will be invested in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
(7) The Fund will not invest in options, futures contracts, or swap
agreements, other than investments in interest rate, fixed income
index, bond, and U.S. Treasury futures contracts as permitted by the
Exemptive Order.
(8) No more than 20% of the value of the Fund's net assets will be
invested in derivative instruments, and any such derivative investments
will be consistent with the Fund's investment goal and will not be used
to enhance leverage.
(9) 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 deemed illiquid by the Manager; will
monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of then-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.
(10) The Fund may lend a portfolio of securities up to one-third of
the value of its total assets (measured at the time of the most recent
loan), and in exchange, the Fund will receive from the borrower or
borrowers cash collateral at least equal to the value of the securities
loaned by the Fund.
(11) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.
This 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 \41\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\41\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\42\ that the proposed rule change (SR-NYSEArca-2013-86), as
modified by Amendment
[[Page 66413]]
No. 1 thereto, be, and it hereby is, approved.
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\42\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26409 Filed 11-4-13; 8:45 am]
BILLING CODE 8011-01-P
