Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 2, Relating to the Listing and Trading of Reality Shares Isolated Dividend Growth ETF Under NYSE Arca Equities Rule 8.600, 14761-14769 [2014-05752]
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Federal Register / Vol. 78, No. 51 / Monday, March 17, 2014 / Notices
credits are reasonably related to the
value to the Exchange’s market quality
associated with higher volumes. In
addition, the Exchange believes that the
proposed credits are reasonable,
equitable, and not unfairly
discriminatory because they would
provide a simplified approach that will
automatically adjust based on prevailing
market conditions.
tkelley on DSK3SPTVN1PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,20 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 purposes of the Act.
The Exchange believes that the
proposed fees for certain MOC and LOC
orders will not place a burden on
competition because the Exchange is
establishing an alternative way for
member organizations to achieve the
reduced fee, which would allow more
member organizations to compete and
qualify for the fee. The Exchange
believes that the new and revised fees
and credits for non-Floor brokers, Floor
brokers, and DMMs would not burden
competition. Rather, the Exchange
believes that the proposed changes
strike an appropriate balance between
fees and credits, which will create an
incentive to submit orders to the
Exchange, thereby promoting
competition. The revised credits for
certain SLP executions would not
burden competition because all SLPs
would have the opportunity to qualify
for the credits. The credits would create
an added incentive for SLPs to provide
liquidity on the Exchange, thereby also
contributing to the Exchange’s
competitiveness with other markets.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee or credit levels at a particular
venue to be unattractive. In such an
environment, the Exchange must
continually review, and consider
adjusting, its fees and credits to remain
competitive with other exchanges. For
these reasons, the Exchange believes
that the proposed rule change reflects
this competitive environment and is
therefore consistent with the Act.
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
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 21 of the Act and
subparagraph (f)(2) of Rule 19b–4 22
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 23 of the Act to
determine whether the proposed rule
change should be approved or
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:
Electronic Comments
• 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–
NYSE–2014–09 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2014–09. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at 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–NYSE–
2014–09 and should be submitted on or
before April 7, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–05750 Filed 3–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71686; File No. SR–
NYSEArca–2014–20]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change, as Modified by
Amendment No. 2, Relating to the
Listing and Trading of Reality Shares
Isolated Dividend Growth ETF Under
NYSE Arca Equities Rule 8.600
March 11, 2014.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b-4 thereunder,3
notice is hereby given that, on February
25, 2014, NYSE Arca, Inc. (‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change, which filing was amended and
replaced in its entirety by Amendment
No. 2 thereto on March 7, 2014, as
24 17
21 15
20 15
U.S.C. 78s(b)(3)(A).
22 17 CFR 240.19b–4(f)(2).
23 15 U.S.C. 78s(b)(2)(B).
U.S.C. 78f(b)(8).
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18:45 Mar 14, 2014
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14761
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b-4.
1 15
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Federal Register / Vol. 78, No. 51 / Monday, March 17, 2014 / Notices
described in Items I, II, and III below,
which Items have been prepared by the
self-regulatory organization.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of the following under
NYSE Arca Equities Rule 8.600
(‘‘Managed Fund Shares’’): Reality
Shares Isolated Dividend Growth ETF.
The text of the proposed rule change is
available on the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
tkelley on DSK3SPTVN1PROD with NOTICES
The Exchange proposes to list and
trade shares (‘‘Shares’’) of the following
under NYSE Arca Equities Rule 8.600,
which governs the listing and trading of
Managed Fund Shares 5 on the
Exchange: Reality Shares Isolated
Dividend Growth ETF (the ‘‘Fund’’).6
4 Amendment No. 1 was filed on March 6, 2014
and withdrawn on March 7, 2014.
5 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that
correspond generally to the price and yield
performance of a specific foreign or domestic stock
index, fixed income securities index or combination
thereof.
6 The Commission approved NYSE Arca Equities
Rule 8.600 and has previously approved listing and
trading on the Exchange of a number of actively
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18:45 Mar 14, 2014
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The Shares of the Fund will be offered
by the Reality Shares ETF Trust
(formerly, the ERNY Financial ETF
Trust) (the ‘‘Trust’’). The Trust will be
registered with the Commission as an
open-end management investment
company.7 Reality Shares Advisors, LLC
(formerly, ERNY Financial Advisors,
LLC) will serve as the investment
adviser to the Fund (the ‘‘Adviser’’).
ALPS Distributors, Inc. (the
‘‘Distributor’’) will be the principal
underwriter and distributor of the
Fund’s Shares. The Bank of New York
Mellon (the ‘‘Administrator,’’ ‘‘Transfer
Agent’’ or ‘‘Custodian’’) will serve as
administrator, custodian and transfer
agent for the Fund.8
Commentary .06 to Rule 8.600
provides that, if the investment adviser
to the investment company issuing
Managed Fund Shares is affiliated with
a broker-dealer, such investment adviser
shall erect a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
managed funds under Rule 8.600. See, e.g.,
Securities Exchange Act Release Nos. 57801 (May
8, 2008), 73 FR 27878 (May 14, 2008) (SR–
NYSEArca–2008–31) (order approving Exchange
listing and trading of twelve actively-managed
funds of the WisdomTree Trust); 60460 (August 7,
2009), 74 FR 41468 (August 17, 2009) (SR–
NYSEArca–2009–55) (order approving listing and
trading of Dent Tactical ETF); 63076 (October 12,
2010), 75 FR 63874 (October 18, 2010) (SR–
NYSEArca–2010–79) (order approving listing and
trading of Cambria Global Tactical ETF); 64643
(June 10, 2011) 76 FR 35062 (June 15, 2011) (SR–
NYSEArca–2011–21) (order approving listing and
trading of WisdomTree Global Real Return Fund);
69397 (April 18, 2013) 78 FR 24276 (April 24, 2013)
(SR–NYSEArca–2013–18) (order approving listing
and trading of fourteen actively-managed funds of
the iShares Trust); 69591 (May 16, 2013) 78 FR
30372 (May 22, 2013) (SR–NYSEArca–2013–33)
(order approving listing and trading of the
International Bear ETF).
7 The Trust will be registered under the 1940 Act.
On November 12, 2013, the Trust filed a registration
statement on Form N–1A under the Securities Act
of 1933 (the ‘‘1933 Act’’) (15 U.S.C. 77a), and under
the 1940 Act relating to the Fund, as amended by
Pre-Effective Amendment Number 1, filed with the
Commission on February 6, 2014 (File Nos. 333–
192288 and 811–22911) (the ‘‘Registration
Statement’’). The description of the operation of the
Trust and the Fund herein is based, in part, on the
Registration Statement. The Commission has issued
an order granting certain exemptive relief to the
Trust under the 1940 Act. Investment Company Act
Release No. 30552 (June 10, 2013) (‘‘Exemptive
Order’’). The Trust filed an Application for an
Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act
and rules thereunder (File No. 812–14146), on April
5, 2013, as amended on May 10, 2013 (together, the
‘‘Exemptive Application’’). Investments made by
the Fund will comply with the conditions set forth
in the Exemptive Application and the Exemptive
Order.
8 This Amendment No. 2 to SR–NYSEArca–2014–
20 replaces SR–NYSEArca–2014–20 as originally
filed and supersedes such filing in its entirety. The
Exchange has withdrawn Amendment No. 1 to SR–
NYSEArca–2014–20.
PO 00000
Frm 00105
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of and/or changes to such investment
company portfolio. Commentary .06
further requires that personnel who
make decisions on the open-end fund’s
portfolio composition must be subject to
procedures designed to prevent the use
and dissemination of material
nonpublic information regarding the
open-end fund’s portfolio.9 Commentary
.06 to Rule 8.600 is similar to
Commentary .03(a)(i) and (iii) to NYSE
Arca Equities Rule 5.2(j)(3); however,
Commentary .06 in connection with the
establishment of a ‘‘fire wall’’ between
the investment adviser and the brokerdealer reflects the applicable open-end
fund’s portfolio, not an underlying
benchmark index, as is the case with
index-based funds. The Adviser is not
registered as a broker-dealer and is not
affiliated with any broker-dealers. In the
event (a) the Adviser or any sub-adviser
becomes registered as a broker-dealer or
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, they will
implement a fire wall with respect to
their relevant personnel or broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the portfolio, and will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio.
Principal Investments
According to the Registration
Statement, the Fund will seek to
produce long term capital appreciation
by attempting to isolate the value of
dividends paid by a portfolio of U.S.,
European and Japanese large
9 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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tkelley on DSK3SPTVN1PROD with NOTICES
capitalization companies.10 The Adviser
considers U.S. large capitalization
companies to be those with market
capitalizations within the range of
market capitalizations of the companies
included in the S&P 500 Index. The
Adviser considers European large
capitalization companies to be those
with market capitalizations within the
range of market capitalizations of the
companies included in the Euro Stoxx
50 Index. The Adviser considers
Japanese large capitalization companies
to be those with market capitalizations
within the range of market
capitalizations of the companies
included in the Nikkei 225 Index.
Under normal market conditions,11
the Fund generally will invest
substantially all its assets in any
combination of investments whose
collective performance is designed to
reflect the growth of the level of
dividends expected to be paid on a
portfolio of securities issued by large
capitalization companies listed for
trading in the United States, Europe and
Japan (as discussed in more detail
below).12
The Fund may take long or short
positions in the securities issued by
large capitalization companies listed for
trading in the U.S., Europe and Japan.
A ‘‘long’’ position means to hold or be
exposed to a security or instrument with
the expectation that its value will
increase over time. A ‘‘short position’’
means to sell or be exposed to a security
or instrument with the expectation that
it will fall in value. To the extent
permitted under the 1940 Act, the Fund
may take long or short positions in
10 The Fund’s non-U.S. investments will be
limited to listed securities traded in European and
Japanese markets and futures contracts, forward
contracts, options and swaps based on such
securities. Not more than 10% of the assets of the
Fund in the aggregate shall consist of non-U.S.
equity securities whose principal market is not a
member of the Intermarket Surveillance Group
(‘‘ISG’’) or is a market with which the Exchange
does not have a comprehensive surveillance sharing
agreement. Furthermore, not more than 10% of the
net assets of the Fund in the aggregate shall consist
of futures contracts or exchange-traded options
whose principal market is not a member of ISG or
is a market with which the Exchange does not have
a comprehensive surveillance sharing agreement.
11 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the equity
markets or the financial markets generally;
operational issues causing dissemination of
inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar
intervening circumstance.
12 There is no guarantee that either the level of
overall dividends paid by such companies will
grow over time, or that the Fund’s investment
strategies will capture such growth. The Fund will
include appropriate risk disclosure in its offering
documents disclosing both of these risks.
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18:45 Mar 14, 2014
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shares of exchange traded funds
(‘‘ETFs’’) that provide exposure to
indexes of large-capitalization equity
securities listed for trading in the U.S.,
Europe and Japan, such as the S&P 500
Index, the Euro Stoxx 50 Index and the
Nikkei 225 Index, or any subset of such
indexes (‘‘Underlying ETFs’’).13 The
strategy of taking both a long position in
a security through its ex-dividend date
(the last date an investor can own the
security and receive dividends paid on
the security) and a corresponding short
position in the same security
immediately thereafter is designed to
allow the Fund to isolate its exposure to
the growth of the level of dividends
expected to be paid on such security
while minimizing its exposure to
changes in the trading price of such
security.
The Fund may buy and sell listed or
over-the counter (‘‘OTC’’) options on
indexes of large-capitalization U.S.,
European and Japanese equity securities
listed for trading in the U.S., Europe and
Japan, such as the S&P 500 Index, the
Euro Stoxx 50 Index and the Nikkei 225
Index, and the securities, or any group
of securities, issued by large
capitalization U.S., European and
Japanese companies.14 A put option
gives the purchaser of the option the
right to sell, and the issuer of the option
the obligation to buy, the underlying
security or instrument on a specified
date or during a specified period of
time. A call option on a security gives
the purchaser of the option the right to
buy, and the writer of the option the
obligation to sell, the underlying
security or instrument on a specified
date or during a specified period of
time. The Fund may invest in a
combination of put and call options
designed to allow the Fund to isolate its
exposure to the growth of the level of
dividends expected to be paid by the
securities issued by large capitalization
companies listed for trading in the
United States, Europe and Japan, while
minimizing the Fund’s exposure to
changes in the trading price of such
securities. The Fund may invest up to
13 For purposes of this proposed rule change,
Underlying ETFs 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). The Underlying ETFs all will be listed
and traded in the U.S. on registered exchanges.
While the Fund may invest in inverse Underlying
ETFs, it may not invest in leveraged or inverse
leveraged (e.g., 2X, –2X, 3X or –3X) ETFs.
14 The Fund will transact only with OTC options
dealers that have in place an International Swaps
and Derivatives Association (‘‘ISDA’’) agreement
with the Fund.
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14763
80% of its assets through options
transactions.
The Fund may invest in exchangelisted futures contracts and forward
contracts based on indexes of largecapitalization U.S., European and
Japanese equity securities listed for
trading in the U.S., Europe or Japan,
such as the S&P 500 Index, the Euro
Stoxx 50 Index and the Nikkei 225
Index, and the securities, or any group
of securities, issued by large
capitalization U.S., European and
Japanese companies. A listed futures
contract is a standardized contract
traded on a recognized exchange in
which two parties agree to exchange
either a specified financial asset or the
cash equivalent of said asset at a
specified future date and price. A
forward contract involves the obligation
to purchase or sell either a specified
financial asset or the cash equivalent of
said asset at a future date at a price set
at the time of the contract. The Fund’s
use of listed futures contracts and
forward contracts will be designed to
allow the Fund to isolate its exposure to
the growth of the level of the dividends
expected to be paid on the securities of
large capitalization U.S., European and
Japanese companies, while minimizing
the Fund’s exposure to changes in the
trading price of such securities. The
Fund also may invest in Eurodollar
futures contracts to manage or hedge
exposure to interest rate fluctuations.
The Fund may invest up to 80% of its
assets through futures contracts and
forward transactions.
The Fund may enter into dividend
and total return swap transactions
(including equity swap transactions)
based on indexes of large-capitalization
U.S., European and Japanese equity
securities listed for trading in the U.S.,
Europe and Japan, such as the S&P 500
Index, the Euro Stoxx 50 Index and the
Nikkei 225 Index, and securities, or any
group of securities, issued by large
capitalization U.S., European and
Japanese companies.15 In a typical swap
transaction, one party agrees to make
periodic payments to another party
(‘‘counterparty’’) based on the change in
market value or level of a specified rate,
index, or asset. In return, the
counterparty agrees to make periodic
payments to the first party based on the
return of a different specified rate,
index, or asset. Swap transactions are
usually done on a net basis, the Fund
receiving or paying only the net amount
of the two payments. In a typical
dividend swap transaction, the Fund
15 The Fund will transact only with swap dealers
that have in place an ISDA agreement with the
Fund.
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Federal Register / Vol. 78, No. 51 / Monday, March 17, 2014 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
would pay the swap counterparty a
premium and would be entitled to
receive the value of the actual dividends
paid on the subject index during the
term of the swap contract. In a typical
total return swap, the Fund might
exchange long or short exposures to the
return of the underlying securities or
index to isolate the value of the
dividends paid on the underlying
securities or index constituents. The
Fund also may engage in interest rate
swap transactions. In a typical interest
rate swap transaction one stream of
future interest payments is exchanged
for another. Such transactions often take
the form of an exchange of a fixed
payment for a variable payment based
on a future interest rate. The Fund
intends to use interest rate swap
transactions to manage or hedge
exposure to interest rate fluctuations.
The Fund may invest up to 80% of its
assets through swap transactions.16
The Fund’s short positions and its
investments in swaps, futures contracts,
forward contracts and options will be
backed by investments in U.S.
Government Securities or other liquid
assets in an amount equal to the Fund’s
maximum liability under the applicable
position or contract. U.S. Government
Securities include securities issued or
guaranteed by the U.S. government or
its authorities, agencies, or
instrumentalities.
The Fund will attempt to limit
counterparty risk by entering into swap,
forward and option contracts only with
counterparties the Adviser believes are
creditworthy and by limiting the Fund’s
exposure to each counterparty. The
Adviser will monitor the
creditworthiness of each counterparty
and the Fund’s exposure to each
counterparty on an ongoing basis.17
The Fund’s investments in swaps,
futures contracts, forward contracts and
options will be consistent with the
16 Where practicable, the Fund intends to invest
in swaps cleared through a central clearing house
(‘‘Cleared Swaps’’). Currently, only certain of the
interest rate swaps in which the Fund intends to
invest are Cleared Swaps, while the dividend and
total return swaps (including equity swaps) in
which the Fund may invest are currently not
Cleared Swaps.
17 The Fund will seek, where possible, to use
counterparties, as applicable, whose financial status
is such that the risk of default is reduced; however,
the risk of losses resulting from default is still
possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser will evaluate each approved
counterparty using various methods of analysis,
such as, for example, the counterparty’s liquidity in
the event of default, the counterparty’s reputation,
the Adviser’s past experience with the
counterparty, and the counterparty’s share of
market participation.
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18:45 Mar 14, 2014
Jkt 232001
Fund’s investment objective and with
the requirements of the 1940 Act.18
Other Investments
In addition to the investments
described above, the Fund may invest
up to 20% of its net assets in highquality, short-term debt securities and
money market instruments.19 Debt
securities and money market
instruments include shares of fixed
income or money market mutual funds,
commercial paper, certificates of
deposit, bankers’ acceptances, U.S.
Government securities (including
securities issued or guaranteed by the
U.S. government or its authorities,
agencies, or instrumentalities),
repurchase agreements 20 and bonds that
are rated BBB or higher.
The Fund will not purchase the
securities of issuers conducting their
principal business activity in the same
industry if, immediately after the
purchase and as a result thereof, the
value of the Fund’s investments in that
industry would equal or exceed 25% of
the current value of the Fund’s total
assets, provided that this restriction
does not limit the Fund’s: (i)
Investments in securities of other
investment companies, (ii) investments
in securities issued or guaranteed by the
U.S. government, its agencies or
instrumentalities, or (iii) investments in
repurchase agreements collateralized by
U.S. Government securities.21
18 To limit the potential risk associated with such
transactions, the Fund will segregate or ‘‘earmark’’
assets determined to be liquid by the Adviser in
accordance with procedures established by the
Trust’s Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to
cover its obligations arising from such transactions.
These procedures have been adopted consistent
with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Fund will
include appropriate risk disclosure in its offering
documents, including leveraging risk. Leveraging
risk is the risk that certain transactions of the Fund,
including the Fund’s use of derivatives, may give
rise to leverage, causing the Fund to be more
volatile than if it had not been leveraged. To
mitigate leveraging risk, the Adviser will segregate
or ‘‘earmark’’ liquid assets or otherwise cover the
transactions that may give rise to such risk.
19 The Fund may invest in shares of money
market mutual funds to the extent permitted by the
1940 Act.
20 The Fund may enter into repurchase
agreements with banks and broker-dealers. A
repurchase agreement is an agreement under which
securities are acquired by a fund from a securities
dealer or bank subject to resale at an agreed upon
price on a later date. The acquiring fund bears a risk
of loss in the event that the other party to a
repurchase agreement defaults on its obligations
and the fund is delayed or prevented from
exercising its rights to dispose of the collateral
securities.
21 See Form N–1A, Item 9. The Commission has
taken the position that a fund is concentrated if it
invests more than 25% of the value of its total
assets in any one industry. See, e.g., Investment
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The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including Rule 144A
securities deemed illiquid by the
Adviser, consistent with Commission
guidance.22 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 assets. Illiquid assets 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
The Fund may invest in the securities
of other investment companies
(including money market funds) to the
extent permitted under the 1940 Act.
The Fund will be classified as a ‘‘nondiversified’’ investment company under
the 1940 Act.24
The Fund intends to qualify for and
to elect treatment as a separate regulated
investment company (‘‘RIC’’) under
Subchapter M of the Internal Revenue
Code.25
The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
Company Act Release No. 9011 (October 30, 1975),
40 FR 54241 (November 21, 1975).
22 In reaching liquidity decisions, the 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).
23 The Commission has stated that long-standing
Commission guidelines have required open-end
funds to hold no more than 15% of their net assets
in illiquid securities and other illiquid assets. See
Investment Company Act Release No. 28193 (March
11, 2008), 73 FR 14618 (March 18, 2008), footnote
34. See also, Investment Company Act Release No.
5847 (October 21, 1969), 35 FR 19989 (December
31, 1970) (Statement Regarding ‘‘Restricted
Securities’’); Investment Company Act Release No.
18612 (March 12, 1992), 57 FR 9828 (March 20,
1992) (Revisions of Guidelines to Form N–1A). A
fund’s portfolio security is illiquid if it cannot be
disposed of in the ordinary course of business
within seven days at approximately the value
ascribed to it by the fund. See Investment Company
Act Release No. 14983 (March 12, 1986), 51 FR
9773 (March 21, 1986) (adopting amendments to
Rule 2a–7 under the 1940 Act); Investment
Company Act Release No. 17452 (April 23, 1990),
55 FR 17933 (April 30, 1990) (adopting Rule 144A
under the 1933 Act).
24 The diversification standard is set forth in
Section 5(b)(1) of the 1940 Act.
25 26 U.S.C. 851 et seq.
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Creation Unit and the market value of
the Deposit Securities or Deposit Cash,
as applicable.
A portfolio composition file, to be
sent via the National Securities Clearing
Corporation (‘‘NSCC’’), will be made
available on each business day, prior to
the opening of business on the Exchange
(currently 9:30 a.m., Eastern time)
containing a list of the names and the
required number of shares of each
security in the Deposit Securities to be
included in the current Fund Deposit
Creation and Redemption of Shares
for the Fund (based on information
about the Fund’s portfolio at the end of
According to the Registration
the previous business day). In addition,
Statement, the Fund will issue and
redeem Shares only in Creation Units at on each business day, the estimated
Cash Component, effective through and
the net asset value (‘‘NAV’’) next
including the previous business day,
determined after receipt of an order on
will be made available through NSCC.
a continuous basis every business day.
The Fund Deposit is applicable for
Creation Unit sizes are 25,000 Shares or
purchases of Creation Units of the Fund
more per Creation Unit. The Creation
until such time as the next-announced
Unit size for the Fund may change.
Fund Deposit is made available. In
The consideration for purchase of a
Creation Unit of the Fund generally will accordance with the Exemptive Order,
the Fund reserves the right to accept a
consist of either (i) the in-kind deposit
nonconforming Fund Deposit. In
of a designated portfolio of securities
addition, the composition of the Deposit
(the ‘‘Deposit Securities’’) per each
Securities may change as, among other
Creation Unit and the ‘‘Cash
Component’’ (defined below), computed things, corporate actions and investment
as described below or (ii) the cash value decisions by the Adviser are
implemented for the Fund’s portfolio.
of the Deposit Securities (‘‘Deposit
All purchase orders must be placed by
Cash’’) and the Cash Component,
or through an ‘‘Authorized Participant’’.
computed as described below. Because
An Authorized Participant must be
non-exchange traded derivatives are not
either a broker-dealer or other
eligible for in-kind transfer, they will be
participant in the Continuous Net
substituted with an amount of cash of
Settlement System (‘‘Clearing Process’’)
equal value (i.e., Deposit Cash) when the
of the NSCC or a participant in The
Fund processes purchases of Creation
Depository Trust Company (‘‘DTC’’)
Units in-kind. Specifically, the Fund
with access to the DTC system, and
will not accept OTC options, forward
must execute an agreement with the
contracts, dividend swap transactions,
Distributor that governs transactions in
total return swap transactions and
the Fund’s Creation Units. In-kind
interest rate swap transactions as
portions of purchase orders will be
Deposit Securities. When accepting
processed through the Clearing Process
purchases of Creation Units for cash, the when it is available.
Fund may incur additional costs
Fund Shares may be redeemed only in
associated with the acquisition of
Creation Units at their NAV next
Deposit Securities that would otherwise determined after receipt of a redemption
be provided by an in-kind purchaser.
request in proper form by the Fund
Together, the Deposit Securities or
through the Distributor and only on a
Deposit Cash, as applicable, and the
business day. The Fund, through the
Cash Component constitute the ‘‘Fund
NSCC, will make available immediately
Deposit,’’ which represents the
prior to the opening of business on the
minimum initial and subsequent
Exchange on each business day, the list
investment amount for a Creation Unit
of the names and quantities of the
of the Fund. The ‘‘Cash Component’’ is
Fund’s portfolio securities that will be
an amount equal to the difference
applicable (subject to possible
between the NAV of the Shares (per
amendment or correction) to
Creation Unit) and the market value of
redemption requests received in proper
the Deposit Securities or Deposit Cash,
form on that day (‘‘Fund Securities’’).
as applicable. The Cash Component
Redemption proceeds for a Creation
serves the function of compensating for
Unit will be paid either in-kind or in
any differences between the NAV per
cash or a combination thereof, as
determined by the Trust. With respect to
26 The Fund’s broad-based securities benchmark
in-kind redemptions of the Fund,
index will be identified in a future amendment to
redemption proceeds for a Creation Unit
the Registration Statement following the Fund’s
first full calendar year of performance.
will consist of Fund Securities plus cash
tkelley on DSK3SPTVN1PROD with NOTICES
leveraged returns. The Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).26 The Trust’s
Exemptive Order does not place any
limit on the amount of derivatives in
which the Fund can invest (other than
adherence to the requirements of the
1940 Act and the rules thereunder).
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18:45 Mar 14, 2014
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14765
in an amount equal to the difference
between the NAV of the Shares being
redeemed, as next determined after a
receipt of a request in proper form, and
the value of the Fund Securities (the
‘‘Cash Redemption Amount’’). In the
event that the Fund Securities have a
value greater than the NAV of the
Shares, a compensating cash payment
equal to the differential will be required
to be made by or through an Authorized
Participant by the redeeming
shareholder. Notwithstanding the
foregoing, at the Trust’s discretion, an
Authorized Participant may receive the
corresponding cash value of the
securities in lieu of the in-kind
securities representing one or more
Fund Securities.27 Because nonexchange traded derivatives are not
eligible for in-kind transfer, they will be
substituted with an amount of cash of
equal value when the Fund processes
redemptions of Creation Units in-kind.
Specifically, the Fund will transfer the
corresponding cash value of OTC
options, forward contracts, dividend
swap transactions, total return swap
transactions and interest rate swap
transactions in lieu of in-kind securities.
In accordance with the Exemptive
Order, the Fund also reserves the right
to distribute to the Authorized
Participant non-conforming Fund
Securities.
The right of redemption may be
suspended or the date of payment
postponed: (i) For any period during
which the New York Stock Exchange
(‘‘NYSE’’) is closed (other than
customary weekend and holiday
closings); (ii) for any period during
which trading on the NYSE is
suspended or restricted; (iii) for any
period during which an emergency
exists as a result of which disposal of
the Shares or determination of the
Fund’s NAV is not reasonably
practicable; or (iv) in such other
circumstances as permitted by the
Commission.
For an order involving a Creation Unit
to be effectuated at the Fund’s NAV on
a particular day, it must be received by
the Distributor by or before the deadline
for such order (‘‘Order Cut-Off Time’’).
The Order Cut-Off Time for creation and
redemption orders for the Fund is
generally expected to be 4:00 p.m.
Eastern Time. Orders for creation or
redemption of Creation Units for cash
generally must be submitted by 4:00
p.m. Eastern Time. A standard creation
or redemption transaction fee (as
27 The Adviser represents that, to the extent the
Trust effects the redemption of Shares in cash, such
transactions will be effected in the same manner for
all Authorized Participants.
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tkelley on DSK3SPTVN1PROD with NOTICES
applicable) will be imposed to offset
transfer and other transaction costs that
may be incurred by the Fund.
Detailed descriptions of the Fund’s
procedures for creating and redeeming
Shares, transaction fees and expenses,
dividends, distributions, taxes, risks,
and reports to be distributed to
beneficial owners of the Shares can be
found in the Registration Statement or
on the Web site for the Fund (which
will be publicly available prior to the
public offering of Shares), as applicable.
Determination of Net Asset Value
The Fund will calculate its NAV by:
(i) Taking the current market value of its
total assets; (ii) subtracting any
liabilities; and (iii) dividing that amount
by the total number of Shares
outstanding. The Fund will calculate
NAV once each business day as of the
regularly scheduled close of trading on
the NYSE (normally, 4:00 p.m., Eastern
Time) as described in its Registration
Statement.
In calculating the Fund’s NAV per
Share, the Fund’s investments will be
valued in accordance with procedures
approved by the Trust’s Board of
Trustees. These procedures, which may
be changed by the Trust’s Board of
Trustees from time to time, generally
require investments to be valued using
market valuations. A market valuation
generally means a valuation (i) obtained
from an exchange, an independent
pricing service, or a major market maker
(or dealer), (ii) based on a price
quotation or other equivalent indication
of value supplied by an exchange, an
independent pricing service, or a major
market maker (or dealer) or (iii) based
on amortized cost. The Trust may use
various independent pricing services, or
discontinue the use of any independent
pricing service, as determined by the
Trust’s Board of Trustees from time to
time.
The Trust will generally value
exchange-listed equity securities (which
include common stocks and Underlying
ETFs) and exchange-listed options on
such securities at market closing prices.
Market closing price is generally
determined on the basis of last reported
sales prices, or if no sales are reported,
based on the last reported quotes. The
Trust will generally value listed futures
at the settlement price determined by
the applicable exchange. Non-exchangetraded derivatives, such as forwards,
OTC options and swap transactions,
will normally be valued on the basis of
quotations or equivalent indication of
value supplied by an independent
pricing service or major market makers
or dealers. Investment company
securities (other than Underlying ETFs)
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18:45 Mar 14, 2014
Jkt 232001
will be valued at NAV. Debt securities
and money market instruments
generally will be valued based on prices
provided by independent pricing
services, which may use valuation
models or matrix pricing to determine
current value. The Trust generally will
use amortized cost to value debt
securities and money market
instruments that have a remaining
maturity of 60 days or less.
In the event that current market
valuations are not readily available or
the Trust or Adviser believes such
valuations do not reflect current market
value, the Trust’s procedures require
that a security’s fair value be
determined.28 In determining such
value the Trust or the Adviser may
consider, among other things, (i) price
comparisons among multiple sources,
(ii) a review of corporate actions and
news events, and (iii) a review of
relevant financial indicators (e.g.,
movement in interest rates, market
indices, and prices from the Fund’s
index providers). In these cases, the
Fund’s NAV may reflect certain
portfolio securities’ fair values rather
than their market prices. Fair value
pricing involves subjective judgments
and it is possible that the fair value
determination for a security is
materially different than the value that
could be realized upon the sale of the
security.
Availability of Information
The Fund’s Web site,
www.realityshares.com, which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for the Fund that may
be downloaded. The Fund’s Web site
will include additional quantitative
information updated on a daily basis,
including, for the Fund, (1) the prior
business day’s reported closing price,
NAV and mid-point of the bid/ask
spread at the time of calculation of such
NAV (the ‘‘Bid/Ask Price’’),29 and a
calculation of the premium and
discount of the Bid/Ask Price against
the NAV, and (2) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
28 The Trust’s Board of Trustees has established
Fair Value Procedures, in accordance with the 1940
Act, governing the valuation of any portfolio
investments for which market quotations or prices
are not readily available. The Fund has
implemented procedures designed to prevent the
use and dissemination of material, non-public
information regarding valuation of any portfolio
investments.
29 The Bid/Ask Price of the Fund will be
determined using the mid-point of the highest bid
and the lowest offer on the Exchange as of the time
of calculation of the Fund’s NAV. The records
relating to Bid/Ask Prices will be retained by the
Fund and its service providers.
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Sfmt 4703
Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters. On each
business day, before commencement of
trading in Shares in the Core Trading
Session on the Exchange, the Fund will
disclose on its Web site the Disclosed
Portfolio (as such term is defined in
NYSE Arca Equities Rule 8.600(c)(2))
that will form the basis for the Fund’s
calculation of NAV at the end of the
business day.30
On a daily basis, the Adviser will
disclose for each portfolio security and
other financial instrument of the Fund
the following information on the Fund’s
Web site: Ticker symbol (if applicable),
name of security and financial
instrument, number of shares or dollar
value [sic] securities and of 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.
In addition, a portfolio composition
file, which includes the security names
and share quantities required to be
delivered in exchange for the Fund’s
Shares, together with estimates and
actual cash components, will be
publicly disseminated daily prior to the
opening of the NYSE via NSCC. The
portfolio composition file will represent
one Creation Unit of Shares of the Fund.
Investors can also obtain the Trust’s
Statement of Additional Information
(‘‘SAI’’), the Fund’s Shareholder
Reports, and the Trust’s Form N–CSR
and Form N–SAR, filed twice a year.
The Trust’s SAI and Shareholder
Reports are available free upon request
from the Trust, and those documents
and the Form N–CSR and Form N–SAR
may be viewed on-screen or
downloaded from the Commission’s
Web site at www.sec.gov. Information
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. Quotation and last sale
information for the Shares will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line. In
addition, the Portfolio Indicative Value
30 Under accounting procedures to be followed by
the Fund, trades made on the prior business day
(‘‘T’’) will be booked and reflected in NAV on the
current business day (‘‘T+1’’). Accordingly, the
Fund will be able to disclose at the beginning of the
business day the portfolio that will form the basis
for the NAV calculation at the end of the business
day.
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(‘‘PIV’’) 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.31
The dissemination of the PIV, together
with the Disclosed Portfolio, will allow
investors to determine the value of the
underlying portfolio of the Fund on a
daily basis and will provide a close
estimate of that value throughout the
trading day. The intra-day, closing and
settlement prices of the portfolio
securities and other Fund investments,
including Underlying ETFs, futures and
exchange-traded equities and options,
will also be readily available from the
national securities exchanges trading
such securities, automated quotation
systems, published or other public
sources, and, with respect to OTC
options, swaps and forwards, from third
party pricing sources, or on-line
information services such as Bloomberg
or Reuters. Price information regarding
investment company securities other
than Underlying ETFs will be available
from on-line information services and
from the Web site for the applicable
investment company security. The intraday, closing and settlement prices of
debt securities and money market
instruments will be readily available
from published and other public sources
or on-line information services.
Additional information regarding the
Trust and the Shares, including
investment strategies, risks, creation and
redemption procedures, fees, portfolio
holdings disclosure policies,
distributions and taxes is included in
the Registration Statement. All terms
relating to the Fund that are referred to,
but not defined in, this proposed rule
change are defined in the Registration
Statement.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares of
the Fund.32 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments comprising
the Disclosed Portfolio of the Fund; or
31 Currently,
it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available PIVs taken from the CTA
or other data feeds.
32 See NYSE Arca Equities Rule 7.12.
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18:45 Mar 14, 2014
Jkt 232001
(2) whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. Trading in the
Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares
of the Fund may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m. Eastern Time in
accordance with NYSE Arca Equities
Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, Commentary .03,
the minimum price variation (‘‘MPV’’)
for quoting and entry of orders in equity
securities traded on the NYSE Arca
Marketplace is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
The Shares will conform to the initial
and continued listing criteria under
NYSE Arca Equities Rule 8.600. The
Exchange represents that, for initial
and/or continued listing, the Fund will
be in compliance with Rule 10A–3 33
under the Act, as provided by NYSE
Arca Equities Rule 5.3. A minimum of
100,000 Shares for the Fund will be
outstanding at the commencement of
trading on the Exchange. The Exchange
will obtain a representation from the
issuer of the Shares that the NAV per
Share will be calculated daily and that
the NAV and the Disclosed Portfolio as
defined in NYSE Arca Equities Rule
8.600(c)(2) will be made available to all
market participants at the same time.
Surveillance
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 applicable federal
securities laws.34 The Exchange
represents that these procedures are
adequate to properly monitor Exchange
trading of the Shares in all trading
sessions and to deter and detect
33 17
CFR 240.10A–3.
34 FINRA surveils trading on the Exchange
pursuant to a regulatory services agreement. The
Exchange is responsible for FINRA’s performance
under this regulatory services agreement.
PO 00000
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14767
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange.
The surveillances referred to above
generally focus on detecting securities
trading outside their normal patterns,
which could be indicative of
manipulative or other violative activity.
When such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares, certain equity
securities, Underlying ETFs, and certain
futures contracts and exchange-listed
options contracts 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, certain equity securities,
Underlying ETFs, and certain futures
contracts and exchange-listed options
contracts from such markets and other
entities. In addition, the Exchange may
obtain information regarding trading in
the Shares, certain equity securities,
Underlying ETFs, and certain futures
contracts and exchange-listed options
contracts from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement.35
Not more than 10% of the assets of
the Fund in the aggregate shall consist
of non-U.S. equity securities whose
principal market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement.
Furthermore, not more than 10% of the
net assets of the Fund in the aggregate
shall consist of futures contracts or
exchange-traded options whose
principal market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit (‘‘ETP’’) Holders
in an Information Bulletin (‘‘Bulletin’’)
35 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund
may trade on markets that are members of ISG or
with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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of the special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation 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 ETP Holders to learn the essential
facts relating to every customer prior to
trading the Shares; (3) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated PIV will not be
calculated or publicly disseminated; (4)
how information regarding the PIV is
disseminated; (5) the requirement that
ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Act. The Bulletin will also disclose that
the NAV for the Shares will be
calculated after 4:00 p.m. Eastern time
each trading day.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 36 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 8.600. The Shares will be subject
to the existing trading surveillances,
administered by FINRA on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange. The Adviser is not
registered as a broker-dealer and is not
affiliated with any broker-dealers. In the
event (a) the Adviser or any sub-adviser
becomes registered as a broker-dealer or
newly affiliated with a broker-dealer, or
(b) any new adviser or sub-adviser is a
36 15
U.S.C. 78f(b)(5).
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18:45 Mar 14, 2014
Jkt 232001
registered broker-dealer or becomes
affiliated with a broker-dealer, they will
implement a fire wall with respect to
their relevant personnel or broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the portfolio, and will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio. The Fund may
hold up to an aggregate amount of 15%
of its net assets in illiquid assets
(calculated at the time of investment),
including Rule 144A securities deemed
illiquid by the Adviser. FINRA, on
behalf of the Exchange, will
communicate as needed regarding
trading in the Shares, certain equity
securities, Underlying ETFs, and certain
futures contracts and exchange-listed
options contracts 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, certain equity securities,
Underlying ETFs, and certain futures
contracts and exchange-listed options
contracts from such markets and other
entities. In addition, the Exchange may
obtain information regarding trading in
the Shares, certain equity securities,
Underlying ETFs, and certain futures
contracts and exchange-listed options
contracts from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. Not more than 10% of the
assets of the Fund in the aggregate shall
consist of non-U.S. equity securities
whose principal market is not a member
of ISG or is a market with which the
Exchange does not have a
comprehensive surveillance sharing
agreement. Furthermore, not more than
10% of the net assets of the Fund in the
aggregate shall consist of futures
contracts or exchange-traded options
whose principal market is not a member
of ISG or is a market with which the
Exchange does not have a
comprehensive surveillance sharing
agreement.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. In
addition, a large amount of information
is publicly available regarding the Fund
and the Shares, thereby promoting
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
market transparency. Moreover, the PIV
will be widely disseminated by one or
more major market data vendors at least
every 15 seconds during the Exchange’s
Core Trading Session. 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. Information regarding
market price and trading volume of the
Shares will be continually available on
a real-time basis throughout the day on
brokers’ computer screens and other
electronic services, and quotation and
last sale information will be available
via the CTA high-speed line. The intraday, closing and settlement prices of the
portfolio securities and other Fund
investments, including Underlying
ETFs, futures and exchange-traded
equities and options, will also be readily
available from the national securities
exchanges trading such securities,
automated quotation systems, published
or other public sources, and, with
respect to OTC options, swaps and
forwards, from third party pricing
sources, or on-line information services
such as Bloomberg or Reuters. Price
information regarding investment
company securities other than
Underlying ETFs will be available from
on-line information services and from
the Web site for the applicable
investment company security. The intraday, closing and settlement prices of
debt securities and money market
instruments will be readily available
from published and other public sources
or on-line information services. The
Web site for the Fund will include the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.
Moreover, prior to the commencement
of trading, the Exchange will inform its
ETP Holders in an Information Bulletin
of the special characteristics and risks
associated with trading the Shares.
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, and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares
of the Fund may be halted. In addition,
as noted above, investors will have
ready access to information regarding
the Fund’s holdings, the PIV, the
Disclosed Portfolio, and quotation and
last sale information for the Shares.
E:\FR\FM\17MRN1.SGM
17MRN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 51 / Monday, March 17, 2014 / Notices
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Shares will be subject to the existing
trading surveillances, administered by
FINRA on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and federal securities
laws applicable to trading on the
Exchange. FINRA, on behalf of the
Exchange, will communicate as needed
regarding trading in the Shares, equity
securities, Underlying ETFs, and certain
futures contracts and exchange-listed
options contracts 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, equity securities, Underlying
ETFs, and certain futures contracts and
exchange-listed options contracts from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares, equity securities, Underlying
ETFs, and certain futures contracts and
exchange-listed options contracts from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. Not
more than 10% of the assets of the Fund
in the aggregate shall consist of non-U.S.
equity securities whose principal
market is not a member of ISG or is a
market with which the Exchange does
not have a comprehensive surveillance
sharing agreement. Furthermore, not
more than 10% of the net assets of the
Fund in the aggregate shall consist of
futures contracts or exchange-traded
options whose principal market is not a
member of ISG or is a market with
which the Exchange does not have a
comprehensive surveillance sharing
agreement. In addition, the Exchange
also has a general policy prohibiting the
distribution of material, non-public
information by its employees. In
addition, as noted above, investors will
have ready access to information
regarding the Fund’s holdings, the PIV,
the Disclosed Portfolio, and quotation
and last sale information for the Shares.
The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns. The Fund’s
investments will not be used to seek
VerDate Mar<15>2010
18:45 Mar 14, 2014
Jkt 232001
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).
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 an
additional type of actively-managed
exchange-traded product 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 (i)
as the Commission may designate up to
90 days of such date 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:
Electronic Comments
• 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–2014–20 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
14769
All submissions should refer to File
Number SR–NYSEArca–2014–20. 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–2014–20 and should be
submitted on or before April 7, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–05752 Filed 3–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71690; File No. SR–MSRB–
2014–02]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Consisting of Changes to the
MSRB’s Electronic Municipal Market
Access System, Real-Time Transaction
Reporting System, and Short-Term
Obligation Rate Transparency System
March 11, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
37 17
E:\FR\FM\17MRN1.SGM
CFR 200.30–3(a)(12).
17MRN1
]]>Agencies
[Federal Register Volume 79, Number 51 (Monday, March 17, 2014)]
[Notices]
[Pages 14761-14769]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05752]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71686; File No. SR-NYSEArca-2014-20]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 2, Relating to
the Listing and Trading of Reality Shares Isolated Dividend Growth ETF
Under NYSE Arca Equities Rule 8.600
March 11, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on February 25, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change, which filing was amended and
replaced in its entirety by Amendment No. 2 thereto on March 7, 2014,
as
[[Page 14762]]
described in Items I, II, and III below, which Items have been prepared
by the self-regulatory organization.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ Amendment No. 1 was filed on March 6, 2014 and withdrawn on
March 7, 2014.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): Reality
Shares Isolated Dividend Growth ETF. The text of the proposed rule
change is available on the Exchange's Web site at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares \5\ on the Exchange: Reality
Shares Isolated Dividend Growth ETF (the ``Fund'').\6\ The Shares of
the Fund will be offered by the Reality Shares ETF Trust (formerly, the
ERNY Financial ETF Trust) (the ``Trust''). The Trust will be registered
with the Commission as an open-end management investment company.\7\
Reality Shares Advisors, LLC (formerly, ERNY Financial Advisors, LLC)
will serve as the investment adviser to the Fund (the ``Adviser'').
ALPS Distributors, Inc. (the ``Distributor'') will be the principal
underwriter and distributor of the Fund's Shares. The Bank of New York
Mellon (the ``Administrator,'' ``Transfer Agent'' or ``Custodian'')
will serve as administrator, custodian and transfer agent for the
Fund.\8\
---------------------------------------------------------------------------
\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\6\ The Commission approved NYSE Arca Equities Rule 8.600 and
has previously approved listing and trading on the Exchange of a
number of actively managed funds under Rule 8.600. See, e.g.,
Securities Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR
27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving Exchange
listing and trading of twelve actively-managed funds of the
WisdomTree Trust); 60460 (August 7, 2009), 74 FR 41468 (August 17,
2009) (SR-NYSEArca-2009-55) (order approving listing and trading of
Dent Tactical ETF); 63076 (October 12, 2010), 75 FR 63874 (October
18, 2010) (SR-NYSEArca-2010-79) (order approving listing and trading
of Cambria Global Tactical ETF); 64643 (June 10, 2011) 76 FR 35062
(June 15, 2011) (SR-NYSEArca-2011-21) (order approving listing and
trading of WisdomTree Global Real Return Fund); 69397 (April 18,
2013) 78 FR 24276 (April 24, 2013) (SR-NYSEArca-2013-18) (order
approving listing and trading of fourteen actively-managed funds of
the iShares Trust); 69591 (May 16, 2013) 78 FR 30372 (May 22, 2013)
(SR-NYSEArca-2013-33) (order approving listing and trading of the
International Bear ETF).
\7\ The Trust will be registered under the 1940 Act. On November
12, 2013, the Trust filed a registration statement on Form N-1A
under the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a),
and under the 1940 Act relating to the Fund, as amended by Pre-
Effective Amendment Number 1, filed with the Commission on February
6, 2014 (File Nos. 333-192288 and 811-22911) (the ``Registration
Statement''). The description of the operation of the Trust and the
Fund herein is based, in part, on the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the 1940 Act. Investment Company Act Release No.
30552 (June 10, 2013) (``Exemptive Order''). The Trust filed an
Application for an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14146), on April 5, 2013, as amended on May
10, 2013 (together, the ``Exemptive Application''). Investments made
by the Fund will comply with the conditions set forth in the
Exemptive Application and the Exemptive Order.
\8\ This Amendment No. 2 to SR-NYSEArca-2014-20 replaces SR-
NYSEArca-2014-20 as originally filed and supersedes such filing in
its entirety. The Exchange has withdrawn Amendment No. 1 to SR-
NYSEArca-2014-20.
---------------------------------------------------------------------------
Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition of and/or
changes to such investment company portfolio. Commentary .06 further
requires that personnel who make decisions on the open-end fund's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material nonpublic information regarding
the open-end fund's portfolio.\9\ Commentary .06 to Rule 8.600 is
similar to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule
5.2(j)(3); however, Commentary .06 in connection with the establishment
of a ``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not registered as a broker-dealer and is not affiliated with any
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes
registered as a broker-dealer or 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, they will implement a fire
wall with respect to their relevant personnel or broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio.
---------------------------------------------------------------------------
\9\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
---------------------------------------------------------------------------
Principal Investments
According to the Registration Statement, the Fund will seek to
produce long term capital appreciation by attempting to isolate the
value of dividends paid by a portfolio of U.S., European and Japanese
large
[[Page 14763]]
capitalization companies.\10\ The Adviser considers U.S. large
capitalization companies to be those with market capitalizations within
the range of market capitalizations of the companies included in the
S&P 500 Index. The Adviser considers European large capitalization
companies to be those with market capitalizations within the range of
market capitalizations of the companies included in the Euro Stoxx 50
Index. The Adviser considers Japanese large capitalization companies to
be those with market capitalizations within the range of market
capitalizations of the companies included in the Nikkei 225 Index.
---------------------------------------------------------------------------
\10\ The Fund's non-U.S. investments will be limited to listed
securities traded in European and Japanese markets and futures
contracts, forward contracts, options and swaps based on such
securities. Not more than 10% of the assets of the Fund in the
aggregate shall consist of non-U.S. equity securities whose
principal market is not a member of the Intermarket Surveillance
Group (``ISG'') or is a market with which the Exchange does not have
a comprehensive surveillance sharing agreement. Furthermore, not
more than 10% of the net assets of the Fund in the aggregate shall
consist of futures contracts or exchange-traded options whose
principal market is not a member of ISG or is a market with which
the Exchange does not have a comprehensive surveillance sharing
agreement.
---------------------------------------------------------------------------
Under normal market conditions,\11\ the Fund generally will invest
substantially all its assets in any combination of investments whose
collective performance is designed to reflect the growth of the level
of dividends expected to be paid on a portfolio of securities issued by
large capitalization companies listed for trading in the United States,
Europe and Japan (as discussed in more detail below).\12\
---------------------------------------------------------------------------
\11\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
\12\ There is no guarantee that either the level of overall
dividends paid by such companies will grow over time, or that the
Fund's investment strategies will capture such growth. The Fund will
include appropriate risk disclosure in its offering documents
disclosing both of these risks.
---------------------------------------------------------------------------
The Fund may take long or short positions in the securities issued
by large capitalization companies listed for trading in the U.S.,
Europe and Japan. A ``long'' position means to hold or be exposed to a
security or instrument with the expectation that its value will
increase over time. A ``short position'' means to sell or be exposed to
a security or instrument with the expectation that it will fall in
value. To the extent permitted under the 1940 Act, the Fund may take
long or short positions in shares of exchange traded funds (``ETFs'')
that provide exposure to indexes of large-capitalization equity
securities listed for trading in the U.S., Europe and Japan, such as
the S&P 500 Index, the Euro Stoxx 50 Index and the Nikkei 225 Index, or
any subset of such indexes (``Underlying ETFs'').\13\ The strategy of
taking both a long position in a security through its ex-dividend date
(the last date an investor can own the security and receive dividends
paid on the security) and a corresponding short position in the same
security immediately thereafter is designed to allow the Fund to
isolate its exposure to the growth of the level of dividends expected
to be paid on such security while minimizing its exposure to changes in
the trading price of such security.
---------------------------------------------------------------------------
\13\ For purposes of this proposed rule change, Underlying ETFs
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). The Underlying ETFs all will be
listed and traded in the U.S. on registered exchanges. While the
Fund may invest in inverse Underlying ETFs, it may not invest in
leveraged or inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
---------------------------------------------------------------------------
The Fund may buy and sell listed or over-the counter (``OTC'')
options on indexes of large-capitalization U.S., European and Japanese
equity securities listed for trading in the U.S., Europe and Japan,
such as the S&P 500 Index, the Euro Stoxx 50 Index and the Nikkei 225
Index, and the securities, or any group of securities, issued by large
capitalization U.S., European and Japanese companies.\14\ A put option
gives the purchaser of the option the right to sell, and the issuer of
the option the obligation to buy, the underlying security or instrument
on a specified date or during a specified period of time. A call option
on a security gives the purchaser of the option the right to buy, and
the writer of the option the obligation to sell, the underlying
security or instrument on a specified date or during a specified period
of time. The Fund may invest in a combination of put and call options
designed to allow the Fund to isolate its exposure to the growth of the
level of dividends expected to be paid by the securities issued by
large capitalization companies listed for trading in the United States,
Europe and Japan, while minimizing the Fund's exposure to changes in
the trading price of such securities. The Fund may invest up to 80% of
its assets through options transactions.
---------------------------------------------------------------------------
\14\ The Fund will transact only with OTC options dealers that
have in place an International Swaps and Derivatives Association
(``ISDA'') agreement with the Fund.
---------------------------------------------------------------------------
The Fund may invest in exchange-listed futures contracts and
forward contracts based on indexes of large-capitalization U.S.,
European and Japanese equity securities listed for trading in the U.S.,
Europe or Japan, such as the S&P 500 Index, the Euro Stoxx 50 Index and
the Nikkei 225 Index, and the securities, or any group of securities,
issued by large capitalization U.S., European and Japanese companies. A
listed futures contract is a standardized contract traded on a
recognized exchange in which two parties agree to exchange either a
specified financial asset or the cash equivalent of said asset at a
specified future date and price. A forward contract involves the
obligation to purchase or sell either a specified financial asset or
the cash equivalent of said asset at a future date at a price set at
the time of the contract. The Fund's use of listed futures contracts
and forward contracts will be designed to allow the Fund to isolate its
exposure to the growth of the level of the dividends expected to be
paid on the securities of large capitalization U.S., European and
Japanese companies, while minimizing the Fund's exposure to changes in
the trading price of such securities. The Fund also may invest in
Eurodollar futures contracts to manage or hedge exposure to interest
rate fluctuations. The Fund may invest up to 80% of its assets through
futures contracts and forward transactions.
The Fund may enter into dividend and total return swap transactions
(including equity swap transactions) based on indexes of large-
capitalization U.S., European and Japanese equity securities listed for
trading in the U.S., Europe and Japan, such as the S&P 500 Index, the
Euro Stoxx 50 Index and the Nikkei 225 Index, and securities, or any
group of securities, issued by large capitalization U.S., European and
Japanese companies.\15\ In a typical swap transaction, one party agrees
to make periodic payments to another party (``counterparty'') based on
the change in market value or level of a specified rate, index, or
asset. In return, the counterparty agrees to make periodic payments to
the first party based on the return of a different specified rate,
index, or asset. Swap transactions are usually done on a net basis, the
Fund receiving or paying only the net amount of the two payments. In a
typical dividend swap transaction, the Fund
[[Page 14764]]
would pay the swap counterparty a premium and would be entitled to
receive the value of the actual dividends paid on the subject index
during the term of the swap contract. In a typical total return swap,
the Fund might exchange long or short exposures to the return of the
underlying securities or index to isolate the value of the dividends
paid on the underlying securities or index constituents. The Fund also
may engage in interest rate swap transactions. In a typical interest
rate swap transaction one stream of future interest payments is
exchanged for another. Such transactions often take the form of an
exchange of a fixed payment for a variable payment based on a future
interest rate. The Fund intends to use interest rate swap transactions
to manage or hedge exposure to interest rate fluctuations. The Fund may
invest up to 80% of its assets through swap transactions.\16\
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\15\ The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund.
\16\ Where practicable, the Fund intends to invest in swaps
cleared through a central clearing house (``Cleared Swaps'').
Currently, only certain of the interest rate swaps in which the Fund
intends to invest are Cleared Swaps, while the dividend and total
return swaps (including equity swaps) in which the Fund may invest
are currently not Cleared Swaps.
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The Fund's short positions and its investments in swaps, futures
contracts, forward contracts and options will be backed by investments
in U.S. Government Securities or other liquid assets in an amount equal
to the Fund's maximum liability under the applicable position or
contract. U.S. Government Securities include securities issued or
guaranteed by the U.S. government or its authorities, agencies, or
instrumentalities.
The Fund will attempt to limit counterparty risk by entering into
swap, forward and option contracts only with counterparties the Adviser
believes are creditworthy and by limiting the Fund's exposure to each
counterparty. The Adviser will monitor the creditworthiness of each
counterparty and the Fund's exposure to each counterparty on an ongoing
basis.\17\
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\17\ The Fund will seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser will
evaluate each approved counterparty using various methods of
analysis, such as, for example, the counterparty's liquidity in the
event of default, the counterparty's reputation, the Adviser's past
experience with the counterparty, and the counterparty's share of
market participation.
---------------------------------------------------------------------------
The Fund's investments in swaps, futures contracts, forward
contracts and options will be consistent with the Fund's investment
objective and with the requirements of the 1940 Act.\18\
---------------------------------------------------------------------------
\18\ To limit the potential risk associated with such
transactions, the Fund will segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Trust's Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations arising from
such transactions. These procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, the Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of the Fund, including the Fund's
use of derivatives, may give rise to leverage, causing the Fund to
be more volatile than if it had not been leveraged. To mitigate
leveraging risk, the Adviser will segregate or ``earmark'' liquid
assets or otherwise cover the transactions that may give rise to
such risk.
---------------------------------------------------------------------------
Other Investments
In addition to the investments described above, the Fund may invest
up to 20% of its net assets in high-quality, short-term debt securities
and money market instruments.\19\ Debt securities and money market
instruments include shares of fixed income or money market mutual
funds, commercial paper, certificates of deposit, bankers' acceptances,
U.S. Government securities (including securities issued or guaranteed
by the U.S. government or its authorities, agencies, or
instrumentalities), repurchase agreements \20\ and bonds that are rated
BBB or higher.
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\19\ The Fund may invest in shares of money market mutual funds
to the extent permitted by the 1940 Act.
\20\ The Fund may enter into repurchase agreements with banks
and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by a fund from a securities dealer or
bank subject to resale at an agreed upon price on a later date. The
acquiring fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the
fund is delayed or prevented from exercising its rights to dispose
of the collateral securities.
---------------------------------------------------------------------------
The Fund will not purchase the securities of issuers conducting
their principal business activity in the same industry if, immediately
after the purchase and as a result thereof, the value of the Fund's
investments in that industry would equal or exceed 25% of the current
value of the Fund's total assets, provided that this restriction does
not limit the Fund's: (i) Investments in securities of other investment
companies, (ii) investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or (iii)
investments in repurchase agreements collateralized by U.S. Government
securities.\21\
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\21\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance.\22\ 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 assets. Illiquid assets 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\
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\22\ In reaching liquidity decisions, the 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).
\23\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------
The Fund may invest in the securities of other investment companies
(including money market funds) to the extent permitted under the 1940
Act.
The Fund will be classified as a ``non-diversified'' investment
company under the 1940 Act.\24\
---------------------------------------------------------------------------
\24\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------
The Fund intends to qualify for and to elect treatment as a
separate regulated investment company (``RIC'') under Subchapter M of
the Internal Revenue Code.\25\
---------------------------------------------------------------------------
\25\ 26 U.S.C. 851 et seq.
---------------------------------------------------------------------------
The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce
[[Page 14765]]
leveraged returns. The Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (i.e., 2Xs and
3Xs) of the Fund's primary broad-based securities benchmark index (as
defined in Form N-1A).\26\ The Trust's Exemptive Order does not place
any limit on the amount of derivatives in which the Fund can invest
(other than adherence to the requirements of the 1940 Act and the rules
thereunder).
---------------------------------------------------------------------------
\26\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------
Creation and Redemption of Shares
According to the Registration Statement, the Fund will issue and
redeem Shares only in Creation Units at the net asset value (``NAV'')
next determined after receipt of an order on a continuous basis every
business day. Creation Unit sizes are 25,000 Shares or more per
Creation Unit. The Creation Unit size for the Fund may change.
The consideration for purchase of a Creation Unit of the Fund
generally will consist of either (i) the in-kind deposit of a
designated portfolio of securities (the ``Deposit Securities'') per
each Creation Unit and the ``Cash Component'' (defined below), computed
as described below or (ii) the cash value of the Deposit Securities
(``Deposit Cash'') and the Cash Component, computed as described below.
Because non-exchange traded derivatives are not eligible for in-kind
transfer, they will be substituted with an amount of cash of equal
value (i.e., Deposit Cash) when the Fund processes purchases of
Creation Units in-kind. Specifically, the Fund will not accept OTC
options, forward contracts, dividend swap transactions, total return
swap transactions and interest rate swap transactions as Deposit
Securities. When accepting purchases of Creation Units for cash, the
Fund may incur additional costs associated with the acquisition of
Deposit Securities that would otherwise be provided by an in-kind
purchaser. Together, the Deposit Securities or Deposit Cash, as
applicable, and the Cash Component constitute the ``Fund Deposit,''
which represents the minimum initial and subsequent investment amount
for a Creation Unit of the Fund. The ``Cash Component'' is an amount
equal to the difference between the NAV of the Shares (per Creation
Unit) and the market value of the Deposit Securities or Deposit Cash,
as applicable. The Cash Component serves the function of compensating
for any differences between the NAV per Creation Unit and the market
value of the Deposit Securities or Deposit Cash, as applicable.
A portfolio composition file, to be sent via the National
Securities Clearing Corporation (``NSCC''), will be made available on
each business day, prior to the opening of business on the Exchange
(currently 9:30 a.m., Eastern time) containing a list of the names and
the required number of shares of each security in the Deposit
Securities to be included in the current Fund Deposit for the Fund
(based on information about the Fund's portfolio at the end of the
previous business day). In addition, on each business day, the
estimated Cash Component, effective through and including the previous
business day, will be made available through NSCC.
The Fund Deposit is applicable for purchases of Creation Units of
the Fund until such time as the next-announced Fund Deposit is made
available. In accordance with the Exemptive Order, the Fund reserves
the right to accept a nonconforming Fund Deposit. In addition, the
composition of the Deposit Securities may change as, among other
things, corporate actions and investment decisions by the Adviser are
implemented for the Fund's portfolio.
All purchase orders must be placed by or through an ``Authorized
Participant''. An Authorized Participant must be either a broker-dealer
or other participant in the Continuous Net Settlement System
(``Clearing Process'') of the NSCC or a participant in The Depository
Trust Company (``DTC'') with access to the DTC system, and must execute
an agreement with the Distributor that governs transactions in the
Fund's Creation Units. In-kind portions of purchase orders will be
processed through the Clearing Process when it is available.
Fund Shares may be redeemed only in Creation Units at their NAV
next determined after receipt of a redemption request in proper form by
the Fund through the Distributor and only on a business day. The Fund,
through the NSCC, will make available immediately prior to the opening
of business on the Exchange on each business day, the list of the names
and quantities of the Fund's portfolio securities that will be
applicable (subject to possible amendment or correction) to redemption
requests received in proper form on that day (``Fund Securities'').
Redemption proceeds for a Creation Unit will be paid either in-kind or
in cash or a combination thereof, as determined by the Trust. With
respect to in-kind redemptions of the Fund, redemption proceeds for a
Creation Unit will consist of Fund Securities plus cash in an amount
equal to the difference between the NAV of the Shares being redeemed,
as next determined after a receipt of a request in proper form, and the
value of the Fund Securities (the ``Cash Redemption Amount''). In the
event that the Fund Securities have a value greater than the NAV of the
Shares, a compensating cash payment equal to the differential will be
required to be made by or through an Authorized Participant by the
redeeming shareholder. Notwithstanding the foregoing, at the Trust's
discretion, an Authorized Participant may receive the corresponding
cash value of the securities in lieu of the in-kind securities
representing one or more Fund Securities.\27\ Because non-exchange
traded derivatives are not eligible for in-kind transfer, they will be
substituted with an amount of cash of equal value when the Fund
processes redemptions of Creation Units in-kind. Specifically, the Fund
will transfer the corresponding cash value of OTC options, forward
contracts, dividend swap transactions, total return swap transactions
and interest rate swap transactions in lieu of in-kind securities. In
accordance with the Exemptive Order, the Fund also reserves the right
to distribute to the Authorized Participant non-conforming Fund
Securities.
---------------------------------------------------------------------------
\27\ The Adviser represents that, to the extent the Trust
effects the redemption of Shares in cash, such transactions will be
effected in the same manner for all Authorized Participants.
---------------------------------------------------------------------------
The right of redemption may be suspended or the date of payment
postponed: (i) For any period during which the New York Stock Exchange
(``NYSE'') is closed (other than customary weekend and holiday
closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency
exists as a result of which disposal of the Shares or determination of
the Fund's NAV is not reasonably practicable; or (iv) in such other
circumstances as permitted by the Commission.
For an order involving a Creation Unit to be effectuated at the
Fund's NAV on a particular day, it must be received by the Distributor
by or before the deadline for such order (``Order Cut-Off Time''). The
Order Cut-Off Time for creation and redemption orders for the Fund is
generally expected to be 4:00 p.m. Eastern Time. Orders for creation or
redemption of Creation Units for cash generally must be submitted by
4:00 p.m. Eastern Time. A standard creation or redemption transaction
fee (as
[[Page 14766]]
applicable) will be imposed to offset transfer and other transaction
costs that may be incurred by the Fund.
Detailed descriptions of the Fund's procedures for creating and
redeeming Shares, transaction fees and expenses, dividends,
distributions, taxes, risks, and reports to be distributed to
beneficial owners of the Shares can be found in the Registration
Statement or on the Web site for the Fund (which will be publicly
available prior to the public offering of Shares), as applicable.
Determination of Net Asset Value
The Fund will calculate its NAV by: (i) Taking the current market
value of its total assets; (ii) subtracting any liabilities; and (iii)
dividing that amount by the total number of Shares outstanding. The
Fund will calculate NAV once each business day as of the regularly
scheduled close of trading on the NYSE (normally, 4:00 p.m., Eastern
Time) as described in its Registration Statement.
In calculating the Fund's NAV per Share, the Fund's investments
will be valued in accordance with procedures approved by the Trust's
Board of Trustees. These procedures, which may be changed by the
Trust's Board of Trustees from time to time, generally require
investments to be valued using market valuations. A market valuation
generally means a valuation (i) obtained from an exchange, an
independent pricing service, or a major market maker (or dealer), (ii)
based on a price quotation or other equivalent indication of value
supplied by an exchange, an independent pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. The Trust
may use various independent pricing services, or discontinue the use of
any independent pricing service, as determined by the Trust's Board of
Trustees from time to time.
The Trust will generally value exchange-listed equity securities
(which include common stocks and Underlying ETFs) and exchange-listed
options on such securities at market closing prices. Market closing
price is generally determined on the basis of last reported sales
prices, or if no sales are reported, based on the last reported quotes.
The Trust will generally value listed futures at the settlement price
determined by the applicable exchange. Non-exchange-traded derivatives,
such as forwards, OTC options and swap transactions, will normally be
valued on the basis of quotations or equivalent indication of value
supplied by an independent pricing service or major market makers or
dealers. Investment company securities (other than Underlying ETFs)
will be valued at NAV. Debt securities and money market instruments
generally will be valued based on prices provided by independent
pricing services, which may use valuation models or matrix pricing to
determine current value. The Trust generally will use amortized cost to
value debt securities and money market instruments that have a
remaining maturity of 60 days or less.
In the event that current market valuations are not readily
available or the Trust or Adviser believes such valuations do not
reflect current market value, the Trust's procedures require that a
security's fair value be determined.\28\ In determining such value the
Trust or the Adviser may consider, among other things, (i) price
comparisons among multiple sources, (ii) a review of corporate actions
and news events, and (iii) a review of relevant financial indicators
(e.g., movement in interest rates, market indices, and prices from the
Fund's index providers). In these cases, the Fund's NAV may reflect
certain portfolio securities' fair values rather than their market
prices. Fair value pricing involves subjective judgments and it is
possible that the fair value determination for a security is materially
different than the value that could be realized upon the sale of the
security.
---------------------------------------------------------------------------
\28\ The Trust's Board of Trustees has established Fair Value
Procedures, in accordance with the 1940 Act, governing the valuation
of any portfolio investments for which market quotations or prices
are not readily available. The Fund has implemented procedures
designed to prevent the use and dissemination of material, non-
public information regarding valuation of any portfolio investments.
---------------------------------------------------------------------------
Availability of Information
The Fund's Web site, www.realityshares.com, which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's Web
site will include additional quantitative information updated on a
daily basis, including, for the Fund, (1) the prior business day's
reported closing price, NAV and mid-point of the bid/ask spread at the
time of calculation of such NAV (the ``Bid/Ask Price''),\29\ and a
calculation of the premium and discount of the Bid/Ask Price against
the NAV, and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Fund will disclose on its Web site the Disclosed Portfolio (as such
term is defined in NYSE Arca Equities Rule 8.600(c)(2)) that will form
the basis for the Fund's calculation of NAV at the end of the business
day.\30\
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\29\ The Bid/Ask Price of the Fund will be determined using the
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
\30\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day.
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On a daily basis, the Adviser will disclose for each portfolio
security and other financial instrument of the Fund the following
information on the Fund's Web site: Ticker symbol (if applicable), name
of security and financial instrument, number of shares or dollar value
[sic] securities and of 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.
In addition, a portfolio composition file, which includes the
security names and share quantities required to be delivered in
exchange for the Fund's Shares, together with estimates and actual cash
components, will be publicly disseminated daily prior to the opening of
the NYSE via NSCC. The portfolio composition file will represent one
Creation Unit of Shares of the Fund.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and
Shareholder Reports are available free upon request from the Trust, and
those documents and the Form N-CSR and Form N-SAR may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the Consolidated Tape Association
(``CTA'') high-speed line. In addition, the Portfolio Indicative Value
[[Page 14767]]
(``PIV'') 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.\31\ The dissemination
of the PIV, together with the Disclosed Portfolio, will allow investors
to determine the value of the underlying portfolio of the Fund on a
daily basis and will provide a close estimate of that value throughout
the trading day. The intra-day, closing and settlement prices of the
portfolio securities and other Fund investments, including Underlying
ETFs, futures and exchange-traded equities and options, will also be
readily available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, and, with respect to OTC options, swaps and forwards, from
third party pricing sources, or on-line information services such as
Bloomberg or Reuters. Price information regarding investment company
securities other than Underlying ETFs will be available from on-line
information services and from the Web site for the applicable
investment company security. The intra-day, closing and settlement
prices of debt securities and money market instruments will be readily
available from published and other public sources or on-line
information services.
---------------------------------------------------------------------------
\31\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available PIVs
taken from the CTA or other data feeds.
---------------------------------------------------------------------------
Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statement. All terms relating
to the Fund that are referred to, but not defined in, this proposed
rule change are defined in the Registration Statement.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\32\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Equities
Rule 7.12 have been reached. Trading also may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of the Fund;
or (2) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present. Trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which Shares of the Fund may be
halted.
---------------------------------------------------------------------------
\32\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. Eastern Time in
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00 for which the
MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents
that, for initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 \33\ under the Act, as provided by NYSE Arca
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund will be
outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares
that the NAV per Share will be calculated daily and that the NAV and
the Disclosed Portfolio as defined in NYSE Arca Equities Rule
8.600(c)(2) will be made available to all market participants at the
same time.
---------------------------------------------------------------------------
\33\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
Surveillance
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
applicable federal securities laws.\34\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
---------------------------------------------------------------------------
\34\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, certain equity securities, Underlying
ETFs, and certain futures contracts and exchange-listed options
contracts 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, certain equity securities,
Underlying ETFs, and certain futures contracts and exchange-listed
options contracts from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares,
certain equity securities, Underlying ETFs, and certain futures
contracts and exchange-listed options contracts from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.\35\
---------------------------------------------------------------------------
\35\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
Not more than 10% of the assets of the Fund in the aggregate shall
consist of non-U.S. equity securities whose principal market is not a
member of ISG or is a market with which the Exchange does not have a
comprehensive surveillance sharing agreement. Furthermore, not more
than 10% of the net assets of the Fund in the aggregate shall consist
of futures contracts or exchange-traded options whose principal market
is not a member of ISG or is a market with which the Exchange does not
have a comprehensive surveillance sharing agreement.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'')
[[Page 14768]]
of the special characteristics and risks associated with trading the
Shares. Specifically, the Bulletin will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation 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 ETP Holders to learn the essential facts relating to every
customer prior to trading the Shares; (3) the risks involved in trading
the Shares during the Opening and Late Trading Sessions when an updated
PIV will not be calculated or publicly disseminated; (4) how
information regarding the PIV is disseminated; (5) the requirement that
ETP Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (6) trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m. Eastern time each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \36\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\36\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange. The Adviser is
not registered as a broker-dealer and is not affiliated with any
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes
registered as a broker-dealer or 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, they will implement a fire
wall with respect to their relevant personnel or broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio. The Fund may hold up to an
aggregate amount of 15% of its net assets in illiquid assets
(calculated at the time of investment), including Rule 144A securities
deemed illiquid by the Adviser. FINRA, on behalf of the Exchange, will
communicate as needed regarding trading in the Shares, certain equity
securities, Underlying ETFs, and certain futures contracts and
exchange-listed options contracts 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, certain
equity securities, Underlying ETFs, and certain futures contracts and
exchange-listed options contracts from such markets and other entities.
In addition, the Exchange may obtain information regarding trading in
the Shares, certain equity securities, Underlying ETFs, and certain
futures contracts and exchange-listed options contracts from markets
and other entities that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement. Not more
than 10% of the assets of the Fund in the aggregate shall consist of
non-U.S. equity securities whose principal market is not a member of
ISG or is a market with which the Exchange does not have a
comprehensive surveillance sharing agreement. Furthermore, not more
than 10% of the net assets of the Fund in the aggregate shall consist
of futures contracts or exchange-traded options whose principal market
is not a member of ISG or is a market with which the Exchange does not
have a comprehensive surveillance sharing agreement.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the PIV will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Exchange's Core Trading Session. 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. Information regarding market
price and trading volume of the Shares will be continually available on
a real-time basis throughout the day on brokers' computer screens and
other electronic services, and quotation and last sale information will
be available via the CTA high-speed line. The intra-day, closing and
settlement prices of the portfolio securities and other Fund
investments, including Underlying ETFs, futures and exchange-traded
equities and options, will also be readily available from the national
securities exchanges trading such securities, automated quotation
systems, published or other public sources, and, with respect to OTC
options, swaps and forwards, from third party pricing sources, or on-
line information services such as Bloomberg or Reuters. Price
information regarding investment company securities other than
Underlying ETFs will be available from on-line information services and
from the Web site for the applicable investment company security. The
intra-day, closing and settlement prices of debt securities and money
market instruments will be readily available from published and other
public sources or on-line information services. The Web site for the
Fund will include the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.
Moreover, prior to the commencement of trading, the Exchange will
inform its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares. 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, and trading in the Shares will be
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of the Fund may be halted. In
addition, as noted above, investors will have ready access to
information regarding the Fund's holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
[[Page 14769]]
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange. FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, equity securities, Underlying ETFs,
and certain futures contracts and exchange-listed options contracts
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, equity securities, Underlying ETFs,
and certain futures contracts and exchange-listed options contracts
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares, equity securities,
Underlying ETFs, and certain futures contracts and exchange-listed
options contracts from markets and other entities that are members of
ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. Not more than 10% of the assets of the
Fund in the aggregate shall consist of non-U.S. equity securities whose
principal market is not a member of ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
Furthermore, not more than 10% of the net assets of the Fund in the
aggregate shall consist of futures contracts or exchange-traded options
whose principal market is not a member of ISG or is a market with which
the Exchange does not have a comprehensive surveillance sharing
agreement. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees. In addition, as noted above, investors will have ready
access to information regarding the Fund's holdings, the PIV, the
Disclosed Portfolio, and quotation and last sale information for the
Shares. The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).
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 an
additional type of actively-managed exchange-traded product 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 (i) as the Commission may
designate up to 90 days of such date 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:
Electronic Comments
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-2014-20 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-20. 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-2014-20 and should
be submitted on or before April 7, 2014.
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\37\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05752 Filed 3-14-14; 8:45 am]
BILLING CODE 8011-01-P
