Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of Shares of AdvisorShares Sage Core Reserves ETF Under NYSE Arca Equities Rule 8.600, 2715-2722 [2014-00575]
Download as PDF
<![CDATA[
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
information regarding the Fund’s
holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale
information for the Shares.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of
actively-managed exchange-traded
products that are based on swaps
indexes and that will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days after publication (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
All submissions should refer to File
Number SR–NYSEArca–2013–144. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2013–144 and should be
submitted on or before February 5, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–00605 Filed 1–14–14; 8:45 am]
BILLING CODE 8011–01–P
wreier-aviles on DSK5TPTVN1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
14:04 Jan 14, 2014
[Release No. 34–71263; File No. SR–
NYSEArca–2013–121]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change Relating to the
Listing and Trading of Shares of
AdvisorShares Sage Core Reserves
ETF Under NYSE Arca Equities Rule
8.600
January 9, 2014.
I. Introduction
On November 5, 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’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of AdvisorShares Sage Core
Reserves ETF (‘‘Fund’’) of the
AdvisorShares Trust (‘‘Trust’’). The
proposed rule change was published for
comment in the Federal Register on
November 25, 2013.3 The Commission
received no comments on the proposal.
This order grants approval of the
proposed rule change.
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade Shares of the Fund under NYSE
Arca Equities Rule 8.600, which governs
the listing and trading of Managed Fund
Shares. The Shares will be offered by
the Trust,4 a Delaware statutory trust
that is registered with the Commission
as an open-end management investment
company. The investment adviser to the
Fund will be AdvisorShares
Investments, LLC (‘‘Adviser’’). Sage
Advisory Services Ltd. Co. (‘‘SubAdviser’’) will be the Fund’s sub-adviser
and will provide day-to-day portfolio
management of the Fund. Foreside Fund
Services, LLC will be the principal
underwriter and distributor of the
Fund’s Shares. The Bank of New York
Mellon will serve as the administrator,
Jkt 232001
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70902
(Nov. 19, 2013), 78 FR 70370 (‘‘Notice’’).
4 On August 13, 2013, the Trust filed with the
Commission an amendment to its registration
statement on Form N–1A under the Securities Act
of 1933 (‘‘Securities Act’’), and under the
Investment Company Act of 1940 (‘‘1940 Act’’)
relating to the Fund (File Nos. 333–157876 and
811–22110) (‘‘Registration Statement’’). In addition,
the Exchange states that the Trust has obtained
certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 29291 (May
28, 2010) (File No. 812–13677).
2 17
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2013–144 on the subject
line.
VerDate Mar<15>2010
SECURITIES AND EXCHANGE
COMMISSION
1 15
Electronic Comments
42 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00084
Fmt 4703
Sfmt 4703
2715
E:\FR\FM\15JAN1.SGM
15JAN1
2716
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
custodian, transfer agent, and
accounting agent for the Fund. The
Exchange represents that neither the
Adviser nor the Sub-Adviser is
registered as a broker-dealer or is
affiliated with a broker-dealer.5
The Exchange has made the following
representations and statements in
describing the Fund and its investment
strategies, including other portfolio
holdings and investment restrictions.6
wreier-aviles on DSK5TPTVN1PROD with NOTICES
Principal Investments
The Fund will seek to preserve capital
while maximizing income. Under
normal market conditions,7 the SubAdviser will seek to achieve the Fund’s
investment objective by investing at
least 80% of the Fund’s net assets in a
variety of fixed-income securities issued
by U.S. and foreign issuers. These fixedincome securities will be U.S. dollardenominated investment-grade debt
securities rated Baa or higher by
Moody’s Investors Service, Inc.
(‘‘Moody’s’’), equivalently rated by
Standard & Poor’s Ratings Services
(‘‘S&P’’) or Fitch, Inc. (‘‘Fitch’’), or, if
unrated, determined by the Sub-Adviser
to be of comparable quality. The Fund
may retain a security if its rating falls
below investment-grade and the SubAdviser determines that retention of the
security is in the Fund’s best interest.8
5 See Commentary .06 to NYSE Arca Equities
Rule 8.600. The Exchange represents that, in the
event that (a) the Adviser or the Sub-Adviser
becomes a registered broker-dealer or 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, the
Advisor or Sub-Advisor will implement a fire wall
with respect to its relevant personnel or its brokerdealer 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.
6 The Commission notes that additional
information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks, net
asset value (‘‘NAV’’) calculation, creation and
redemption procedures, fees, portfolio holdings,
disclosure policies, distributions, and taxes, among
other information, is included in the Notice and the
Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 3 and 4,
respectively.
7 The Exchange states that the term ‘‘under
normal market conditions’’ means, without
limitation, the absence of extreme volatility or
trading halts in the fixed-income 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.
8 In determining whether a security is of
‘‘comparable quality,’’ the Exchange represents that
the Sub-Adviser will consider, for example,
whether the issuer of the security has issued other
rated securities; whether the obligations under the
security are guaranteed by another entity and, if so,
the rating of the guarantor (if any); whether and (if
applicable) how the security is collateralized; other
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
The Exchange represents that the
Fund’s investment portfolio of fixedincome securities will meet certain
criteria for index-based, fixed-income
exchange-traded funds (‘‘ETFs’’)
contained in NYSE Arca Equities Rule
5.2(j)(3), Commentary .02.9
The average duration of the Fund will
vary based on the Sub-Adviser’s forecast
for interest rates and will normally not
exceed one year.10 The dollar-weighted
average portfolio maturity of the Fund
will normally not be expected to exceed
three years.
The Fund may invest in debt
securities, which are securities
consisting of a certificate or other
evidence of a debt (secured or
unsecured) on which the issuing
company or governmental body
forms of credit enhancement (if any); the security’s
maturity date, liquidity features (if any), relevant
cash flow(s), and valuation features; other structural
analysis; macroeconomic analysis; and sector or
industry analysis.
9 See NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02 governing fixed-income-based
Investment Company Units. The requirements of
Rule 5.2(j)(3), Commentary .02(a) that will be met
include the following: (i) The index or portfolio
must consist of Fixed-income Securities (as defined
in Rule 5.2(j)(3), Commentary.02) (Commentary
.02(a)(1)); (ii) components that in the aggregate
account for at least 75% of the weight of the index
or portfolio each must have a minimum original
principal amount outstanding of $100 million or
more (Rule 5.2(j)(3), Commentary.02(a)(2)); (iii) a
component may be a convertible security; however,
once the convertible security converts to an
underlying equity security, the component is
removed from the index or portfolio (Rule 5.2(j)(3),
Commentary.02(a)(3)); (iv) no component fixedincome security (excluding Treasury Securities)
will represent more than 30% of the weight of the
index or portfolio, and the five highest weighted
component fixed-income securities do not in the
aggregate account for more than 65% of the weight
of the index or portfolio (Rule 5.2(j)(3),
Commentary.02(a)(4)); and (v) an underlying index
or portfolio (excluding exempted securities) must
include securities from a minimum of 13 nonaffiliated issuers (Rule 5.2(j)(3),
Commentary.02(a)(5)).
The Commission notes that the Fund’s
investment portfolio of fixed-income securities
would not be required to meet the quantitative
criteria in NYSE Arca Equities Rule 5.2(j)(3)
Commentary.02(a)(6), which requires that
component securities that in aggregate account for
at least 90% of the weight of the index or portfolio
must be either (a) from issuers that are required to
file reports pursuant to Sections 13 and 15(d) of the
Securities Exchange Act of 1934; (b) from issuers
that have a worldwide market value of its
outstanding common equity held by non-affiliates
of $700 million or more; (c) from issuers that have
outstanding securities that are notes, bonds,
debentures, or evidence of indebtedness having a
total remaining principal amount of at least $1
billion; (d) exempted securities as defined in
Section 3(a)(12) of the Securities Exchange Act of
1934; or (e) from issuers that are a government of
a foreign country or a political subdivision of a
foreign country.
10 According to the Exchange, duration is a
measure used to determine the sensitivity of a
security’s price to changes in interest rates. The
longer a security’s duration, the more sensitive it
will be to changes in interest rates.
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
promises to pay the holder thereof a
fixed, variable, or floating rate of
interest for a specified length of time
and to repay the debt on the specified
maturity date. Some debt securities,
such as zero-coupon bonds, do not make
regular interest payments but are issued
at a discount to their principal or
maturity value. The debt securities that
the Fund will invest in will include a
variety of fixed-income obligations,
including, but not limited to, corporate
debt securities, government securities,
municipal securities, convertible
securities, and mortgage-backed
securities.
The Fund may invest in variable- and
floating-rate instruments, which involve
certain obligations that may carry
variable or floating rates of interest and
may involve a conditional or
unconditional demand feature. These
instruments bear interest at rates that
are not fixed, but that vary with changes
in specified market rates or indices. The
interest rates on these securities may be
reset daily, weekly, quarterly, or
according to some other reset period,
and there may be a set floor or ceiling
on interest rate changes. There is a risk
that the current interest rate on these
obligations may not accurately reflect
existing market interest rates. A demand
instrument with a demand notice
exceeding seven days may be
considered illiquid if there is no
secondary market for the security.
The Fund may invest in bank
obligations, including certificates of
deposit, bankers’ acceptances, and fixed
time deposits. Certificates of deposit are
negotiable certificates issued against
funds deposited in a commercial bank
for a definite period of time and earning
a specified return. Bankers’ acceptances
are negotiable drafts or bills of
exchange, normally drawn by an
importer or exporter to pay for specific
merchandise, that are ‘‘accepted’’ by a
bank, meaning, in effect, that the bank
unconditionally agrees to pay the face
value of the instrument on maturity.
The Exchange states that fixed time
deposits are bank obligations payable at
a stated maturity date and bearing
interest at a fixed rate. Fixed time
deposits may be withdrawn on demand
by the investor, but may be subject to
early withdrawal penalties that vary
depending upon market conditions and
the remaining maturity of the obligation.
The Fund may invest in commercial
paper. The Exchange represents that
commercial paper is a short-term
obligation with a maturity ranging from
one to 270 days issued by banks,
corporations, and other borrowers and
that these investments are unsecured
and usually discounted. To the extent
E:\FR\FM\15JAN1.SGM
15JAN1
wreier-aviles on DSK5TPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
the Fund invests in commercial paper,
the Fund will invest in commercial
paper rated A–1 or A–2 by S&P or
Prime–1 or Prime–2 by Moody’s.
The Fund may invest in U.S.
government securities. Securities issued
or guaranteed by the U.S. government or
its agencies or instrumentalities include
U.S. Treasury securities, which are
backed by the full faith and credit of the
U.S. Treasury and which differ only in
their interest rates, maturities, and times
of issuance. U.S. Treasury bills have
initial maturities of one year or less;
U.S. Treasury notes have initial
maturities of one to ten years; and U.S.
Treasury bonds generally have initial
maturities of greater than ten years. The
Exchange represents that certain U.S.
government securities are issued or
guaranteed by agencies or
instrumentalities of the U.S. government
including, but not limited to, obligations
of U.S. government agencies or
instrumentalities such as Fannie Mae,
Freddie Mac, the Government National
Mortgage Association (‘‘Ginnie Mae’’),
the Small Business Administration, the
Federal Farm Credit Administration, the
Federal Home Loan Banks, Banks for
Cooperatives (including the Central
Bank for Cooperatives), the Federal
Land Banks, the Federal Intermediate
Credit Banks, the Tennessee Valley
Authority, the Export-Import Bank of
the United States, the Commodity Credit
Corporation, the Federal Financing
Bank, the National Credit Union
Administration, and the Federal
Agricultural Mortgage Corporation.
The Fund may invest in inflationindexed bonds, which are fixed-income
securities whose principal value is
periodically adjusted according to the
rate of inflation. According to the
Exchange, two structures are common.
The U.S. Treasury and some other
issuers use a structure that accrues
inflation into the principal value of the
bond. Most other issuers pay out the
Consumer Price Index accruals as part
of a semi-annual coupon. Inflationindexed securities issued by the U.S.
Treasury have maturities of five, ten, or
thirty years, although it is possible that
securities with other maturities will be
issued in the future. The U.S. Treasury
securities pay interest on a semi-annual
basis, equal to a fixed percentage of the
inflation-adjusted principal amount.
The Fund may invest in mortgagerelated securities and asset-backed
securities (‘‘ABSs’’).11 According to the
Exchange, mortgage-related securities
are interests in pools of residential or
commercial mortgage loans, including
mortgage loans made by savings and
loan institutions, mortgage bankers,
commercial banks, and others. Pools of
mortgage loans are assembled as
securities for sale to investors by various
governmental, government-related, and
private organizations. The Fund also
may invest in debt securities that are
secured with collateral consisting of
mortgage-related securities. According
to the Exchange, interests in pools of
mortgage-related securities differ from
other forms of debt instruments, which
normally provide for periodic payment
of interest in fixed amounts with
principal payments at maturity or
specified call dates. Instead, these
securities provide a monthly payment
that consists of both interest and
principal payments. In effect, these
payments are a ‘‘pass-through’’ of the
monthly payments made by the
individual borrowers on their
residential or commercial mortgage
loans, net of any fees paid to the issuer
or guarantor of these securities.
Additional payments are caused by
repayments of principal resulting from
the sale of the underlying property,
refinancing or foreclosure, net of fees or
costs that may be incurred. Some
mortgage-related securities (such as
securities issued by Ginnie Mae) are
described as ‘‘modified pass-through.’’
These securities entitle the holder to
receive all interest and principal
payments owed on the mortgage pool,
net of certain fees, at the scheduled
payment dates regardless of whether or
not the mortgagor actually makes the
payment.
The Fund may invest in agency
mortgage-related securities. According
to the Exchange, the principal
governmental guarantor of mortgagerelated securities is Ginnie Mae. Ginnie
Mae is a wholly owned United States
government corporation within the
Department of Housing and Urban
Development. Ginnie Mae is authorized
to guarantee, with the full faith and
credit of the United States government,
the timely payment of principal and
interest on securities issued by
institutions approved by Ginnie Mae
(such as savings and loan institutions,
commercial banks, and mortgage
bankers) and backed by pools of
mortgages insured by the Federal
11 According to the Exchange, ABSs are bonds
backed by pools of loans or other receivables. ABSs
are created from many types of assets, including
auto loans, credit card receivables, home equity
loans, and student loans. ABSs are issued through
special purpose vehicles that are bankruptcy remote
from the issuer of the collateral. The credit quality
of an ABS transaction depends on the performance
of the underlying assets. To protect ABS investors
from the possibility that some borrowers could miss
payments or even default on their loans, ABSs
include various forms of credit enhancement.
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
2717
Housing Administration or guaranteed
by the Department of Veterans Affairs.
The Fund may invest up to 10% of its
net assets in privately issued (nongovernment-sponsored entity (‘‘nonGSE’’)) mortgage-related securities,
including commercial mortgage-backed
securities,12 collateralized mortgage
obligations (‘‘CMOs’’),13 and adjustable
rate mortgage-backed securities
(‘‘ARMBSs’’).14 According to the
Exchange, commercial banks, savings
and loan institutions, private mortgage
insurance companies, mortgage bankers,
and other secondary market issuers also
create pass-through pools of
conventional residential mortgage loans.
These issuers may be the originators or
servicers of the underlying mortgage
loans as well as the guarantors of the
mortgage-related securities. The Fund
will not purchase mortgage-related
securities (including non-GSE mortgagerelated securities) or any other assets
that in the Sub-Adviser’s opinion are
illiquid if, as a result, more than 15% of
the Fund’s net assets will be invested in
illiquid securities.
The Sub-Adviser will seek to manage
the portion of the Fund’s assets
committed to privately issued mortgagerelated securities in a manner consistent
with the Fund’s investment objective,
policies, and overall portfolio risk
profile. In determining whether and
how much to invest in privately issued
mortgage-related securities, and how to
allocate those assets, the Sub-Adviser
will consider a number of factors. These
include, but are not limited to: (1) The
nature of the borrowers (e.g., residential
or commercial); (2) the collateral loan
type (e.g., for residential: First Lien—
Jumbo/Prime, First Lien—Alt-A, First
Lien—Subprime, First Lien—PayOption or Second Lien; for commercial:
Conduit, Large Loan, or Single Asset/
12 The Exchange states that commercial mortgagebacked securities include securities that reflect an
interest in, and are secured by, mortgage loans on
commercial real property.
13 The Exchange states that CMOs are debt
obligations of a legal entity and that they are
collateralized by mortgages and divided into
classes. Similarly to a bond, interest and prepaid
principal is paid, in most cases, on a monthly basis.
CMOs may be collateralized by whole mortgage
loans or private mortgage bonds, but are more
typically collateralized by portfolios of mortgage
pass-through securities guaranteed by Ginnie Mae,
Freddie Mac, or Fannie Mae, and their income
streams.
14 The Exchange states that ARMBSs have interest
rates that reset at periodic intervals. Acquiring
ARMBSs permits the Fund to participate in
increases in prevailing current interest rates
through periodic adjustments in the coupons of
mortgages underlying the pool on which ARMBSs
are based. These ARMBSs generally have higher
current yield and lower price fluctuations than is
the case with more traditional fixed-income debt
securities of comparable rating and maturity.
E:\FR\FM\15JAN1.SGM
15JAN1
2718
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
Single Borrower); and (3) in the case of
residential loans, whether they are
fixed-rate or adjustable-rate mortgages.
Each of these criteria can cause
privately issued mortgage-related
securities to have differing primary
economic characteristics and
distinguishable risk factors and
performance characteristics.
wreier-aviles on DSK5TPTVN1PROD with NOTICES
Other Fund Investments
In order to respond to adverse market,
economic, political, or other conditions,
the Fund may invest 100% of its total
assets, without limitation, in
investment-grade debt securities and
money market instruments, either
directly or through ETFs.15 The Fund
may be invested in this manner for
extended periods, depending on the
Sub-Adviser’s assessment of market
conditions. These debt securities and
money market instruments include
shares of other fixed-income mutual
funds, commercial paper, certificates of
deposit, bankers’ acceptances, U.S.
government securities, repurchase
agreements, and bonds that are rated
BBB or higher. While the Fund is in a
defensive position, the opportunity to
achieve its investment objective will be
limited.
While the Fund, under normal market
conditions, will invest at least 80% of
its net assets in investment-grade fixedincome securities, as described above,
the Fund may invest its remaining
assets in the following.
The Fund may invest in noninvestment-grade securities. According
to the Exchange, non-investment-grade
securities, also referred to as ‘‘high-yield
securities’’ or ‘‘junk bonds,’’ are debt
securities that are rated lower than the
four highest rating categories by a
nationally recognized statistical rating
organization (for example, lower than
Baa3 by Moody’s or lower than BBB- by
S&P) or are determined to be of
comparable quality by the Fund’s SubAdviser. These securities are generally
considered to be, on balance,
predominantly speculative with respect
to capacity to pay interest and repay
principal in accordance with the terms
of the obligation and will generally
involve more credit risk than securities
in the investment-grade categories.
According to the Exchange, investment
15 The ETFs in which the Fund may invest will
be registered under the 1940 Act and include
Investment Company Units (as described in NYSE
Arca Equities Rule 5.2(j)(3)); Portfolio Depositary
Receipts (as described in NYSE Arca Equities Rule
8.100); and Managed Fund Shares (as described in
NYSE Arca Equities Rule 8.600). These ETFs all
will be listed and traded in the U.S. on registered
exchanges. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged or
inverse leveraged (e.g., 2X, –2X, 3X, or –3X) ETFs.
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
in these securities generally provides
greater income and increased
opportunity for capital appreciation
than investments in higher quality
securities, but they also typically entail
greater price volatility and principal and
income risk.
The Fund may invest in equity
securities, including common stocks,
preferred stocks, warrants to acquire
common stock, securities convertible
into common stock, investments in
master limited partnerships, and rights.
With respect to its equity securities
investments, the Fund will invest only
in equity securities that trade in markets
that are members of the Intermarket
Surveillance Group (‘‘ISG’’) or are
parties to a comprehensive surveillance
sharing agreement with the Exchange.
The Fund may invest in exchangetraded notes (‘‘ETNs’’). According to the
Exchange, ETNs (also called ‘‘indexlinked securities’’ as would be listed, for
example, under NYSE Arca Equities
Rule 5.2(j)(6)), are senior, unsecured,
and unsubordinated debt securities,
issued by an underwriting bank, that are
designed to provide returns that are
linked to a particular benchmark, minus
investor fees. ETNs have a maturity date
and, generally, are backed only by the
creditworthiness of the issuer.
The Fund may invest in CMO
residuals, which the Exchange states are
mortgage securities issued by agencies
or instrumentalities of the U.S.
government or by private originators of,
or investors in, mortgage loans,
including savings and loan associations,
homebuilders, mortgage banks,
commercial banks, investment banks,
and special purpose entities of the
foregoing. CMO residuals, whether or
not registered under the Securities Act,
may be subject to certain restrictions on
transferability and may be deemed
‘‘illiquid’’ and subject to the Fund’s
limitations on investment in illiquid
securities.
The Fund may invest in the securities
of exchange-traded pooled vehicles that
are not investment companies and, thus,
not required to comply with the
provisions of the 1940 Act.16 As a result,
as a shareholder of these pooled
vehicles, the Fund will not have all of
the investor protections afforded by the
1940 Act. These pooled vehicles may,
however, be required to comply with
the provisions of other federal securities
16 These securities include Trust Issued Receipts
(as described in NYSE Arca Equities Rule 8.200);
Commodity-Based Trust Shares (as described in
NYSE Arca Equities Rule 8.201); Currency Trust
Shares (as described in NYSE Arca Equities Rule
8.202); Commodity Index Trust Shares (as described
in NYSE Arca Equities Rule 8.203); and Trust Units
(as described in NYSE Arca Equities Rule 8.500).
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
laws, such as the Securities Act. These
pooled vehicles typically hold currency
or commodities, such as gold or oil, or
other property that is itself not a
security. If the Fund invests in and,
thus, is a shareholder of a pooled
vehicle, the Fund’s shareholders will
indirectly bear the Fund’s proportionate
share of the fees and expenses paid by
the pooled vehicle, including any
applicable management fees, in addition
to both the management fees payable
directly by the Fund to the Adviser and
the other expenses that the Fund bears
directly in connection with its own
operations.
The Fund may invest in equities
issuers located outside the United States
directly 17 or through financial
instruments, ETFs, ETNs, and exchangetraded pooled vehicles that are
indirectly linked to the performance of
foreign issuers.
The Fund may invest directly and
indirectly in foreign currencies. The
Fund may conduct foreign currency
transactions on a spot (i.e., cash) or
forward basis (i.e., by entering into
forward contracts to purchase or sell
foreign currencies). At the discretion of
the Adviser, the Fund may, but is not
obligated to, enter into forward currency
exchange contracts for hedging purposes
to help reduce the risks and volatility
caused by changes in foreign currency
exchange rates. When used for hedging
purposes, forward currency contracts
tend to limit any potential gain that may
be realized if the value of the Fund’s
17 Securities of equities issuers may be any one
of the following: American Depositary Receipts
(‘‘ADRs’’), Global Depositary Receipts (‘‘GDRs’’),
European Depositary Receipts (‘‘EDRs’’),
International Depository Receipts (‘‘IDRs’’),
‘‘ordinary shares,’’ and ‘‘New York shares’’ issued
and traded in the U.S. (collectively, ‘‘Equity
Financial Instruments’’). The Exchange states that
ADRs are U.S.-dollar-denominated receipts
typically issued by U.S. banks and trust companies
that evidence ownership of underlying securities
issued by a foreign issuer. Generally, ADRs in
registered form are designed for use in domestic
securities markets and are traded on exchanges or
over-the-counter in the U.S. GDRs, EDRs, and IDRs
are similar to ADRs in that they are certificates
evidencing ownership of shares of a foreign issuer;
however, GDRs, EDRs, and IDRs may be issued in
bearer form and denominated in other currencies,
and they are generally designed for use in specific
or multiple securities markets outside the U.S.
EDRs, for example, are designed for use in
European securities markets while GDRs are
designed for use throughout the world. Ordinary
shares are shares of foreign issuers that are traded
abroad and on a U.S. exchange. New York shares
are shares that a foreign issuer has allocated for
trading in the U.S. ADRs may be sponsored or
unsponsored, but unsponsored ADRs will not
exceed 10% of the Fund’s net assets. With respect
to its investments in equity securities (including
Equity Financial Instruments), the Fund will invest
at least 90% of its assets invested in securities that
trade in markets that are members of the ISG or are
parties to a comprehensive surveillance sharing
agreement with the Exchange.
E:\FR\FM\15JAN1.SGM
15JAN1
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
wreier-aviles on DSK5TPTVN1PROD with NOTICES
foreign holdings increases because of
currency fluctuations.
The Fund may invest in other
mortgage-related securities, which
include securities other than those
described above that directly or
indirectly represent a participation in,
or are secured by and payable from,
mortgage loans on real property,
including mortgage dollar rolls (that is,
a series of purchase and sale
contracts),18 or stripped mortgagebacked securities (‘‘SMBS’’), which are
derivative multi-class mortgage
securities.19 The other mortgage-related
securities may be debt securities issued
by agencies or instrumentalities of the
U.S. government or by private
originators of, or investors in, mortgage
loans, including savings and loan
associations, homebuilders, mortgage
banks, commercial banks, investment
banks, partnerships, trusts, and special
purpose entities of the foregoing.
The Fund may invest in closed-end
funds. Closed-end funds are pooled
investment vehicles that are registered
under the 1940 Act and whose shares
are listed and traded on U.S. national
securities exchanges.
The Fund may invest in U.S.
exchange-traded futures contracts,
including stock index futures and U.S.
Treasury futures, and options on these
futures contracts. The Fund also may
invest in U.S. exchange- and over-thecounter-traded options, which will
generally be based on U.S. Treasuries.
The Fund may enter into swap
agreements generally based on fixedincome securities, including, but not
limited to, total return swaps, index
swaps, and interest rate swaps. The
Fund may utilize swap agreements in an
18 According to the Exchange, a mortgage dollar
roll involves the sale of mortgage-backed securities
by the Fund and its agreement to repurchase the
instrument (or one which is substantially similar)
at a specified time and price.
19 According to the Exchange, SMBSs are usually
structured with two classes that receive different
proportions of the interest and principal
distributions on a pool of mortgage assets. A
common type of SMBS will have one class
receiving some of the interest and most of the
principal from the mortgage assets, while the other
class will receive most of the interest and the
remainder of the principal. In the most extreme
case, one class will receive all of the interest (the
interest-only or ‘‘IO’’ class), while the other class
will receive all of the principal (the principal-only
or ‘‘PO’’ class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal
payments (including pre-payments) on the related
underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse
effect on the Fund’s yield to maturity from these
securities. If the underlying mortgage assets
experience greater than anticipated pre-payments of
principal, the Fund may fail to recoup some or all
of its initial investment in these securities even if
the security is in one of the highest rating
categories.
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
attempt to gain exposure to the
securities in a market without actually
purchasing those securities, or to hedge
a position. The Fund will utilize cleared
swaps, if available, to the extent
practicable and will not enter into any
swap agreement unless the Adviser
believes that the other party to the
transaction is creditworthy. Swaps
utilized by the Fund will be backed by
collateral of the Fund’s assets, as
required. The Sub-Adviser will evaluate
the creditworthiness of counterparties
on an ongoing basis. In addition to
information provided by credit agencies,
the Sub-Adviser’s credit analysts will
evaluate each approved counterparty
using various methods of analysis,
including company visits, earnings
updates, the broker-dealer’s reputation,
past experience with the broker-dealer,
market levels for the counterparty’s debt
and equity, the counterparty’s liquidity,
and the broker-dealer’s share of market
participation.
The Fund may invest in collateralized
bond obligations (‘‘CBOs’’),
collateralized loan obligations (‘‘CLOs’’),
other collateralized debt obligations
(‘‘CDOs’’), and other similarly
structured securities. CBOs, CLOs, and
other CDOs are types of ABSs.
According to the Exchange, a CBO is a
trust that is often backed by a
diversified pool of high-risk, belowinvestment-grade, fixed-income
securities. The collateral can be from
many different types of fixed-income
securities such as high-yield debt,
residential privately issued mortgagerelated securities, commercial privately
issued mortgage-related securities, trust
preferred securities, and emerging
market debt. A CLO is a trust typically
collateralized by a pool of loans, which
may include, among others, domestic
and foreign senior secured loans, senior
unsecured loans, and subordinated
corporate loans, including loans that
may be rated below-investment-grade or
equivalent unrated loans. Other CDOs
are trusts backed by other types of assets
representing obligations of various
parties.20
The Fund may invest in hybrid
instruments. The Exchange represents
that a hybrid instrument is a type of
potentially high-risk derivative that
20 According to the Exchange, the risks of an
investment in a CBO, CLO, or other CDO depend
largely on the type of the collateral securities and
the class of the instrument in which the Fund
invests. Normally, CBOs, CLOs, and other CDOs are
privately offered and sold, and thus are not
registered under the securities laws. As a result,
investments in CBOs, CLOs, and other CDOs may
be characterized by the Fund as illiquid securities;
however, an active dealer market may exist for
CBOs, CLOs, and other CDOs allowing them to
qualify for Rule 144A transactions.
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
2719
combines a traditional stock, bond, or
commodity with an option or forward
contract. Generally, the principal
amount, amount payable upon maturity
or redemption, or interest rate of a
hybrid is tied (positively or negatively)
to the price of some security,
commodity, currency, or securities
index; another interest rate; or some
other economic factor (each a
‘‘benchmark’’). The interest rate or
(unlike most fixed-income securities)
the principal amount payable at
maturity of a hybrid security may be
increased or decreased, depending on
changes in the value of the benchmark.
An example of a hybrid instrument
could be a bond issued by an oil
company that pays a small base level of
interest with additional interest that
accrues in correlation with the extent to
which oil prices exceed a certain
predetermined level. Such a hybrid
instrument would be a combination of
a bond and a call option on oil.
The Fund may invest in structured
notes, which the Exchange states are
debt obligations that also contain an
embedded derivative component with
characteristics that adjust the
obligation’s risk/return profile.
Generally, the performance of a
structured note will track that of the
underlying debt obligation and the
derivative embedded within it.21 The
Fund would have the right to receive
periodic interest payments from the
issuer of the structured notes at an
agreed-upon interest rate and a return of
the principal at the maturity date.
The Fund may invest in shares of
exchange-traded real estate investment
trusts (‘‘REITs’’). According to the
Exchange, REITs are pooled investment
vehicles that invest primarily in real
estate or real estate-related loans. REITs
are generally classified as equity REITs,
mortgage REITs, or a combination of
equity and mortgage REITs.
The Fund may enter into repurchase
agreements with financial institutions,
which may be deemed to be loans. The
Fund follows certain procedures
designed to minimize the risks inherent
in these agreements. These procedures
include effecting repurchase
transactions only with large, wellcapitalized, and well-established
financial institutions whose condition
will be continually monitored by the
Sub-Adviser. In addition, the value of
21 According to the Exchange, structured notes
are typically privately negotiated transactions
between two or more parties. The Fund bears the
risk that the issuer of the structured note will
default or become bankrupt, which may result in
the loss of principal investment and periodic
interest payments expected to be received for the
duration of its investment in the structured notes.
E:\FR\FM\15JAN1.SGM
15JAN1
wreier-aviles on DSK5TPTVN1PROD with NOTICES
2720
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
the collateral underlying the repurchase
agreement will always be at least equal
to the repurchase price, including any
accrued interest earned on the
repurchase agreement. It is the current
policy of the Fund not to invest in
repurchase agreements that do not
mature within seven days if the
investment, together with any other
illiquid assets held by the Fund,
amounts to more than 15% of the
Fund’s net assets.
The Fund may enter into reverse
repurchase agreements as part of the
Fund’s investment strategy. According
to the Exchange, reverse repurchase
agreements involve sales by the Fund of
portfolio assets concurrently with an
agreement by the Fund to repurchase
the same assets at a later date at a fixed
price. Generally, the effect of this
transaction is that the Fund can recover
all or most of the cash invested in the
portfolio securities involved during the
term of the reverse repurchase
agreement, while the Fund will be able
to keep the interest income associated
with those portfolio securities.
The Fund may engage in short sales
transactions in which the Fund sells a
security it does not own.
The Fund may invest in mortgagerelated securities that are equity
securities issued by agencies or
instrumentalities of the U.S. government
or by private originators of, or investors
in, mortgage loans, including savings
and loan associations, homebuilders,
mortgage banks, commercial banks,
investment banks, partnerships, trusts,
and special purpose entities of the
foregoing.22
The Fund, from time to time, in the
ordinary course of business, may
purchase securities on a when-issued,
delayed-delivery, or forward
commitment basis (i.e., delivery and
payment can take place between a
month and 120 days after the date of the
transaction).
The Fund may invest in U.S. Treasury
zero-coupon bonds. The Exchange states
that these securities are U.S. Treasury
bonds which have been stripped of their
unmatured interest coupons, the
coupons themselves, and receipts or
certificates representing interests in
these stripped debt obligations and
coupons. Interest is not paid in cash
during the term of these securities, but
is accrued and paid at maturity.
22 The
Exchange states that, with respect to its
mortgage-related securities holdings that are equity
securities, the Fund will invest only in securities
that trade in markets that are members of the ISG
or are parties to a comprehensive surveillance
sharing agreement with the Exchange.
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
Investment Restrictions
According to the Registration
Statement, the Fund may not:
(i) With respect to 75% of its total
assets, purchase securities of any issuer
(except securities issued or guaranteed
by the U.S. government, its agencies or
instrumentalities or shares of
investment companies) if, as a result,
more than 5% of its total assets would
be invested in the securities of an issuer;
or (ii) acquire more than 10% of the
outstanding voting securities of any one
issuer. For purposes of this policy, the
issuer of the underlying security will be
deemed to be the issuer of any
respective depositary receipt.
(ii) Invest 25% or more of its total
assets in the securities of one or more
issuers conducting their principal
business activities in the same industry
or group of industries. This limitation
does not apply to investments in
securities issued or guaranteed by the
U.S. government, its agencies or
instrumentalities, or shares of
investment companies. The Fund will
not invest 25% or more of its total assets
in any investment company that so
concentrates.
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
Adviser or Sub-Adviser 23 in accordance
with Commission guidance, CMO
residuals, and demand instruments with
a demand notice exceeding seven days.
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 the securities
of other investment companies to the
extent that this investment would be
23 In reaching liquidity decisions, the Adviser or
Sub-Adviser 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).
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
consistent with the requirements of
Section 12(d)(1) of the 1940 Act or any
rule, regulation, or order of the
Commission or interpretation thereof.
The Trust has entered into agreements
with several unaffiliated ETFs that
permit, pursuant to a Commission order,
the Fund to purchase shares of those
ETFs beyond the Section 12(d)(1) limits
described above. The Fund will only
make these investments in conformity
with the requirements of Subchapter M
of the Internal Revenue Code of 1986.
The Fund will seek to qualify for
treatment as a Regulated Investment
Company (‘‘RIC’’) under the Internal
Revenue Code.
The Fund’s investments will be
consistent with the Fund’s investment
objective and will not be used to
enhance leverage.
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 24 and the rules and
regulations thereunder applicable to a
national securities exchange.25 In
particular, the Commission finds that
the proposal is consistent with Section
6(b)(5) of the Act,26 which requires,
among other things, that the Exchange’s
rules be designed to promote just and
equitable principles of trade, 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 initial and continued
listing criteria in NYSE Arca Equities
Rule 8.600 for the Shares 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,27 which sets
forth Congress’ finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last-sale information for the Shares
and U.S. exchange-listed equity
securities, including ETFs, ETNs,
exchange-traded pooled vehicles, ADRs,
24 15
U.S.C. 78f.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
26 17 U.S.C. 78f(b)(5).
27 15 U.S.C. 78k–1(a)(1)(C)(iii).
25 In
E:\FR\FM\15JAN1.SGM
15JAN1
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
wreier-aviles on DSK5TPTVN1PROD with NOTICES
equity-related financial instruments and
other exchange-traded products, REITs,
and mortgage-related securities, will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line
and will be available from the national
securities exchange on which they are
listed. Information regarding
unsponsored ADRs will be available
from major market data vendors. Intraday and closing price information
relating to the fixed income and equities
investments of the Fund, as well as
Fund investments in spot currencies
and derivatives, including futures,
forwards, options, options on futures,
and swaps, will be available from major
market data vendors and from securities
and futures exchanges, as applicable.
Information relating to U.S. exchangelisted options will be available via the
Options Price Reporting Authority. In
addition, the Portfolio Indicative Value,
as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated
at least every 15 seconds during the
Core Trading Session by one or more
major market data vendors.28 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 that will form the basis for the
Fund’s calculation of NAV at the end of
the business day.29 In addition, a basket
composition file, which includes the
security names and share quantities (as
applicable) required to be delivered in
exchange for Fund Shares, together with
estimates and actual cash components,
will be publicly disseminated daily
prior to the opening of the New York
Stock Exchange, LLC (‘‘NYSE’’) via the
National Securities Clearing
Corporation. The basket will represent
one creation unit of the Fund. The
Administrator will calculate NAV and
NAV per Share once each business day
as of the regularly scheduled close of
normal trading on the NYSE (normally,
4:00 p.m., Eastern Time).30 Information
28 According to the Exchange, several major
market data vendors display or make widely
available Portfolio Indicative Values taken from
CTA or other data feeds.
29 On a daily basis, the Fund’s Web site will
disclose for each portfolio security and other
financial instrument of the Fund the following
information: Ticker symbol (if applicable); name
and, when available, the individual identifier
(CUSIP) of the security and financial instrument;
number of shares (if applicable) and dollar value of
securities and financial instruments held in the
portfolio; and percentage weighting of the security
and financial instrument in the portfolio. The Web
site information will be publicly available at no
charge.
30 According to the Exchange, price information
on listed securities, including ETFs, ETNs,
exchange-traded pooled vehicles, ADRs, equityrelated financial instruments and other exchange-
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. The Web site for the
Fund will include a form of the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Exchange will obtain a representation
from the issuer of the Shares that the
NAV per Share will be calculated daily
and that the NAV and the Disclosed
Portfolio will be made available to all
market participants at the same time.
Trading in Shares of the Fund will be
traded products, REITs, and mortgage-related
securities, will be taken from the exchange where
the security is primarily traded. Other portfolio
securities and assets for which market quotations
are not readily available or determined to not
represent the current fair value will be valued based
on fair value as determined in good faith in
accordance with procedures adopted by the Trust’s
Board of Trustees and in accordance with the 1940
Act. For assets such as options, futures, and swaps,
in general, Bloomberg will be the primary source for
pricing, and Reuters will be the secondary source.
Spot currency transactions and non-exchangetraded derivatives, including forwards, swaps, and
certain options will normally be valued on the basis
of quotes obtained from brokers and dealers or
pricing services using data reflecting the earlier
closing of the principal markets for those assets.
The Exchange states that prices obtained from
independent pricing services use information
provided by market makers or estimates of market
values obtained from yield data relating to
investments or securities with similar
characteristics. Exchange-traded options will be
valued at market closing prices. Futures and
options on futures will be valued at the settlement
price determined by the applicable exchange.
Unsponsored ADRs will be valued on the basis of
the market closing price on the exchange where the
stock of the foreign issuer that underlies the ADR
is listed. Domestic and foreign fixed-income
securities generally trade in the over-the-counter
market rather than on a securities exchange. The
Fund will generally value these portfolio securities
by relying on independent pricing services. The
Fund’s pricing services will use valuation models
or matrix pricing to determine current value. The
Exchange states that, in general, pricing services use
information with respect to comparable bond and
note transactions, quotations from bond dealers, or
by reference to other securities that are considered
comparable in these characteristics as rating,
interest rate, maturity date, option-adjusted spread
models, prepayment projections, interest rate
spreads, and yield curves. A matrix price is an
estimated price or value for a fixed-income security.
Matrix pricing is considered a form of fair-value
pricing.
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
2721
halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have
been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable,31 and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth additional circumstances under
which Shares of the Fund may be
halted. The Exchange states that it has
a general policy prohibiting the
distribution of material, non-public
information by its employees.
Consistent with NYSE Arca Equities
Rule 8.600(d)(2)(B)(ii), the Reporting
Authority 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 Funds’ portfolios. In
addition, the Exchange states that
neither the Adviser nor Sub-Adviser is
registered as a broker-dealer or is
affiliated with a broker-dealer.32 The
Exchange represents that trading in the
Shares will be subject to the existing
trading surveillances, administered by
the Financial Industry Regulatory
Authority (‘‘FINRA’’) on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and
31 These reasons may include: (1) The extent to
which trading is not occurring in the securities or
the financial instruments composing the Disclosed
Portfolio of a Fund; or (2) whether other unusual
conditions or circumstances detrimental to the
maintenance of a fair and orderly market are
present. With respect to trading halts, the Exchange
may consider all relevant factors in exercising its
discretion to halt of suspend trading in the Shares
of the Fund.
32 See supra note 5 and accompanying text. The
Exchange states 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, the 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 the
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.
E:\FR\FM\15JAN1.SGM
15JAN1
wreier-aviles on DSK5TPTVN1PROD with NOTICES
2722
Federal Register / Vol. 79, No. 10 / Wednesday, January 15, 2014 / Notices
applicable federal securities laws.33 The
Exchange further 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.
Moreover, prior to the commencement
of trading, the Exchange states that it
will inform its Equity Trading Permit
Holders in an Information Bulletin of
the special characteristics and risks
associated with trading the Shares.
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 the
following:
(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) FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares, underlying
exchange-traded equity securities
(including, without limitation, ETFs,
ETNs, exchange-traded pooled vehicles,
ADRs, equity-related financial
instruments and other exchange-traded
products, REITs, and mortgage-related
securities), futures, options on futures,
and exchange-traded options with other
markets and other entities that are
members of the ISG, and FINRA, on
behalf of the Exchange, may obtain
trading information regarding trading in
the Shares, underlying exchange-traded
equity securities, futures, options on
futures, and exchange-traded options
from these markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares, underlying exchange-traded
equity securities (including, without
limitation, ETFs, ETNs, exchange-traded
pooled vehicles, ADRs, equity-related
financial instruments and other
exchange-traded products, REITs, and
mortgage-related securities), futures,
options on futures, and exchange-traded
options from markets and other entities
that are members of ISG or with which
the Exchange has in place a
comprehensive surveillance sharing
agreement. In addition, FINRA, on
behalf of the Exchange, is able to access,
as needed, trade information for certain
33 The
Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement and that the Exchange is
responsible for FINRA’s performance under this
regulatory services agreement.
VerDate Mar<15>2010
14:04 Jan 14, 2014
Jkt 232001
fixed-income securities held by the
Fund reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’).
(4) At least 90% of the Fund’s
investments in equity securities
(including Equity Financial
Instruments) will be in securities that
trade in markets that are members of the
ISG or are parties to a comprehensive
surveillance sharing agreement with the
Exchange. With respect to its mortgagerelated securities holdings that are
equity securities, the Fund will invest
only in securities that trade in markets
that are members of the ISG or are
parties to a comprehensive surveillance
sharing agreement with the Exchange.
(5) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Specifically, the
Information Bulletin will discuss the
following: (1) The procedures for
purchases and redemptions of Shares in
creation unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Equities Rule 9.2(a),
which imposes a duty of due diligence
on its Equity Trading Permit 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 Portfolio
Indicative Value will not be calculated
or publicly disseminated; (4) how
information regarding the Portfolio
Indicative Value is disseminated; (5) the
requirement that Equity Trading Permit
Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
(6) For initial and continued listing,
the Funds must be in compliance with
Rule 10A–3 under the Act,34 as
provided by NYSE Arca Equities Rule
5.3.
(7) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities (calculated
at the time of investment), including
Rule 144A securities deemed illiquid by
the Adviser or Sub-Adviser in
accordance with Commission guidance,
CMO residuals, and demand
instruments with a demand notice
exceeding seven days.
(8) The Fund will utilize cleared
swaps, if available, to the extent
practicable and will not enter into any
swap agreement unless the Adviser
believes that the other party to the
34 See
PO 00000
17 CFR 240.10A–3.
Frm 00091
Fmt 4703
Sfmt 9990
transaction is creditworthy. Swaps
utilized by the Fund will be backed by
collateral of the Fund’s assets, as
required. The Sub-Adviser will evaluate
the creditworthiness of counterparties
on an ongoing basis.
(9) The Fund will effect repurchase
transactions only with large, wellcapitalized and well-established
financial institutions whose condition
will be continually monitored by the
Sub-Adviser. In addition, the value of
the collateral underlying the repurchase
agreement will always be at least equal
to the repurchase price, including any
accrued interest earned on the
repurchase agreement.
(10) The Fund may invest up to 10%
of its net assets in privately issued nonGSE mortgage-related securities
(including commercial mortgage-backed
securities, CMOs, and ARMBS).
(11) The Fund’s fixed-income
investment portfolio will meet certain
listing criteria for index-based, fixedincome exchange-traded funds
contained in NYSE Arca Equities Rule
5.2(j)(3), Commentary .02.35
(12) The Fund’s investments will be
consistent with that Fund’s investment
objective and will not be used to
enhance leverage. In addition, the Fund
will not invest in leveraged or inverse
leveraged (e.g., 2X, –2X, 3X, or –3X)
ETFs.
(13) A minimum of 100,000 Shares of
the Fund will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Funds.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 36 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,37 that the
proposed rule change (SR–NYSEArca–
2013–121), be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–00575 Filed 1–14–14; 8:45 am]
BILLING CODE 8011–01–P
35 See
supra note 9 and accompanying text.
U.S.C. 78f(b)(5).
37 15 U.S.C. 78s(b)(2).
38 17 CFR 200.30–3(a)(12).
36 15
E:\FR\FM\15JAN1.SGM
15JAN1
]]>Agencies
[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Notices]
[Pages 2715-2722]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00575]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71263; File No. SR-NYSEArca-2013-121]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change Relating to the Listing and Trading of
Shares of AdvisorShares Sage Core Reserves ETF Under NYSE Arca Equities
Rule 8.600
January 9, 2014.
I. Introduction
On November 5, 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'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of
AdvisorShares Sage Core Reserves ETF (``Fund'') of the AdvisorShares
Trust (``Trust''). The proposed rule change was published for comment
in the Federal Register on November 25, 2013.\3\ The Commission
received no comments on the proposal. This order grants approval of the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70902 (Nov. 19,
2013), 78 FR 70370 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Equities Rule 8.600, which governs the listing and trading of
Managed Fund Shares. The Shares will be offered by the Trust,\4\ a
Delaware statutory trust that is registered with the Commission as an
open-end management investment company. The investment adviser to the
Fund will be AdvisorShares Investments, LLC (``Adviser''). Sage
Advisory Services Ltd. Co. (``Sub-Adviser'') will be the Fund's sub-
adviser and will provide day-to-day portfolio management of the Fund.
Foreside Fund Services, LLC will be the principal underwriter and
distributor of the Fund's Shares. The Bank of New York Mellon will
serve as the administrator,
[[Page 2716]]
custodian, transfer agent, and accounting agent for the Fund. The
Exchange represents that neither the Adviser nor the Sub-Adviser is
registered as a broker-dealer or is affiliated with a broker-dealer.\5\
---------------------------------------------------------------------------
\4\ On August 13, 2013, the Trust filed with the Commission an
amendment to its registration statement on Form N-1A under the
Securities Act of 1933 (``Securities Act''), and under the
Investment Company Act of 1940 (``1940 Act'') relating to the Fund
(File Nos. 333-157876 and 811-22110) (``Registration Statement'').
In addition, the Exchange states that the Trust has obtained certain
exemptive relief under the 1940 Act. See Investment Company Act
Release No. 29291 (May 28, 2010) (File No. 812-13677).
\5\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The
Exchange represents that, in the event that (a) the Adviser or the
Sub-Adviser becomes a registered broker-dealer or 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, the Advisor or Sub-Advisor will implement a fire wall
with respect to its relevant personnel or its 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.
---------------------------------------------------------------------------
The Exchange has made the following representations and statements
in describing the Fund and its investment strategies, including other
portfolio holdings and investment restrictions.\6\
---------------------------------------------------------------------------
\6\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, portfolio holdings, disclosure
policies, distributions, and taxes, among other information, is
included in the Notice and the Registration Statement, as
applicable. See Notice and Registration Statement, supra notes 3 and
4, respectively.
---------------------------------------------------------------------------
Principal Investments
The Fund will seek to preserve capital while maximizing income.
Under normal market conditions,\7\ the Sub-Adviser will seek to achieve
the Fund's investment objective by investing at least 80% of the Fund's
net assets in a variety of fixed-income securities issued by U.S. and
foreign issuers. These fixed-income securities will be U.S. dollar-
denominated investment-grade debt securities rated Baa or higher by
Moody's Investors Service, Inc. (``Moody's''), equivalently rated by
Standard & Poor's Ratings Services (``S&P'') or Fitch, Inc.
(``Fitch''), or, if unrated, determined by the Sub-Adviser to be of
comparable quality. The Fund may retain a security if its rating falls
below investment-grade and the Sub-Adviser determines that retention of
the security is in the Fund's best interest.\8\
---------------------------------------------------------------------------
\7\ The Exchange states that the term ``under normal market
conditions'' means, without limitation, the absence of extreme
volatility or trading halts in the fixed-income 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.
\8\ In determining whether a security is of ``comparable
quality,'' the Exchange represents that the Sub-Adviser will
consider, for example, whether the issuer of the security has issued
other rated securities; whether the obligations under the security
are guaranteed by another entity and, if so, the rating of the
guarantor (if any); whether and (if applicable) how the security is
collateralized; other forms of credit enhancement (if any); the
security's maturity date, liquidity features (if any), relevant cash
flow(s), and valuation features; other structural analysis;
macroeconomic analysis; and sector or industry analysis.
---------------------------------------------------------------------------
The Exchange represents that the Fund's investment portfolio of
fixed-income securities will meet certain criteria for index-based,
fixed-income exchange-traded funds (``ETFs'') contained in NYSE Arca
Equities Rule 5.2(j)(3), Commentary .02.\9\
---------------------------------------------------------------------------
\9\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02
governing fixed-income-based Investment Company Units. The
requirements of Rule 5.2(j)(3), Commentary .02(a) that will be met
include the following: (i) The index or portfolio must consist of
Fixed-income Securities (as defined in Rule 5.2(j)(3),
Commentary.02) (Commentary .02(a)(1)); (ii) components that in the
aggregate account for at least 75% of the weight of the index or
portfolio each must have a minimum original principal amount
outstanding of $100 million or more (Rule 5.2(j)(3),
Commentary.02(a)(2)); (iii) a component may be a convertible
security; however, once the convertible security converts to an
underlying equity security, the component is removed from the index
or portfolio (Rule 5.2(j)(3), Commentary.02(a)(3)); (iv) no
component fixed-income security (excluding Treasury Securities) will
represent more than 30% of the weight of the index or portfolio, and
the five highest weighted component fixed-income securities do not
in the aggregate account for more than 65% of the weight of the
index or portfolio (Rule 5.2(j)(3), Commentary.02(a)(4)); and (v) an
underlying index or portfolio (excluding exempted securities) must
include securities from a minimum of 13 non-affiliated issuers (Rule
5.2(j)(3), Commentary.02(a)(5)).
The Commission notes that the Fund's investment portfolio of
fixed-income securities would not be required to meet the
quantitative criteria in NYSE Arca Equities Rule 5.2(j)(3)
Commentary.02(a)(6), which requires that component securities that
in aggregate account for at least 90% of the weight of the index or
portfolio must be either (a) from issuers that are required to file
reports pursuant to Sections 13 and 15(d) of the Securities Exchange
Act of 1934; (b) from issuers that have a worldwide market value of
its outstanding common equity held by non-affiliates of $700 million
or more; (c) from issuers that have outstanding securities that are
notes, bonds, debentures, or evidence of indebtedness having a total
remaining principal amount of at least $1 billion; (d) exempted
securities as defined in Section 3(a)(12) of the Securities Exchange
Act of 1934; or (e) from issuers that are a government of a foreign
country or a political subdivision of a foreign country.
---------------------------------------------------------------------------
The average duration of the Fund will vary based on the Sub-
Adviser's forecast for interest rates and will normally not exceed one
year.\10\ The dollar-weighted average portfolio maturity of the Fund
will normally not be expected to exceed three years.
---------------------------------------------------------------------------
\10\ According to the Exchange, duration is a measure used to
determine the sensitivity of a security's price to changes in
interest rates. The longer a security's duration, the more sensitive
it will be to changes in interest rates.
---------------------------------------------------------------------------
The Fund may invest in debt securities, which are securities
consisting of a certificate or other evidence of a debt (secured or
unsecured) on which the issuing company or governmental body promises
to pay the holder thereof a fixed, variable, or floating rate of
interest for a specified length of time and to repay the debt on the
specified maturity date. Some debt securities, such as zero-coupon
bonds, do not make regular interest payments but are issued at a
discount to their principal or maturity value. The debt securities that
the Fund will invest in will include a variety of fixed-income
obligations, including, but not limited to, corporate debt securities,
government securities, municipal securities, convertible securities,
and mortgage-backed securities.
The Fund may invest in variable- and floating-rate instruments,
which involve certain obligations that may carry variable or floating
rates of interest and may involve a conditional or unconditional demand
feature. These instruments bear interest at rates that are not fixed,
but that vary with changes in specified market rates or indices. The
interest rates on these securities may be reset daily, weekly,
quarterly, or according to some other reset period, and there may be a
set floor or ceiling on interest rate changes. There is a risk that the
current interest rate on these obligations may not accurately reflect
existing market interest rates. A demand instrument with a demand
notice exceeding seven days may be considered illiquid if there is no
secondary market for the security.
The Fund may invest in bank obligations, including certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of
deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified
return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, that are ``accepted'' by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument
on maturity. The Exchange states that fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the
investor, but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the
obligation.
The Fund may invest in commercial paper. The Exchange represents
that commercial paper is a short-term obligation with a maturity
ranging from one to 270 days issued by banks, corporations, and other
borrowers and that these investments are unsecured and usually
discounted. To the extent
[[Page 2717]]
the Fund invests in commercial paper, the Fund will invest in
commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's.
The Fund may invest in U.S. government securities. Securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which are backed by
the full faith and credit of the U.S. Treasury and which differ only in
their interest rates, maturities, and times of issuance. U.S. Treasury
bills have initial maturities of one year or less; U.S. Treasury notes
have initial maturities of one to ten years; and U.S. Treasury bonds
generally have initial maturities of greater than ten years. The
Exchange represents that certain U.S. government securities are issued
or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies
or instrumentalities such as Fannie Mae, Freddie Mac, the Government
National Mortgage Association (``Ginnie Mae''), the Small Business
Administration, the Federal Farm Credit Administration, the Federal
Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit
Banks, the Tennessee Valley Authority, the Export-Import Bank of the
United States, the Commodity Credit Corporation, the Federal Financing
Bank, the National Credit Union Administration, and the Federal
Agricultural Mortgage Corporation.
The Fund may invest in inflation-indexed bonds, which are fixed-
income securities whose principal value is periodically adjusted
according to the rate of inflation. According to the Exchange, two
structures are common. The U.S. Treasury and some other issuers use a
structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the Consumer Price Index accruals as part of
a semi-annual coupon. Inflation-indexed securities issued by the U.S.
Treasury have maturities of five, ten, or thirty years, although it is
possible that securities with other maturities will be issued in the
future. The U.S. Treasury securities pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal
amount.
The Fund may invest in mortgage-related securities and asset-backed
securities (``ABSs'').\11\ According to the Exchange, mortgage-related
securities are interests in pools of residential or commercial mortgage
loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others. Pools of mortgage loans
are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. The Fund
also may invest in debt securities that are secured with collateral
consisting of mortgage-related securities. According to the Exchange,
interests in pools of mortgage-related securities differ from other
forms of debt instruments, which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly
payment that consists of both interest and principal payments. In
effect, these payments are a ``pass-through'' of the monthly payments
made by the individual borrowers on their residential or commercial
mortgage loans, net of any fees paid to the issuer or guarantor of
these securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property,
refinancing or foreclosure, net of fees or costs that may be incurred.
Some mortgage-related securities (such as securities issued by Ginnie
Mae) are described as ``modified pass-through.'' These securities
entitle the holder to receive all interest and principal payments owed
on the mortgage pool, net of certain fees, at the scheduled payment
dates regardless of whether or not the mortgagor actually makes the
payment.
---------------------------------------------------------------------------
\11\ According to the Exchange, ABSs are bonds backed by pools
of loans or other receivables. ABSs are created from many types of
assets, including auto loans, credit card receivables, home equity
loans, and student loans. ABSs are issued through special purpose
vehicles that are bankruptcy remote from the issuer of the
collateral. The credit quality of an ABS transaction depends on the
performance of the underlying assets. To protect ABS investors from
the possibility that some borrowers could miss payments or even
default on their loans, ABSs include various forms of credit
enhancement.
---------------------------------------------------------------------------
The Fund may invest in agency mortgage-related securities.
According to the Exchange, the principal governmental guarantor of
mortgage-related securities is Ginnie Mae. Ginnie Mae is a wholly owned
United States government corporation within the Department of Housing
and Urban Development. Ginnie Mae is authorized to guarantee, with the
full faith and credit of the United States government, the timely
payment of principal and interest on securities issued by institutions
approved by Ginnie Mae (such as savings and loan institutions,
commercial banks, and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Administration or guaranteed
by the Department of Veterans Affairs.
The Fund may invest up to 10% of its net assets in privately issued
(non-government-sponsored entity (``non-GSE'')) mortgage-related
securities, including commercial mortgage-backed securities,\12\
collateralized mortgage obligations (``CMOs''),\13\ and adjustable rate
mortgage-backed securities (``ARMBSs'').\14\ According to the Exchange,
commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market
issuers also create pass-through pools of conventional residential
mortgage loans. These issuers may be the originators or servicers of
the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. The Fund will not purchase mortgage-
related securities (including non-GSE mortgage-related securities) or
any other assets that in the Sub-Adviser's opinion are illiquid if, as
a result, more than 15% of the Fund's net assets will be invested in
illiquid securities.
---------------------------------------------------------------------------
\12\ The Exchange states that commercial mortgage-backed
securities include securities that reflect an interest in, and are
secured by, mortgage loans on commercial real property.
\13\ The Exchange states that CMOs are debt obligations of a
legal entity and that they are collateralized by mortgages and
divided into classes. Similarly to a bond, interest and prepaid
principal is paid, in most cases, on a monthly basis. CMOs may be
collateralized by whole mortgage loans or private mortgage bonds,
but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by Ginnie Mae, Freddie Mac, or
Fannie Mae, and their income streams.
\14\ The Exchange states that ARMBSs have interest rates that
reset at periodic intervals. Acquiring ARMBSs permits the Fund to
participate in increases in prevailing current interest rates
through periodic adjustments in the coupons of mortgages underlying
the pool on which ARMBSs are based. These ARMBSs generally have
higher current yield and lower price fluctuations than is the case
with more traditional fixed-income debt securities of comparable
rating and maturity.
---------------------------------------------------------------------------
The Sub-Adviser will seek to manage the portion of the Fund's
assets committed to privately issued mortgage-related securities in a
manner consistent with the Fund's investment objective, policies, and
overall portfolio risk profile. In determining whether and how much to
invest in privately issued mortgage-related securities, and how to
allocate those assets, the Sub-Adviser will consider a number of
factors. These include, but are not limited to: (1) The nature of the
borrowers (e.g., residential or commercial); (2) the collateral loan
type (e.g., for residential: First Lien--Jumbo/Prime, First Lien--Alt-
A, First Lien--Subprime, First Lien--Pay-Option or Second Lien; for
commercial: Conduit, Large Loan, or Single Asset/
[[Page 2718]]
Single Borrower); and (3) in the case of residential loans, whether
they are fixed-rate or adjustable-rate mortgages. Each of these
criteria can cause privately issued mortgage-related securities to have
differing primary economic characteristics and distinguishable risk
factors and performance characteristics.
Other Fund Investments
In order to respond to adverse market, economic, political, or
other conditions, the Fund may invest 100% of its total assets, without
limitation, in investment-grade debt securities and money market
instruments, either directly or through ETFs.\15\ The Fund may be
invested in this manner for extended periods, depending on the Sub-
Adviser's assessment of market conditions. These debt securities and
money market instruments include shares of other fixed-income mutual
funds, commercial paper, certificates of deposit, bankers' acceptances,
U.S. government securities, repurchase agreements, and bonds that are
rated BBB or higher. While the Fund is in a defensive position, the
opportunity to achieve its investment objective will be limited.
---------------------------------------------------------------------------
\15\ The ETFs in which the Fund may invest will be registered
under the 1940 Act and include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100);
and Managed Fund Shares (as described in NYSE Arca Equities Rule
8.600). These ETFs all will be listed and traded in the U.S. on
registered exchanges. While the Fund may invest in inverse ETFs, the
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X, or -3X) ETFs.
---------------------------------------------------------------------------
While the Fund, under normal market conditions, will invest at
least 80% of its net assets in investment-grade fixed-income
securities, as described above, the Fund may invest its remaining
assets in the following.
The Fund may invest in non-investment-grade securities. According
to the Exchange, non-investment-grade securities, also referred to as
``high-yield securities'' or ``junk bonds,'' are debt securities that
are rated lower than the four highest rating categories by a nationally
recognized statistical rating organization (for example, lower than
Baa3 by Moody's or lower than BBB- by S&P) or are determined to be of
comparable quality by the Fund's Sub-Adviser. These securities are
generally considered to be, on balance, predominantly speculative with
respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation and will generally involve more credit
risk than securities in the investment-grade categories. According to
the Exchange, investment in these securities generally provides greater
income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically
entail greater price volatility and principal and income risk.
The Fund may invest in equity securities, including common stocks,
preferred stocks, warrants to acquire common stock, securities
convertible into common stock, investments in master limited
partnerships, and rights. With respect to its equity securities
investments, the Fund will invest only in equity securities that trade
in markets that are members of the Intermarket Surveillance Group
(``ISG'') or are parties to a comprehensive surveillance sharing
agreement with the Exchange.
The Fund may invest in exchange-traded notes (``ETNs''). According
to the Exchange, ETNs (also called ``index-linked securities'' as would
be listed, for example, under NYSE Arca Equities Rule 5.2(j)(6)), are
senior, unsecured, and unsubordinated debt securities, issued by an
underwriting bank, that are designed to provide returns that are linked
to a particular benchmark, minus investor fees. ETNs have a maturity
date and, generally, are backed only by the creditworthiness of the
issuer.
The Fund may invest in CMO residuals, which the Exchange states are
mortgage securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage
banks, commercial banks, investment banks, and special purpose entities
of the foregoing. CMO residuals, whether or not registered under the
Securities Act, may be subject to certain restrictions on
transferability and may be deemed ``illiquid'' and subject to the
Fund's limitations on investment in illiquid securities.
The Fund may invest in the securities of exchange-traded pooled
vehicles that are not investment companies and, thus, not required to
comply with the provisions of the 1940 Act.\16\ As a result, as a
shareholder of these pooled vehicles, the Fund will not have all of the
investor protections afforded by the 1940 Act. These pooled vehicles
may, however, be required to comply with the provisions of other
federal securities laws, such as the Securities Act. These pooled
vehicles typically hold currency or commodities, such as gold or oil,
or other property that is itself not a security. If the Fund invests in
and, thus, is a shareholder of a pooled vehicle, the Fund's
shareholders will indirectly bear the Fund's proportionate share of the
fees and expenses paid by the pooled vehicle, including any applicable
management fees, in addition to both the management fees payable
directly by the Fund to the Adviser and the other expenses that the
Fund bears directly in connection with its own operations.
---------------------------------------------------------------------------
\16\ These securities include Trust Issued Receipts (as
described in NYSE Arca Equities Rule 8.200); Commodity-Based Trust
Shares (as described in NYSE Arca Equities Rule 8.201); Currency
Trust Shares (as described in NYSE Arca Equities Rule 8.202);
Commodity Index Trust Shares (as described in NYSE Arca Equities
Rule 8.203); and Trust Units (as described in NYSE Arca Equities
Rule 8.500).
---------------------------------------------------------------------------
The Fund may invest in equities issuers located outside the United
States directly \17\ or through financial instruments, ETFs, ETNs, and
exchange-traded pooled vehicles that are indirectly linked to the
performance of foreign issuers.
---------------------------------------------------------------------------
\17\ Securities of equities issuers may be any one of the
following: American Depositary Receipts (``ADRs''), Global
Depositary Receipts (``GDRs''), European Depositary Receipts
(``EDRs''), International Depository Receipts (``IDRs''), ``ordinary
shares,'' and ``New York shares'' issued and traded in the U.S.
(collectively, ``Equity Financial Instruments''). The Exchange
states that ADRs are U.S.-dollar-denominated receipts typically
issued by U.S. banks and trust companies that evidence ownership of
underlying securities issued by a foreign issuer. Generally, ADRs in
registered form are designed for use in domestic securities markets
and are traded on exchanges or over-the-counter in the U.S. GDRs,
EDRs, and IDRs are similar to ADRs in that they are certificates
evidencing ownership of shares of a foreign issuer; however, GDRs,
EDRs, and IDRs may be issued in bearer form and denominated in other
currencies, and they are generally designed for use in specific or
multiple securities markets outside the U.S. EDRs, for example, are
designed for use in European securities markets while GDRs are
designed for use throughout the world. Ordinary shares are shares of
foreign issuers that are traded abroad and on a U.S. exchange. New
York shares are shares that a foreign issuer has allocated for
trading in the U.S. ADRs may be sponsored or unsponsored, but
unsponsored ADRs will not exceed 10% of the Fund's net assets. With
respect to its investments in equity securities (including Equity
Financial Instruments), the Fund will invest at least 90% of its
assets invested in securities that trade in markets that are members
of the ISG or are parties to a comprehensive surveillance sharing
agreement with the Exchange.
---------------------------------------------------------------------------
The Fund may invest directly and indirectly in foreign currencies.
The Fund may conduct foreign currency transactions on a spot (i.e.,
cash) or forward basis (i.e., by entering into forward contracts to
purchase or sell foreign currencies). At the discretion of the Adviser,
the Fund may, but is not obligated to, enter into forward currency
exchange contracts for hedging purposes to help reduce the risks and
volatility caused by changes in foreign currency exchange rates. When
used for hedging purposes, forward currency contracts tend to limit any
potential gain that may be realized if the value of the Fund's
[[Page 2719]]
foreign holdings increases because of currency fluctuations.
The Fund may invest in other mortgage-related securities, which
include securities other than those described above that directly or
indirectly represent a participation in, or are secured by and payable
from, mortgage loans on real property, including mortgage dollar rolls
(that is, a series of purchase and sale contracts),\18\ or stripped
mortgage-backed securities (``SMBS''), which are derivative multi-class
mortgage securities.\19\ The other mortgage-related securities may be
debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage
banks, commercial banks, investment banks, partnerships, trusts, and
special purpose entities of the foregoing.
---------------------------------------------------------------------------
\18\ According to the Exchange, a mortgage dollar roll involves
the sale of mortgage-backed securities by the Fund and its agreement
to repurchase the instrument (or one which is substantially similar)
at a specified time and price.
\19\ According to the Exchange, SMBSs are usually structured
with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A common
type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of
the interest (the interest-only or ``IO'' class), while the other
class will receive all of the principal (the principal-only or
``PO'' class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including pre-payments)
on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Fund's
yield to maturity from these securities. If the underlying mortgage
assets experience greater than anticipated pre-payments of
principal, the Fund may fail to recoup some or all of its initial
investment in these securities even if the security is in one of the
highest rating categories.
---------------------------------------------------------------------------
The Fund may invest in closed-end funds. Closed-end funds are
pooled investment vehicles that are registered under the 1940 Act and
whose shares are listed and traded on U.S. national securities
exchanges.
The Fund may invest in U.S. exchange-traded futures contracts,
including stock index futures and U.S. Treasury futures, and options on
these futures contracts. The Fund also may invest in U.S. exchange- and
over-the-counter-traded options, which will generally be based on U.S.
Treasuries.
The Fund may enter into swap agreements generally based on fixed-
income securities, including, but not limited to, total return swaps,
index swaps, and interest rate swaps. The Fund may utilize swap
agreements in an attempt to gain exposure to the securities in a market
without actually purchasing those securities, or to hedge a position.
The Fund will utilize cleared swaps, if available, to the extent
practicable and will not enter into any swap agreement unless the
Adviser believes that the other party to the transaction is
creditworthy. Swaps utilized by the Fund will be backed by collateral
of the Fund's assets, as required. The Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition to
information provided by credit agencies, the Sub-Adviser's credit
analysts will evaluate each approved counterparty using various methods
of analysis, including company visits, earnings updates, the broker-
dealer's reputation, past experience with the broker-dealer, market
levels for the counterparty's debt and equity, the counterparty's
liquidity, and the broker-dealer's share of market participation.
The Fund may invest in collateralized bond obligations (``CBOs''),
collateralized loan obligations (``CLOs''), other collateralized debt
obligations (``CDOs''), and other similarly structured securities.
CBOs, CLOs, and other CDOs are types of ABSs. According to the
Exchange, a CBO is a trust that is often backed by a diversified pool
of high-risk, below-investment-grade, fixed-income securities. The
collateral can be from many different types of fixed-income securities
such as high-yield debt, residential privately issued mortgage-related
securities, commercial privately issued mortgage-related securities,
trust preferred securities, and emerging market debt. A CLO is a trust
typically collateralized by a pool of loans, which may include, among
others, domestic and foreign senior secured loans, senior unsecured
loans, and subordinated corporate loans, including loans that may be
rated below-investment-grade or equivalent unrated loans. Other CDOs
are trusts backed by other types of assets representing obligations of
various parties.\20\
---------------------------------------------------------------------------
\20\ According to the Exchange, the risks of an investment in a
CBO, CLO, or other CDO depend largely on the type of the collateral
securities and the class of the instrument in which the Fund
invests. Normally, CBOs, CLOs, and other CDOs are privately offered
and sold, and thus are not registered under the securities laws. As
a result, investments in CBOs, CLOs, and other CDOs may be
characterized by the Fund as illiquid securities; however, an active
dealer market may exist for CBOs, CLOs, and other CDOs allowing them
to qualify for Rule 144A transactions.
---------------------------------------------------------------------------
The Fund may invest in hybrid instruments. The Exchange represents
that a hybrid instrument is a type of potentially high-risk derivative
that combines a traditional stock, bond, or commodity with an option or
forward contract. Generally, the principal amount, amount payable upon
maturity or redemption, or interest rate of a hybrid is tied
(positively or negatively) to the price of some security, commodity,
currency, or securities index; another interest rate; or some other
economic factor (each a ``benchmark''). The interest rate or (unlike
most fixed-income securities) the principal amount payable at maturity
of a hybrid security may be increased or decreased, depending on
changes in the value of the benchmark. An example of a hybrid
instrument could be a bond issued by an oil company that pays a small
base level of interest with additional interest that accrues in
correlation with the extent to which oil prices exceed a certain
predetermined level. Such a hybrid instrument would be a combination of
a bond and a call option on oil.
The Fund may invest in structured notes, which the Exchange states
are debt obligations that also contain an embedded derivative component
with characteristics that adjust the obligation's risk/return profile.
Generally, the performance of a structured note will track that of the
underlying debt obligation and the derivative embedded within it.\21\
The Fund would have the right to receive periodic interest payments
from the issuer of the structured notes at an agreed-upon interest rate
and a return of the principal at the maturity date.
---------------------------------------------------------------------------
\21\ According to the Exchange, structured notes are typically
privately negotiated transactions between two or more parties. The
Fund bears the risk that the issuer of the structured note will
default or become bankrupt, which may result in the loss of
principal investment and periodic interest payments expected to be
received for the duration of its investment in the structured notes.
---------------------------------------------------------------------------
The Fund may invest in shares of exchange-traded real estate
investment trusts (``REITs''). According to the Exchange, REITs are
pooled investment vehicles that invest primarily in real estate or real
estate-related loans. REITs are generally classified as equity REITs,
mortgage REITs, or a combination of equity and mortgage REITs.
The Fund may enter into repurchase agreements with financial
institutions, which may be deemed to be loans. The Fund follows certain
procedures designed to minimize the risks inherent in these agreements.
These procedures include effecting repurchase transactions only with
large, well-capitalized, and well-established financial institutions
whose condition will be continually monitored by the Sub-Adviser. In
addition, the value of
[[Page 2720]]
the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. It is the current policy of the
Fund not to invest in repurchase agreements that do not mature within
seven days if the investment, together with any other illiquid assets
held by the Fund, amounts to more than 15% of the Fund's net assets.
The Fund may enter into reverse repurchase agreements as part of
the Fund's investment strategy. According to the Exchange, reverse
repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same
assets at a later date at a fixed price. Generally, the effect of this
transaction is that the Fund can recover all or most of the cash
invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while the Fund will be able to keep the
interest income associated with those portfolio securities.
The Fund may engage in short sales transactions in which the Fund
sells a security it does not own.
The Fund may invest in mortgage-related securities that are equity
securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage
banks, commercial banks, investment banks, partnerships, trusts, and
special purpose entities of the foregoing.\22\
---------------------------------------------------------------------------
\22\ The Exchange states that, with respect to its mortgage-
related securities holdings that are equity securities, the Fund
will invest only in securities that trade in markets that are
members of the ISG or are parties to a comprehensive surveillance
sharing agreement with the Exchange.
---------------------------------------------------------------------------
The Fund, from time to time, in the ordinary course of business,
may purchase securities on a when-issued, delayed-delivery, or forward
commitment basis (i.e., delivery and payment can take place between a
month and 120 days after the date of the transaction).
The Fund may invest in U.S. Treasury zero-coupon bonds. The
Exchange states that these securities are U.S. Treasury bonds which
have been stripped of their unmatured interest coupons, the coupons
themselves, and receipts or certificates representing interests in
these stripped debt obligations and coupons. Interest is not paid in
cash during the term of these securities, but is accrued and paid at
maturity.
Investment Restrictions
According to the Registration Statement, the Fund may not:
(i) With respect to 75% of its total assets, purchase securities of
any issuer (except securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or shares of investment
companies) if, as a result, more than 5% of its total assets would be
invested in the securities of an issuer; or (ii) acquire more than 10%
of the outstanding voting securities of any one issuer. For purposes of
this policy, the issuer of the underlying security will be deemed to be
the issuer of any respective depositary receipt.
(ii) Invest 25% or more of its total assets in the securities of
one or more issuers conducting their principal business activities in
the same industry or group of industries. This limitation does not
apply to investments in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or shares of investment
companies. The Fund will not invest 25% or more of its total assets in
any investment company that so concentrates.
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 Adviser or Sub-
Adviser \23\ in accordance with Commission guidance, CMO residuals, and
demand instruments with a demand notice exceeding seven days. 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.
---------------------------------------------------------------------------
\23\ In reaching liquidity decisions, the Adviser or Sub-Adviser
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 the securities of other investment companies
to the extent that this investment would be consistent with the
requirements of Section 12(d)(1) of the 1940 Act or any rule,
regulation, or order of the Commission or interpretation thereof. The
Trust has entered into agreements with several unaffiliated ETFs that
permit, pursuant to a Commission order, the Fund to purchase shares of
those ETFs beyond the Section 12(d)(1) limits described above. The Fund
will only make these investments in conformity with the requirements of
Subchapter M of the Internal Revenue Code of 1986. The Fund will seek
to qualify for treatment as a Regulated Investment Company (``RIC'')
under the Internal Revenue Code.
The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage.
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 \24\
and the rules and regulations thereunder applicable to a national
securities exchange.\25\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\26\ which
requires, among other things, that the Exchange's rules be designed to
promote just and equitable principles of trade, 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 initial and continued listing criteria in NYSE Arca Equities
Rule 8.600 for the Shares to be listed and traded on the Exchange.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f.
\25\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\26\ 17 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,\27\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares and U.S. exchange-listed equity
securities, including ETFs, ETNs, exchange-traded pooled vehicles,
ADRs,
[[Page 2721]]
equity-related financial instruments and other exchange-traded
products, REITs, and mortgage-related securities, will be available via
the Consolidated Tape Association (``CTA'') high-speed line and will be
available from the national securities exchange on which they are
listed. Information regarding unsponsored ADRs will be available from
major market data vendors. Intra-day and closing price information
relating to the fixed income and equities investments of the Fund, as
well as Fund investments in spot currencies and derivatives, including
futures, forwards, options, options on futures, and swaps, will be
available from major market data vendors and from securities and
futures exchanges, as applicable. Information relating to U.S.
exchange-listed options will be available via the Options Price
Reporting Authority. In addition, the Portfolio Indicative Value, as
defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely
disseminated at least every 15 seconds during the Core Trading Session
by one or more major market data vendors.\28\ 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 that will form the basis for the Fund's calculation of NAV at
the end of the business day.\29\ In addition, a basket composition
file, which includes the security names and share quantities (as
applicable) required to be delivered in exchange for Fund Shares,
together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the New York Stock Exchange,
LLC (``NYSE'') via the National Securities Clearing Corporation. The
basket will represent one creation unit of the Fund. The Administrator
will calculate NAV and NAV per Share once each business day as of the
regularly scheduled close of normal trading on the NYSE (normally, 4:00
p.m., Eastern Time).\30\ Information regarding market price and trading
volume of the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Information regarding the previous day's closing price and
trading volume information for the Shares will be published daily in
the financial section of newspapers. The Web site for the Fund will
include a form of the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\28\ According to the Exchange, several major market data
vendors display or make widely available Portfolio Indicative Values
taken from CTA or other data feeds.
\29\ On a daily basis, the Fund's Web site will disclose for
each portfolio security and other financial instrument of the Fund
the following information: Ticker symbol (if applicable); name and,
when available, the individual identifier (CUSIP) of the security
and financial instrument; number of shares (if applicable) and
dollar value of securities and financial instruments held in the
portfolio; and percentage weighting of the security and financial
instrument in the portfolio. The Web site information will be
publicly available at no charge.
\30\ According to the Exchange, price information on listed
securities, including ETFs, ETNs, exchange-traded pooled vehicles,
ADRs, equity-related financial instruments and other exchange-traded
products, REITs, and mortgage-related securities, will be taken from
the exchange where the security is primarily traded. Other portfolio
securities and assets for which market quotations are not readily
available or determined to not represent the current fair value will
be valued based on fair value as determined in good faith in
accordance with procedures adopted by the Trust's Board of Trustees
and in accordance with the 1940 Act. For assets such as options,
futures, and swaps, in general, Bloomberg will be the primary source
for pricing, and Reuters will be the secondary source. Spot currency
transactions and non-exchange-traded derivatives, including
forwards, swaps, and certain options will normally be valued on the
basis of quotes obtained from brokers and dealers or pricing
services using data reflecting the earlier closing of the principal
markets for those assets. The Exchange states that prices obtained
from independent pricing services use information provided by market
makers or estimates of market values obtained from yield data
relating to investments or securities with similar characteristics.
Exchange-traded options will be valued at market closing prices.
Futures and options on futures will be valued at the settlement
price determined by the applicable exchange. Unsponsored ADRs will
be valued on the basis of the market closing price on the exchange
where the stock of the foreign issuer that underlies the ADR is
listed. Domestic and foreign fixed-income securities generally trade
in the over-the-counter market rather than on a securities exchange.
The Fund will generally value these portfolio securities by relying
on independent pricing services. The Fund's pricing services will
use valuation models or matrix pricing to determine current value.
The Exchange states that, in general, pricing services use
information with respect to comparable bond and note transactions,
quotations from bond dealers, or by reference to other securities
that are considered comparable in these characteristics as rating,
interest rate, maturity date, option-adjusted spread models,
prepayment projections, interest rate spreads, and yield curves. A
matrix price is an estimated price or value for a fixed-income
security. Matrix pricing is considered a form of fair-value pricing.
---------------------------------------------------------------------------
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 Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the
NAV and the Disclosed Portfolio will be made available to all market
participants at the same time. Trading in Shares of the Fund will be
halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached or because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable,\31\ and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances
under which Shares of the Fund may be halted. The Exchange states that
it has a general policy prohibiting the distribution of material, non-
public information by its employees. Consistent with NYSE Arca Equities
Rule 8.600(d)(2)(B)(ii), the Reporting Authority 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 Funds' portfolios. In addition, the Exchange states
that neither the Adviser nor Sub-Adviser is registered as a broker-
dealer or is affiliated with a broker-dealer.\32\ The Exchange
represents that trading in the Shares will be subject to the existing
trading surveillances, administered by the Financial Industry
Regulatory Authority (``FINRA'') on behalf of the Exchange, which are
designed to detect violations of Exchange rules and
[[Page 2722]]
applicable federal securities laws.\33\ The Exchange further 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.
Moreover, prior to the commencement of trading, the Exchange states
that it will inform its Equity Trading Permit Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares.
---------------------------------------------------------------------------
\31\ These reasons may include: (1) The extent to which trading
is not occurring in the securities or the financial instruments
composing the Disclosed Portfolio of a Fund; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance
of a fair and orderly market are present. With respect to trading
halts, the Exchange may consider all relevant factors in exercising
its discretion to halt of suspend trading in the Shares of the Fund.
\32\ See supra note 5 and accompanying text. The Exchange states
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, the 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 the 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.
\33\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
---------------------------------------------------------------------------
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 the following:
(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) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, underlying exchange-traded equity
securities (including, without limitation, ETFs, ETNs, exchange-traded
pooled vehicles, ADRs, equity-related financial instruments and other
exchange-traded products, REITs, and mortgage-related securities),
futures, options on futures, and exchange-traded options with other
markets and other entities that are members of the ISG, and FINRA, on
behalf of the Exchange, may obtain trading information regarding
trading in the Shares, underlying exchange-traded equity securities,
futures, options on futures, and exchange-traded options from these
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, underlying exchange-traded
equity securities (including, without limitation, ETFs, ETNs, exchange-
traded pooled vehicles, ADRs, equity-related financial instruments and
other exchange-traded products, REITs, and mortgage-related
securities), futures, options on futures, and exchange-traded options
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement. In addition, FINRA, on behalf of the Exchange, is able to
access, as needed, trade information for certain fixed-income
securities held by the Fund reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE'').
(4) At least 90% of the Fund's investments in equity securities
(including Equity Financial Instruments) will be in securities that
trade in markets that are members of the ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange. With
respect to its mortgage-related securities holdings that are equity
securities, the Fund will invest only in securities that trade in
markets that are members of the ISG or are parties to a comprehensive
surveillance sharing agreement with the Exchange.
(5) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
The procedures for purchases and redemptions of Shares in creation unit
aggregations (and that Shares are not individually redeemable); (2)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit 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 Portfolio Indicative Value will not be
calculated or publicly disseminated; (4) how information regarding the
Portfolio Indicative Value is disseminated; (5) the requirement that
Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
(6) For initial and continued listing, the Funds must be in
compliance with Rule 10A-3 under the Act,\34\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\34\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(7) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser or Sub-
Adviser in accordance with Commission guidance, CMO residuals, and
demand instruments with a demand notice exceeding seven days.
(8) The Fund will utilize cleared swaps, if available, to the
extent practicable and will not enter into any swap agreement unless
the Adviser believes that the other party to the transaction is
creditworthy. Swaps utilized by the Fund will be backed by collateral
of the Fund's assets, as required. The Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis.
(9) The Fund will effect repurchase transactions only with large,
well-capitalized and well-established financial institutions whose
condition will be continually monitored by the Sub-Adviser. In
addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement.
(10) The Fund may invest up to 10% of its net assets in privately
issued non-GSE mortgage-related securities (including commercial
mortgage-backed securities, CMOs, and ARMBS).
(11) The Fund's fixed-income investment portfolio will meet certain
listing criteria for index-based, fixed-income exchange-traded funds
contained in NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.\35\
---------------------------------------------------------------------------
\35\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------
(12) The Fund's investments will be consistent with that Fund's
investment objective and will not be used to enhance leverage. In
addition, the Fund will not invest in leveraged or inverse leveraged
(e.g., 2X, -2X, 3X, or -3X) ETFs.
(13) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.
This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice, and
the Exchange's description of the Funds.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \36\ and the
rules and regulations thereunder applicable to a national securities
exchange.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-NYSEArca- 2013-121), be, and
it hereby is, approved.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
---------------------------------------------------------------------------
\38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00575 Filed 1-14-14; 8:45 am]
BILLING CODE 8011-01-P
