Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Proposed Rule Change Relating to the Listing and Trading of the Shares of the Reality Shares NASDAQ-100 Isolated Dividend Growth Index ETF of the Reality Shares ETF Trust Under Rule 5705, 24465-24473 [2014-09807]

Download as PDF Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices retail order programs.13 The Exchange believes that the amendment, by increasing the amount of disseminated information regarding Retail Orders, will increase the level of competition around retail executions resulting in better prices for retail investors. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from Members or other interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. Internet Web site (http://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–EDGX– 2014–13, and should be submitted on or before May 21, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–09809 Filed 4–29–14; 8:45 am] Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– EDGX–2014–13 on the subject line. mstockstill on DSK4VPTVN1PROD with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Proposed Rule Change Relating to the Listing and Trading of the Shares of the Reality Shares NASDAQ–100 Isolated Dividend Growth Index ETF of the Reality Shares ETF Trust Under Rule 5705 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–EDGX–2014–13. 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 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72014; File No. SR– NASDAQ–2014–038] April 24, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 10, 2014, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 13 Id. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 24465 been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to list and trade the shares of the Reality Shares NASDAQ–100 Isolated Dividend Growth Index ETF (the ‘‘Fund’’) of the Reality Shares ETF Trust (the ‘‘Trust’’) under Rule 5705 (Exchange Traded Funds: Portfolio Depository Receipts and Index Fund Shares).3 The shares of the Fund are collectively referred to herein as the ‘‘Shares.’’ The text of the proposed rule change is available at http:// nasdaq.cchwallstreet.com/, at NASDAQ’s principal office, 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, NASDAQ included statements concerning the purpose of, and basis for, the proposed rule change. The text of these statements may be examined at the places specified in Item III below, and is set forth in Sections A, B, and C below. 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 the Shares of the Fund under NASDAQ Rule 5705(b), which governs the listing and trading of Index Fund Shares 4 on the Exchange. The Fund is an exchange-traded fund (‘‘ETF’’) which seeks to track the performance of an underlying index, as discussed herein.5 3 The Commission approved NASDAQ’s Rule 5705, as well as Rule 5735 regarding managed fund shares, in Securities Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR–NASDAQ–2008–039). 4 Index Fund Shares that are issued by an openend investment company and listed and traded on the Exchange under NASDAQ Rule 5705 seek to provide investment results that correspond generally to the price and yield performance of a specific foreigh or domestic stock index, fixed income securities index or combination thereof. See Rule 5705(b)(1)(A). 5 The Exchange notes that its proposal to list shares of the Fund which tracks the performance of an index of U.S. exchange listed options is similar to the proposal and resultant order issued to the NYSE ARCA to list and trade under NYSE Arca Equities Rule 5.2(j)(3) (which is similar to NASDAQ Rule 5705(b)) Investment Company Units based on Continued E:\FR\FM\30APN1.SGM 30APN1 24466 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES The Shares will be offered by the Trust, which was established as a Delaware statutory trust on March 26, 2013. The Trust will be registered with the Commission as an open-end management investment company.6 The Fund is a series of the Trust. Reality Shares Advisors, LLC will be the investment adviser (‘‘Adviser’’) to the Fund. ALPS Distributors, Inc. (the ‘‘Distributor’’) will be the principal underwriter and distributor of the Fund’s Shares. The Bank of New York Mellon (‘‘BNY’’) will act as the administrator, accounting agent, custodian and transfer agent to the Fund. As described in more detail below, the Fund will seek long-term capital appreciation by tracking the Reality Shares NASDAQ–100 Isolated Dividend Growth Index (the ‘‘Index’’). The Index measures market expectations for dividend growth of the companies included in the NASDAQ–100 Index.7 The Index consists of options on the NASDAQ–100 Index and options on ETFs designed to track the NASDAQ– 100 Index. All options included in the Index will be listed and traded on a U.S. national securities exchange. The Index will consist of a minimum of 20 components. Paragraph (b)(5)(A)(i) of Rule 5705 states that if an index is maintained by indexes of U.S. exchange listed options. See Securities Exchange Act Release Nos. 68667 (January 16, 2013), 78 FR 4955 (January 23, 2013) (SR–NASDAQ–2012–109) (order approving listing and trading of U.S. Equity High Volatility Put Write Index Fund); and 69373 (April 15, 2013), 78 FR 23601 (April 19, 2913) (SR–NYSEArca–2012–108) (order approving listing and trading of NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund). The Exchange believes the proposed rule change does not raise any significant issues not previously addressed in those prior Commission orders. 6 The Trust will be registered under the Investment Company Act of 1940 (15 U.S.C. 80a– 1) (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 (File Nos. 333–192288 and 811–22911), as amended by Pre-Effective Amendment Number 1, filed with the Commission on February 6, 2014 (the ‘‘Registration Statement’’). The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. In addition, the Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 30678 August 27, 2013 (the ‘‘Exemptive Order’’). Investments made by the Fund will comply with the conditions set forth in the Exemptive Order. 7 The NASDAQ–100 Index is an index of 100 of the largest domestic and international securities (based on market capitalization) listed on The NASDAQ Stock Market. The NASDAQ–100 Index includes companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology, and excludes securities of financial companies. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 a broker-dealer or fund advisor, the broker-dealer or fund advisor shall erect a ‘‘fire wall’’ around the personnel who have access to information concerning changes and adjustments to the index. If the investment adviser to the investment company issuing Index Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect a ‘‘fire wall’’ between the investment adviser and the brokerdealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.8 In addition, paragraph (b)(5)(A)(iii) requires that any advisory committee, supervisory board, or similar entity that advises a Reporting Authority 9 or that makes decisions on index composition, methodology and related matters, must implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the applicable index. The Adviser is not a broker-dealer and is not affiliated with any broker-dealers. The Index was developed by Reality Shares, Inc., the parent company of the Adviser, in conjunction with The NASDAQ OMX Group, Inc., and is maintained by Reality Shares, Inc. (the ‘‘Index Provider’’).10 The Index Provider is not a broker-dealer and is not affiliated with any broker-dealers.11 In 8 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. 9 Rule 5705(b)(1)(C). 10 The Index will be calculated by International Data Corporation (‘‘IDC’’), which is not affiliated with the Adviser, Index Provider or The NASDAQ OMX Group, and which is not a broker-dealer or fund advisor. 11 The Adviser and the Index Provider have represented that a fire wall exists around the respective personnel who have access to PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 the event (a) the Adviser, any subadviser or the Index Provider becomes registered as a broker-dealer or is newly affiliated with a broker dealer, or (b) any new adviser, sub-adviser or Index Provider is a registered broker-dealer or becomes affiliated with a broker dealer, the Adviser, sub-adviser or Index Provider will implement a fire wall with respect to its relevant personnel and/or such broker dealer affiliate, as applicable, 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 does not currently intend to use a subadviser. The Exchange is submitting this proposed rule change because the Index for the Fund does not meet all of the ‘‘generic’’ listing requirements of paragraph (b)(3)(A)(i) of Rule 5705 applicable to the listing of Index Fund Shares based upon an index of ‘‘US Component Stocks.’’ 12 Specifically, Rule 5705(b)(3)(A)(i) sets forth the requirements to be met by components of an index or portfolio of US Component Stocks. As described in more detail herein, the Index will consist primarily of U.S. exchange-listed and traded options on the NASDAQ– 100 Index and U.S. exchange-listed and traded options on ETFs that track the NASDAQ–100 Index.13 The Fund may also invest up to 20% of its total assets in other securities such as over-thecounter (‘‘OTC’’) options, futures, and forward contracts on the NASDAQ–100 Index and OTC options, futures and forward contracts on ETFs that track the information concerning changes and adjustments to the Index. 12 Paragraph (b)(1)(D) of Rule 5705 states that the term ‘‘US Component Stock’’ shall mean an equity security that is registered under Sections 12(b) or 12(g) of the Exchange Act, or an American Depositary Receipt, the underlying equity security of which is registered under Sections 12(b) or 12(g) of the Act. Rule 5705(b)(1)(D). 13 Paragraph (b)(3)(A)(i) of Rule 5705 states, in relevant part, that upon the initial listing of a series of Index Fund Shares pursuant to 19b–4(e) under the Act, all securities in the index or portfolio shall be U.S. Component Stocks listed on NASDAQ (including The NASDAQ Capital Market) or another national securities exchange and shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Act. Each component stock of the NASDAQ–100 Index is a U.S. Component Stock that is listed on a national securities exchange and is an NMS Stock. Options are excluded from the definition of NMS Stock. The Fund and the Index meet all of the requirements of the listing standards for Index Fund Shares in Rule 5705 except the requirements in 5705(b)(3)(A)(i)(a)–(e), as the Index consists of options on U.S. Component Stocks. The NASDAQ–100 Index consists of Component Stocks and satisfies the requirements of Commentary [sic] 5705(b)(3)(A)(i)(a)–(e). E:\FR\FM\30APN1.SGM 30APN1 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices NASDAQ–100 Index. The Exchange has represented that the Shares will conform to the initial and continued requirements of listing criteria under Rule 5705(b), except to the extent that the Index is comprised of options based on U.S. Component Stocks (i.e., ETFs based on the NASDAQ 100 Index) and options on an index of U.S. Component Stocks (i.e., the NASDAQ–100 Index). Reality Shares NASDAQ–100 Isolated Dividend Growth Index ETF mstockstill on DSK4VPTVN1PROD with NOTICES Principal Investments According to the Registration Statement, the Fund will seek long-term capital appreciation and will seek investment results that, before fees and expenses, generally correspond to the performance of the Index. At least 80% of the Fund’s total assets (exclusive of collateral held from securities lending, if any) will be invested in the component securities of the Index. The Fund will seek a correlation of 0.95 or better between its performance and the performance of its Index. A figure of 1.00 would represent perfect correlation. The Fund generally will use a representative sampling investment strategy. The Fund will buy (i.e., hold a ‘‘long’’ position in) and sell (i.e., hold a ‘‘short’’ position in) put and call options. The Fund has a strategy of taking both a long position in a security through its exdividend 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. This 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 will buy and sell U.S. exchange-listed options on the NASDAQ–100 Index and U.S. exchangelisted options on ETFs designed to track the NASDAQ–100 Index. 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 will 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 expected dividends reflected in options VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 on the NASDAQ–100 Index and options on ETFs tracking the NASDAQ–100 Index, while minimizing the Fund’s exposure to changes in the trading price of such securities. Index Methodology The Index will be calculated using a proprietary, rules-based methodology designed to track market expectations for dividend growth conveyed in realtime using the mid-point of the bid-ask spread on NASDAQ–100 Index options and options on ETFs designed to track the NASDAQ–100 Index.14 All options included in the Index will be listed and traded on a U.S. national securities exchange. The Index will consist of a minimum of 20 components.15 The prices of index and ETF options reflect the market trading prices of the securities included in the applicable underlying index or ETF, as well as market expectations regarding the level of dividends to be paid on such indexes or ETFs during the term of the option. The Index constituents, and therefore most of the Fund’s portfolio holdings, will consist of multiple corresponding near-term and long-term put and call option combinations on the same reference assets (i.e., options on the NASDAQ–100 Index or the NASDAQ– 100 ETF) with the same strike price. Because option prices reflect both stock price and dividend expectations, they can be used in combination to isolate either price exposure or dividend expectations. The use of near-term and long-term put and call option combinations on the same reference asset with the same strike price, but with different maturities, is designed to gain exposure to the expected dividends of the securities in the NASDAQ–100 Index while neutralizing the impact of the stock price. Once established, this portfolio construction of option combinations will accomplish two goals. First, the use of corresponding buy or sell positions on near and long-term options at the same strike price is designed to neutralize underlying stock price movements. In other words, the corresponding ‘‘buy’’ and ‘‘sell’’ positions on the same reference asset are designed to net against each other and eliminate the impact that changes to the stock price of the reference asset would 14 There is no guarantee that either the level of overall dividends paid by such companies will grow over time, or that the Index or Fund’s investment strategies will capture such growth. The Fund will include appropriate risk disclosure in its offering documents disclosing these risks, which will be available for free on the SEC’s Web site and on the Fund’s Web site, www.realityshares.com. 15 Rule 5705(b)(3). PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 24467 otherwise have on the value of the Index (and Fund). Second, by minimizing the impact of price fluctuations through the construct of the near- and long-term contract combinations, the strategy is designed to isolate market expectations for dividends implied between the expiration dates of the near-term and long-term option contracts. Over time, the Index will increase or decrease in value as the dividend spread between the near-term and long-term option combinations increases or decreases as a result of changing market expectations for dividend growth. Other Fund Investments While, as described above, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending, if any) will be invested in the component securities of the Index, the Fund may invest up to 20% of the Fund’s total assets in other securities and financial instruments, as described below. The Fund may invest in U.S. exchange-listed futures contracts on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index and may invest in forward contracts on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index. The Fund’s use of exchange-listed futures contracts and forward contracts is designed to allow the Fund to isolate its exposure to the growth of the level of expected dividends reflected in options on the NASDAQ–100 Index and options on ETFs tracking the NASDAQ–100 Index, while minimizing the Fund’s exposure to changes in the trading price of such securities. The Fund may also buy and sell OTC options on the NASDAQ–100 Index and on ETFs designed to track the NASDAQ–100 Index. The Fund may enter into dividend and total return swap transactions (including equity swap transactions) based on the NASDAQ–100 Index and ETFs designed to track the NASDAQ– 100 Index.16 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 16 The Fund will transact only with swap dealers that have in place an ISDA agreement with the Fund. E:\FR\FM\30APN1.SGM 30APN1 mstockstill on DSK4VPTVN1PROD with NOTICES 24468 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices dividend swap transaction, the Fund 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 transaction, 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 20% of its assets (exclusive of collateral held from securities lending, if any) in exchangelisted equity securities and derivative instruments (specifically, futures contracts, forward contracts and swap transactions) 17 relating to the Index and its component securities that the Adviser believes will help the Fund track the Index. For example, the Fund may buy and sell ETFs and, to a limited extent, individual large-capitalization equity securities listed and traded on a U.S. national securities exchange. 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’s short positions and its investments in swaps, futures contracts, forward contracts and options based on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index will be backed by investments in cash, high-quality, short-term debt securities and money-market instruments in an amount equal to the Fund’s maximum liability under the applicable position or contract or will otherwise be offset in accordance with Section 18 of the 1940 Act. Short-term 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 17 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. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 U.S. government or its authorities, agencies, or instrumentalities), repurchase agreements 18 and bonds that are rated BBB or higher. In addition to the investments described above, and in a manner consistent with its investment objective, the Fund may invest a limited portion of its net assets in high-quality, shortterm debt securities and money market instruments for cash management purposes.19 The Fund will attempt to limit counterparty risk in non-cleared swap, forward and OTC option contracts by entering into such 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.20 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.21 18 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. 19 The Fund may invest in shares of money market mutual funds to the extent permitted by the 1940 Act. 20 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. 21 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. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Investment Restrictions To the extent the Index concentrates (i.e., holds 25% or more of its total assets) in the securities of a particular industry or group of industries, the Fund will concentrate its investments to approximately the same extent as the Index. The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment) 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 make secured loans of its portfolio securities; however, securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by the Fund exceeds 331⁄3% of its total assets (including the market value of collateral received). To the extent the Fund engages in securities lending, securities loans will be made to broker-dealers that the Adviser believes to be of relatively high credit standing pursuant to agreements requiring that the loans 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 Nos. [sic] 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also Investment Company Act Release Nos. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); and 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 Nos. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a–7 under the 1940 Act); and 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the 1933 Act). E:\FR\FM\30APN1.SGM 30APN1 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices Fund processes purchases of Creation Units in-kind. Specifically, the Fund will not accept exchange-traded options, OTC options, exchange-traded futures, 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 inkind purchaser. Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash Component will constitute the ‘‘Fund Deposit,’’ which represents the minimum initial and subsequent investment amount for The Shares a Creation Unit of the Fund. The ‘‘Cash According to the Registration Component’’ will be an amount equal to Statement, the Fund will issue and redeem Shares only in Creation Units at the difference between the NAV of the Shares (per Creation Unit) and the the net asset value (‘‘NAV’’) 26 next market value of the Deposit Securities or determined after receipt of an order on Deposit Cash, as applicable. The Cash a continuous basis every business day. Component will serve the function of The NAV of the Fund will be compensating for any difference determined once each business day, normally as of the close of trading of the between the NAV per Creation Unit and the market value of the Deposit Exchange, generally, 4:00 p.m. Eastern Time. Creation Unit sizes will be 25,000 Securities or Deposit Cash, as Shares per Creation Unit. The Trust will applicable. A portfolio composition file, to be issue and sell Shares of the Fund only sent via the National Securities Clearing in Creation Units on a continuous basis Corporation (‘‘NSCC’’), will be made through the Distributor, without a sales available on each business day, prior to load (but subject to transaction fees), at the opening of business on the Exchange their NAV per Share next determined 27 after receipt of an order, on any business (currently 9:30 a.m., Eastern time) containing a list of the names and the day, in proper form pursuant to the required amount of each security in the terms of the Authorized Participant Deposit Securities to be included in the agreement (as referred to below). current Fund Deposit for the Fund The consideration for purchase of a (based on information about the Fund’s Creation Unit generally will consist of portfolio at the end of the previous either (i) the in-kind deposit of a business day). In addition, on each designated portfolio of securities (the business day, the estimated Cash ‘‘Deposit Securities’’) per each Creation Component, effective through and Unit and the Cash Component (defined below), computed as described below or including the previous business day, will be made available through NSCC. (ii) the cash value of all or a portion of The Fund Deposit will be applicable the Deposit Securities (‘‘Deposit Cash’’) for purchases of Creation Units of the and the ‘‘Cash Component,’’ computed Fund until such time as the nextas described below. Because nonexchange traded derivatives and certain announced Fund Deposit is made available. In accordance with the listed derivatives are not currently eligible for in-kind transfer, they will be Exemptive Order, the Fund will reserve the right to accept a non-conforming substituted with an amount of cash of equal value (i.e., Deposit Cash) when the Fund Deposit. In addition, the composition of the Deposit Securities 24 The diversification standard is set forth in may change as, among other things, Section 5(b)(1) of the 1940 Act. corporate actions and investment 25 26 U.S.C. 851 et seq. decisions by the Adviser are 26 The NAV of the Fund’s Shares generally will implemented for the Fund’s portfolio. mstockstill on DSK4VPTVN1PROD with NOTICES continuously be collateralized by cash, liquid securities, or shares of other investment companies with a value at least equal to the market value of the loaned securities. The Fund will be classified as a ‘‘non-diversified’’ 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 leveraged returns. be calculated once daily Monday through Friday as of the close of the Regular Market Session on the Exchange, generally 4:00 or 4:15 p.m. Eastern time (the ‘‘NAV Calculation Time’’). NAV per Share will be calculated by dividing the Fund’s net assets by the number of Fund Shares outstanding. For more information regarding the valuation of Fund investments in calculating the Fund’s NAV, see Registration Statement. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 27 See NASDAQ Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m. Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m. Eastern time; and (3) PostMarket Session from 4 p.m. or 4:15 p.m. to 8 p.m. Eastern time). PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 24469 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.28 Because nonexchange traded derivatives and certain listed derivatives are not eligible for inkind 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 exchange-traded options, 28 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. E:\FR\FM\30APN1.SGM 30APN1 24470 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES OTC options, exchange-traded futures, 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 Exchange is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the Exchange 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 will 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 applicable) will be imposed to offset transfer and other transaction costs that may be incurred by the Fund. 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 Exchange (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, a third-party 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, a third-party pricing service, or a major market maker VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 (or dealer) or (iii) based on amortized cost. The Trust may use various thirdparty pricing services, or discontinue the use of any third-party pricing service, as determined by the Trust’s Board of Trustees from time to time. The Trust will generally value exchange-listed securities (which include common stocks and ETFs), exchange-listed options, and options on the NASDAQ–100 Index or NASDAQ– 100 ETFs at market closing prices; or, if market closing prices are not available, then the midpoint between the last reported bid and ask. Market closing price is generally determined on the basis of last reported sales prices on the applicable exchange, or if no sales are reported, based on the last reported quotes. The Trust will generally value exchange-listed futures at the settlement price determined by the applicable exchange. Non-exchange-traded derivatives, including OTC options, swap transactions and forward transactions, will normally be valued on the basis of quotations or equivalent indication of value supplied by a thirdparty pricing service or major market makers or dealers. Debt securities and money market instruments generally will be valued based on prices provided by third-party pricing services, which may use valuation models or matrix pricing to determine current value. Investment company securities (other than ETFs) will be valued at NAV. The Trust generally will use amortized cost to value fixed income or money market securities that have a remaining maturity of 60 days or less. In the event that current market valuations are not readily available or such valuations do not reflect current market value, the Trust’s procedures require the Adviser’s Pricing Committee to determine a security’s fair value in accordance with the 1940 Act.29 In determining such value the Adviser’s Pricing Committee 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. In these cases, the Fund’s NAV may reflect certain portfolio securities’ fair 29 The Valuation Committee of the Trust Board will be responsible for the oversight of the pricing procedures of the Fund and the valuation of the Fund’s portfolio. The Valuation Committee has delegated day-to-day pricing responsibilities to the Adviser’s Pricing Committee, which will be composed of officers of the Adviser. The Pricing Committee will be responsible for the valuation and revaluation 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 and revaluation of any portfolio investments. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 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, as well as a description of the rules and methodology applicable to the Fund. 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 NAV, mid-point of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’),30 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 Regular Market Session on the Exchange, the Fund will disclose on its Web site the identities and quantities of the portfolio of securities and other assets (the ‘‘Disclosed Portfolio’’) held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the business day.31 On a daily basis, the Adviser, on behalf of the Fund, will disclose on the Fund’s Web site the following information regarding each portfolio holding, as applicable to the type of holding: ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index, or other asset or instrument underlying the holding, if any; for 30 The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of such Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 31 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’’). Notwithstanding the foregoing, portfolio trades that are executed prior to the opening of the Exchange on any business day may be booked and reflected in NAV on such business day. 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. E:\FR\FM\30APN1.SGM 30APN1 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holdings in the Fund’s portfolio. The Web site information will be publicly available at no charge. In addition, for the Fund, an estimated value, defined in Rule 5705(b)(3)(C) as the ‘‘Intraday Indicative Value,’’ will be disseminated. Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service,32 will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated and broadly displayed at least every 15 seconds during the Regular Market Session (currently 9:30 a.m. Eastern time). The Intraday Indicative Value will be based on quotes and closing prices from the assets’ local market and may not reflect events that occur subsequent to the local market’s close. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. The dissemination of the Intraday Indicative Value, 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. Intra-day, executable price quotations on the securities and other assets held by the Fund will be available from major broker-dealer firms or on the exchange on which they are traded, as applicable. Intra-day price information will also be available through subscription services, such as Bloomberg, Markit and Thomson Reuters, which can be accessed by Authorized Participants and other investors. Specifically, the intra-day, closing and settlement prices of the portfolio securities and other Fund investments, including exchange-listed equity securities (which include common stocks and ETFs), exchangelisted futures, and exchange-listed options, will be readily available from 32 Currently, the NASDAQ OMX Global Index Data Service (‘‘GIDS’’) is the NASDAQ OMX global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and ETFs. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 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 and 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. In addition, a basket composition file, which includes the security names and quantities, as applicable, 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 NASDAQ via NSCC. The basket will represent one Creation Unit of the Fund. Investors will also be able to obtain the Fund’s Statement of Additional Information (‘‘SAI’’), the Fund’s annual and semi-annual reports (together, ‘‘Shareholder Reports’’), and its Form N–CSR and Form N–SAR, filed twice a year. The Fund’s SAI and Shareholder Reports will be available free upon request from the Fund, 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 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 NASDAQ proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association plans for the Shares and any underlying exchange-traded products. The value of the Index will be published by one or more major market data vendors every 15 seconds during the Regular Market Session. Information about the Index constituents, the weighting of the constituents, the Index’s methodology and the Index’s rules will be available at no charge on the Index Provider’s Web site at www.realityshares.com. In addition, for the Fund, an estimated value, defined in Rule PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 24471 5705(b)(3)(C) as the ‘‘Intraday Indicative Value,’’, [sic] will be disseminated. Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund 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. Initial and Continued Listing The Shares will be subject to Rule 5705, which sets forth the initial and continued listing criteria applicable to Index Fund Shares. The Exchange represents that, for initial and/or continued listing, the Fund must be in compliance with Rule 10A–3 33 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading Halts and Trading Pauses 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. NASDAQ will halt or pause trading in the Shares under the conditions specified in NASDAQ Rules 4120 and 4121, including the trading pauses under NASDAQ Rules 4120(a)(11) and (12). Trading 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 constituting 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 also will be subject to Rules 5705(b)(1)(B) and 5705(b)(9)(B), which sets forth circumstances under which Shares of the Fund may be halted. If the IIV, the Index Value or the value of the Index Components is not being disseminated as required, the Exchange may halt trading during the day in which the disruption occurs; if the interruption persists past the day in which it occurred, the Exchange will 33 See E:\FR\FM\30APN1.SGM 17 CFR 240.10A–3. 30APN1 24472 Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices halt trading no later than the beginning of the trading day following the interruption. The Exchange will obtain a representation from the Fund that the NAV for the Fund will be calculated daily and will be made available to all market participants at the same time. mstockstill on DSK4VPTVN1PROD with NOTICES Trading Rules NASDAQ deems the Shares to be equity securities, thus rendering trading in the Shares subject to NASDAQ’s existing rules governing the trading of equity securities. NASDAQ will allow trading in the Shares from 4:00 a.m. until 8:00 p.m. Eastern time. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Rule 4613(a)(2)(I), the minimum quotation increment for quotations of $1.00 and above in Shares on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both NASDAQ and also 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 applicable federal securities laws. 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 and in the U.S. exchange-traded options, exchangetraded futures, exchange-traded equities, and exchange-traded investment company securities which the Fund will buy or write with other markets. FINRA may obtain trading information regarding trading in the Shares and in such U.S. exchangetraded options from such markets and other entities. In addition, the Exchange may obtain information regarding 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. VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 trading in the Shares, and in exchangetraded securities from markets and other entities that are members of the Intermarket Surveillance Group (‘‘ISG’’) or with which the Exchange has in place a comprehensive surveillance sharing agreement.35 The Exchange may also obtain information from the Trade Reporting and Compliance Engine (‘‘TRACE’’), which is the FINRA developed vehicle that facilitates mandatory reporting of OTC secondary market transactions in eligible fixed income securities.36 In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) NASDAQ Rule 2111A, which imposes suitability obligations on NASDAQ members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Index Value and Intraday Indicative Value will be disseminated; (4) the risks involved in trading the Shares during the PreMarket and Post-Market Sessions when an updated Index Value and Intraday Indicative Value will not be calculated or publicly disseminated; (5) the requirement that members 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 Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Fund. Members purchasing Shares from the Fund for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the 35 A list of ISG members, which includes all U.S. national securities exchanges and certain foreign exchanges, and which enables ISG members to share surveillance data regarding trades on the respective member exchanges, is available at www.isgportal.org. 36 All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV Calculation Time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Distributor’s Web site. 2. Statutory Basis NASDAQ believes that the proposal is consistent with Section 6(b) of the Act 37 in general and Section 6(b)(5) of the Act 38 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. 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 NASDAQ Rule 5705, except that the Index will consist of options based on U.S. Component Stocks (i.e., ETFs based on the NASDAQ–100 Index) and options on an index of U.S. Component Stocks (i.e., the NASDAQ–100 Index), rather than U.S. Component Stocks themselves. The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on NASDAQ during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. 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 will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. The Intraday Indicative Value, available on the NASDAQ OMX Information LLC 37 15 38 15 E:\FR\FM\30APN1.SGM U.S.C. 78f. U.S.C. 78f(b)(5). 30APN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices proprietary index data service, will be widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. On each business day, before commencement of trading in Shares in the Regular Market Session on the Exchange, the Fund will disclose on the Distributor’s 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 for the Shares will also be available via NASDAQ proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association plans for the Shares and any underlying exchange-traded products. Intra-day, executable price quotations of the securities and other assets held by the Fund will be available from major broker-dealer firms or on the exchange on which they are traded, if applicable. Intra-day price information will also be available through subscription services, such as Bloomberg, Markit and Thomson Reuters, which can be accessed by Authorized Participants and other investors. The Distributor’s Web site for the Fund will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. Trading in Shares of the Fund will be halted or paused under the conditions specified in NASDAQ Rules 4120 and 4121, including the trading pauses under NASDAQ Rules 4120(a)(11) and (12). Trading may be halted 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 NASDAQ Rule 5705(b)(1)(B), 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 Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. 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 exchange-traded product that will enhance competition among market participants, to the VerDate Mar<15>2010 17:41 Apr 29, 2014 Jkt 232001 benefit of investors and the marketplace. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. For the above reasons, NASDAQ believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. 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 purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of exchange-traded fund 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 Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 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–NASDAQ–2014–038. 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 (http://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– NASDAQ–2014–038 and should be submitted on or before May 21, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.39 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–09807 Filed 4–29–14; 8:45 am] BILLING CODE 8011–01–P Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2014–038 on the subject line. PO 00000 Frm 00103 Fmt 4703 Sfmt 9990 24473 39 17 E:\FR\FM\30APN1.SGM CFR 200.30–3(a)(12). 30APN1

Agencies

[Federal Register Volume 79, Number 83 (Wednesday, April 30, 2014)]
[Notices]
[Pages 24465-24473]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72014; File No. SR-NASDAQ-2014-038]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Proposed Rule Change Relating to the Listing and Trading of 
the Shares of the Reality Shares NASDAQ-100 Isolated Dividend Growth 
Index ETF of the Reality Shares ETF Trust Under Rule 5705

April 24, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 10, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by NASDAQ. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to list and trade the shares of the Reality Shares 
NASDAQ-100 Isolated Dividend Growth Index ETF (the ``Fund'') of the 
Reality Shares ETF Trust (the ``Trust'') under Rule 5705 (Exchange 
Traded Funds: Portfolio Depository Receipts and Index Fund Shares).\3\ 
The shares of the Fund are collectively referred to herein as the 
``Shares.''
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    \3\ The Commission approved NASDAQ's Rule 5705, as well as Rule 
5735 regarding managed fund shares, in Securities Exchange Act 
Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR-
NASDAQ-2008-039).
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    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at NASDAQ's principal office, 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, NASDAQ included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

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 the Shares of the Fund 
under NASDAQ Rule 5705(b), which governs the listing and trading of 
Index Fund Shares \4\ on the Exchange. The Fund is an exchange-traded 
fund (``ETF'') which seeks to track the performance of an underlying 
index, as discussed herein.\5\

[[Page 24466]]

The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on March 26, 2013. The Trust will be 
registered with the Commission as an open-end management investment 
company.\6\ The Fund is a series of the Trust.
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    \4\ Index Fund Shares that are issued by an open-end investment 
company and listed and traded on the Exchange under NASDAQ Rule 5705 
seek to provide investment results that correspond generally to the 
price and yield performance of a specific foreigh or domestic stock 
index, fixed income securities index or combination thereof. See 
Rule 5705(b)(1)(A).
    \5\ The Exchange notes that its proposal to list shares of the 
Fund which tracks the performance of an index of U.S. exchange 
listed options is similar to the proposal and resultant order issued 
to the NYSE ARCA to list and trade under NYSE Arca Equities Rule 
5.2(j)(3) (which is similar to NASDAQ Rule 5705(b)) Investment 
Company Units based on indexes of U.S. exchange listed options. See 
Securities Exchange Act Release Nos. 68667 (January 16, 2013), 78 FR 
4955 (January 23, 2013) (SR-NASDAQ-2012-109) (order approving 
listing and trading of U.S. Equity High Volatility Put Write Index 
Fund); and 69373 (April 15, 2013), 78 FR 23601 (April 19, 2913) (SR-
NYSEArca-2012-108) (order approving listing and trading of NYSE Arca 
U.S. Equity Synthetic Reverse Convertible Index Fund). The Exchange 
believes the proposed rule change does not raise any significant 
issues not previously addressed in those prior Commission orders.
    \6\ The Trust will be registered under the Investment Company 
Act of 1940 (15 U.S.C. 80a-1) (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 (File Nos. 333-192288 and 
811-22911), as amended by Pre-Effective Amendment Number 1, filed 
with the Commission on February 6, 2014 (the ``Registration 
Statement''). The descriptions of the Fund and the Shares contained 
herein are based, in part, on information in the Registration 
Statement. In addition, the Commission has issued an order, upon 
which the Trust may rely, granting certain exemptive relief under 
the 1940 Act. See Investment Company Act Release No. 30678 August 
27, 2013 (the ``Exemptive Order''). Investments made by the Fund 
will comply with the conditions set forth in the Exemptive Order.
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    Reality Shares Advisors, LLC will be the investment adviser 
(``Adviser'') to the Fund. ALPS Distributors, Inc. (the 
``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. The Bank of New York Mellon (``BNY'') will act as 
the administrator, accounting agent, custodian and transfer agent to 
the Fund.
    As described in more detail below, the Fund will seek long-term 
capital appreciation by tracking the Reality Shares NASDAQ-100 Isolated 
Dividend Growth Index (the ``Index''). The Index measures market 
expectations for dividend growth of the companies included in the 
NASDAQ-100 Index.\7\ The Index consists of options on the NASDAQ-100 
Index and options on ETFs designed to track the NASDAQ-100 Index. All 
options included in the Index will be listed and traded on a U.S. 
national securities exchange. The Index will consist of a minimum of 20 
components.
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    \7\ The NASDAQ-100 Index is an index of 100 of the largest 
domestic and international securities (based on market 
capitalization) listed on The NASDAQ Stock Market. The NASDAQ-100 
Index includes companies across major industry groups, including 
computer hardware and software, telecommunications, retail/wholesale 
trade and biotechnology, and excludes securities of financial 
companies.
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    Paragraph (b)(5)(A)(i) of Rule 5705 states that if an index is 
maintained by a broker-dealer or fund advisor, the broker-dealer or 
fund advisor shall erect a ``fire wall'' around the personnel who have 
access to information concerning changes and adjustments to the index. 
If the investment adviser to the investment company issuing Index 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 and/or changes to such investment company portfolio.\8\ In 
addition, paragraph (b)(5)(A)(iii) requires that any advisory 
committee, supervisory board, or similar entity that advises a 
Reporting Authority \9\ or that makes decisions on index composition, 
methodology and related matters, must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material non-public information regarding the applicable index.
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    \8\ 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.
    \9\ Rule 5705(b)(1)(C).
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    The Adviser is not a broker-dealer and is not affiliated with any 
broker-dealers. The Index was developed by Reality Shares, Inc., the 
parent company of the Adviser, in conjunction with The NASDAQ OMX 
Group, Inc., and is maintained by Reality Shares, Inc. (the ``Index 
Provider'').\10\ The Index Provider is not a broker-dealer and is not 
affiliated with any broker-dealers.\11\ In the event (a) the Adviser, 
any sub-adviser or the Index Provider becomes registered as a broker-
dealer or is newly affiliated with a broker dealer, or (b) any new 
adviser, sub-adviser or Index Provider is a registered broker-dealer or 
becomes affiliated with a broker dealer, the Adviser, sub-adviser or 
Index Provider will implement a fire wall with respect to its relevant 
personnel and/or such broker dealer affiliate, as applicable, 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 does not currently intend to use a sub-adviser.
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    \10\ The Index will be calculated by International Data 
Corporation (``IDC''), which is not affiliated with the Adviser, 
Index Provider or The NASDAQ OMX Group, and which is not a broker-
dealer or fund advisor.
    \11\ The Adviser and the Index Provider have represented that a 
fire wall exists around the respective personnel who have access to 
information concerning changes and adjustments to the Index.
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    The Exchange is submitting this proposed rule change because the 
Index for the Fund does not meet all of the ``generic'' listing 
requirements of paragraph (b)(3)(A)(i) of Rule 5705 applicable to the 
listing of Index Fund Shares based upon an index of ``US Component 
Stocks.'' \12\ Specifically, Rule 5705(b)(3)(A)(i) sets forth the 
requirements to be met by components of an index or portfolio of US 
Component Stocks. As described in more detail herein, the Index will 
consist primarily of U.S. exchange-listed and traded options on the 
NASDAQ-100 Index and U.S. exchange-listed and traded options on ETFs 
that track the NASDAQ-100 Index.\13\ The Fund may also invest up to 20% 
of its total assets in other securities such as over-the-counter 
(``OTC'') options, futures, and forward contracts on the NASDAQ-100 
Index and OTC options, futures and forward contracts on ETFs that track 
the

[[Page 24467]]

NASDAQ-100 Index. The Exchange has represented that the Shares will 
conform to the initial and continued requirements of listing criteria 
under Rule 5705(b), except to the extent that the Index is comprised of 
options based on U.S. Component Stocks (i.e., ETFs based on the NASDAQ 
100 Index) and options on an index of U.S. Component Stocks (i.e., the 
NASDAQ-100 Index).
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    \12\ Paragraph (b)(1)(D) of Rule 5705 states that the term ``US 
Component Stock'' shall mean an equity security that is registered 
under Sections 12(b) or 12(g) of the Exchange Act, or an American 
Depositary Receipt, the underlying equity security of which is 
registered under Sections 12(b) or 12(g) of the Act. Rule 
5705(b)(1)(D).
    \13\ Paragraph (b)(3)(A)(i) of Rule 5705 states, in relevant 
part, that upon the initial listing of a series of Index Fund Shares 
pursuant to 19b-4(e) under the Act, all securities in the index or 
portfolio shall be U.S. Component Stocks listed on NASDAQ (including 
The NASDAQ Capital Market) or another national securities exchange 
and shall be NMS Stocks as defined in Rule 600 of Regulation NMS 
under the Act. Each component stock of the NASDAQ-100 Index is a 
U.S. Component Stock that is listed on a national securities 
exchange and is an NMS Stock. Options are excluded from the 
definition of NMS Stock. The Fund and the Index meet all of the 
requirements of the listing standards for Index Fund Shares in Rule 
5705 except the requirements in 5705(b)(3)(A)(i)(a)-(e), as the 
Index consists of options on U.S. Component Stocks. The NASDAQ-100 
Index consists of Component Stocks and satisfies the requirements of 
Commentary [sic] 5705(b)(3)(A)(i)(a)-(e).
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Reality Shares NASDAQ-100 Isolated Dividend Growth Index ETF
Principal Investments
    According to the Registration Statement, the Fund will seek long-
term capital appreciation and will seek investment results that, before 
fees and expenses, generally correspond to the performance of the 
Index. At least 80% of the Fund's total assets (exclusive of collateral 
held from securities lending, if any) will be invested in the component 
securities of the Index. The Fund will seek a correlation of 0.95 or 
better between its performance and the performance of its Index. A 
figure of 1.00 would represent perfect correlation. The Fund generally 
will use a representative sampling investment strategy.
    The Fund will buy (i.e., hold a ``long'' position in) and sell 
(i.e., hold a ``short'' position in) put and call options. The Fund has 
a 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. This 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 will buy and sell U.S. exchange-listed options on the 
NASDAQ-100 Index and U.S. exchange-listed options on ETFs designed to 
track the NASDAQ-100 Index. 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 will 
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 expected 
dividends reflected in options on the NASDAQ-100 Index and options on 
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's 
exposure to changes in the trading price of such securities.
Index Methodology
    The Index will be calculated using a proprietary, rules-based 
methodology designed to track market expectations for dividend growth 
conveyed in real-time using the mid-point of the bid-ask spread on 
NASDAQ-100 Index options and options on ETFs designed to track the 
NASDAQ-100 Index.\14\ All options included in the Index will be listed 
and traded on a U.S. national securities exchange. The Index will 
consist of a minimum of 20 components.\15\
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    \14\ There is no guarantee that either the level of overall 
dividends paid by such companies will grow over time, or that the 
Index or Fund's investment strategies will capture such growth. The 
Fund will include appropriate risk disclosure in its offering 
documents disclosing these risks, which will be available for free 
on the SEC's Web site and on the Fund's Web site, 
www.realityshares.com.
    \15\ Rule 5705(b)(3).
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    The prices of index and ETF options reflect the market trading 
prices of the securities included in the applicable underlying index or 
ETF, as well as market expectations regarding the level of dividends to 
be paid on such indexes or ETFs during the term of the option. The 
Index constituents, and therefore most of the Fund's portfolio 
holdings, will consist of multiple corresponding near-term and long-
term put and call option combinations on the same reference assets 
(i.e., options on the NASDAQ-100 Index or the NASDAQ-100 ETF) with the 
same strike price. Because option prices reflect both stock price and 
dividend expectations, they can be used in combination to isolate 
either price exposure or dividend expectations. The use of near-term 
and long-term put and call option combinations on the same reference 
asset with the same strike price, but with different maturities, is 
designed to gain exposure to the expected dividends of the securities 
in the NASDAQ-100 Index while neutralizing the impact of the stock 
price.
    Once established, this portfolio construction of option 
combinations will accomplish two goals. First, the use of corresponding 
buy or sell positions on near and long-term options at the same strike 
price is designed to neutralize underlying stock price movements. In 
other words, the corresponding ``buy'' and ``sell'' positions on the 
same reference asset are designed to net against each other and 
eliminate the impact that changes to the stock price of the reference 
asset would otherwise have on the value of the Index (and Fund). 
Second, by minimizing the impact of price fluctuations through the 
construct of the near- and long-term contract combinations, the 
strategy is designed to isolate market expectations for dividends 
implied between the expiration dates of the near-term and long-term 
option contracts. Over time, the Index will increase or decrease in 
value as the dividend spread between the near-term and long-term option 
combinations increases or decreases as a result of changing market 
expectations for dividend growth.
Other Fund Investments
    While, as described above, at least 80% of the Fund's total assets 
(exclusive of collateral held from securities lending, if any) will be 
invested in the component securities of the Index, the Fund may invest 
up to 20% of the Fund's total assets in other securities and financial 
instruments, as described below.
    The Fund may invest in U.S. exchange-listed futures contracts on 
the NASDAQ-100 Index and ETFs designed to track the NASDAQ-100 Index 
and may invest in forward contracts on the NASDAQ-100 Index and ETFs 
designed to track the NASDAQ-100 Index. The Fund's use of exchange-
listed futures contracts and forward contracts is designed to allow the 
Fund to isolate its exposure to the growth of the level of expected 
dividends reflected in options on the NASDAQ-100 Index and options on 
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's 
exposure to changes in the trading price of such securities. The Fund 
may also buy and sell OTC options on the NASDAQ-100 Index and on ETFs 
designed to track the NASDAQ-100 Index.
    The Fund may enter into dividend and total return swap transactions 
(including equity swap transactions) based on the NASDAQ-100 Index and 
ETFs designed to track the NASDAQ-100 Index.\16\ 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

[[Page 24468]]

dividend swap transaction, the Fund 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 transaction, 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.
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    \16\ The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.
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    The Fund may invest up to 20% of its assets (exclusive of 
collateral held from securities lending, if any) in exchange-listed 
equity securities and derivative instruments (specifically, futures 
contracts, forward contracts and swap transactions) \17\ relating to 
the Index and its component securities that the Adviser believes will 
help the Fund track the Index. For example, the Fund may buy and sell 
ETFs and, to a limited extent, individual large-capitalization equity 
securities listed and traded on a U.S. national securities exchange.
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    \17\ 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 may invest in the securities of other investment companies 
(including money market funds) to the extent permitted under the 1940 
Act.
    The Fund's short positions and its investments in swaps, futures 
contracts, forward contracts and options based on the NASDAQ-100 Index 
and ETFs designed to track the NASDAQ-100 Index will be backed by 
investments in cash, high-quality, short-term debt securities and 
money-market instruments in an amount equal to the Fund's maximum 
liability under the applicable position or contract or will otherwise 
be offset in accordance with Section 18 of the 1940 Act. Short-term 
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 
\18\ and bonds that are rated BBB or higher.
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    \18\ 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.
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    In addition to the investments described above, and in a manner 
consistent with its investment objective, the Fund may invest a limited 
portion of its net assets in high-quality, short-term debt securities 
and money market instruments for cash management purposes.\19\
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    \19\ The Fund may invest in shares of money market mutual funds 
to the extent permitted by the 1940 Act.
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    The Fund will attempt to limit counterparty risk in non-cleared 
swap, forward and OTC option contracts by entering into such 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.\20\
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    \20\ 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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    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.\21\
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    \21\ 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.
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Investment Restrictions
    To the extent the Index concentrates (i.e., holds 25% or more of 
its total assets) in the securities of a particular industry or group 
of industries, the Fund will concentrate its investments to 
approximately the same extent as the Index.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) 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 Nos. [sic] 28193 (March 11, 
2008), 73 FR 14618 (March 18, 2008), footnote 34. See also 
Investment Company Act Release Nos. 5847 (October 21, 1969), 35 FR 
19989 (December 31, 1970) (Statement Regarding ``Restricted 
Securities''); and 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 Nos. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); and 17452 (April 23, 
1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the 
1933 Act).
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    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans

[[Page 24469]]

continuously be collateralized by cash, liquid securities, or shares of 
other investment companies with a value at least equal to the market 
value of the loaned securities. The Fund will be classified as a ``non-
diversified'' investment company under the 1940 Act.\24\
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    \24\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
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    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\
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    \25\ 26 U.S.C. 851 et seq.
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    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 Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares only in Creation Units at the net asset value (``NAV'') 
\26\ next determined after receipt of an order on a continuous basis 
every business day. The NAV of the Fund will be determined once each 
business day, normally as of the close of trading of the Exchange, 
generally, 4:00 p.m. Eastern Time. Creation Unit sizes will be 25,000 
Shares per Creation Unit. The Trust will issue and sell Shares of the 
Fund only in Creation Units on a continuous basis through the 
Distributor, without a sales load (but subject to transaction fees), at 
their NAV per Share next determined after receipt of an order, on any 
business day, in proper form pursuant to the terms of the Authorized 
Participant agreement (as referred to below).
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    \26\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of the Regular 
Market Session on the Exchange, generally 4:00 or 4:15 p.m. Eastern 
time (the ``NAV Calculation Time''). NAV per Share will be 
calculated by dividing the Fund's net assets by the number of Fund 
Shares outstanding. For more information regarding the valuation of 
Fund investments in calculating the Fund's NAV, see Registration 
Statement.
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    The consideration for purchase of a Creation Unit 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 all or a portion of the Deposit Securities (``Deposit 
Cash'') and the ``Cash Component,'' computed as described below. 
Because non-exchange traded derivatives and certain listed derivatives 
are not currently 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 exchange-traded options, OTC 
options, exchange-traded futures, 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 will constitute the ``Fund Deposit,'' which 
represents the minimum initial and subsequent investment amount for a 
Creation Unit of the Fund. The ``Cash Component'' will be 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 will serve the function of 
compensating for any difference 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) \27\ containing a list of the names 
and the required amount 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.
---------------------------------------------------------------------------

    \27\ See NASDAQ Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m. Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m. Eastern time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m. Eastern time).
---------------------------------------------------------------------------

    The Fund Deposit will be 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 will 
reserve the right to accept a non-conforming 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.\28\ Because non-exchange 
traded derivatives and certain listed 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 exchange-traded options,

[[Page 24470]]

OTC options, exchange-traded futures, 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.
---------------------------------------------------------------------------

    \28\ 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 Exchange is closed 
(other than customary weekend and holiday closings); (ii) for any 
period during which trading on the Exchange 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 will 
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 
applicable) will be imposed to offset transfer and other transaction 
costs that may be incurred by the Fund.
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 Exchange (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, a third-
party 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, a third-party pricing service, or a major market maker 
(or dealer) or (iii) based on amortized cost. The Trust may use various 
third-party pricing services, or discontinue the use of any third-party 
pricing service, as determined by the Trust's Board of Trustees from 
time to time.
    The Trust will generally value exchange-listed securities (which 
include common stocks and ETFs), exchange-listed options, and options 
on the NASDAQ-100 Index or NASDAQ-100 ETFs at market closing prices; 
or, if market closing prices are not available, then the midpoint 
between the last reported bid and ask. Market closing price is 
generally determined on the basis of last reported sales prices on the 
applicable exchange, or if no sales are reported, based on the last 
reported quotes. The Trust will generally value exchange-listed futures 
at the settlement price determined by the applicable exchange. Non-
exchange-traded derivatives, including OTC options, swap transactions 
and forward transactions, will normally be valued on the basis of 
quotations or equivalent indication of value supplied by a third-party 
pricing service or major market makers or dealers. Debt securities and 
money market instruments generally will be valued based on prices 
provided by third-party pricing services, which may use valuation 
models or matrix pricing to determine current value. Investment company 
securities (other than ETFs) will be valued at NAV. The Trust generally 
will use amortized cost to value fixed income or money market 
securities that have a remaining maturity of 60 days or less. In the 
event that current market valuations are not readily available or such 
valuations do not reflect current market value, the Trust's procedures 
require the Adviser's Pricing Committee to determine a security's fair 
value in accordance with the 1940 Act.\29\ In determining such value 
the Adviser's Pricing Committee 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. 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.
---------------------------------------------------------------------------

    \29\ The Valuation Committee of the Trust Board will be 
responsible for the oversight of the pricing procedures of the Fund 
and the valuation of the Fund's portfolio. The Valuation Committee 
has delegated day-to-day pricing responsibilities to the Adviser's 
Pricing Committee, which will be composed of officers of the 
Adviser. The Pricing Committee will be responsible for the valuation 
and revaluation 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 and 
revaluation 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, as well as a 
description of the rules and methodology applicable to the Fund. 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 NAV, mid-point of the bid/ask spread at the 
time of calculation of such NAV (the ``Bid/Ask Price''),\30\ 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.
---------------------------------------------------------------------------

    \30\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of such Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
---------------------------------------------------------------------------

    On each business day, before commencement of trading in Shares in 
the Regular Market Session on the Exchange, the Fund will disclose on 
its Web site the identities and quantities of the portfolio of 
securities and other assets (the ``Disclosed Portfolio'') held by the 
Fund that will form the basis for the Fund's calculation of NAV at the 
end of the business day.\31\
---------------------------------------------------------------------------

    \31\ 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''). 
Notwithstanding the foregoing, portfolio trades that are executed 
prior to the opening of the Exchange on any business day may be 
booked and reflected in NAV on such business day. 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.
---------------------------------------------------------------------------

    On a daily basis, the Adviser, on behalf of the Fund, will disclose 
on the Fund's Web site the following information regarding each 
portfolio holding, as applicable to the type of holding: ticker symbol, 
CUSIP number or other identifier, if any; a description of the holding 
(including the type of holding, such as the type of swap); the identity 
of the security, commodity, index, or other asset or instrument 
underlying the holding, if any; for

[[Page 24471]]

options, the option strike price; quantity held (as measured by, for 
example, par value, notional value or number of shares, contracts or 
units); maturity date, if any; coupon rate, if any; effective date, if 
any; market value of the holding; and the percentage weighting of the 
holdings in the Fund's portfolio. The Web site information will be 
publicly available at no charge.
    In addition, for the Fund, an estimated value, defined in Rule 
5705(b)(3)(C) as the ``Intraday Indicative Value,'' will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
NASDAQ OMX Information LLC proprietary index data service,\32\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated and broadly 
displayed at least every 15 seconds during the Regular Market Session 
(currently 9:30 a.m. Eastern time). The Intraday Indicative Value will 
be based on quotes and closing prices from the assets' local market and 
may not reflect events that occur subsequent to the local market's 
close. Premiums and discounts between the Intraday Indicative Value and 
the market price may occur. This should not be viewed as a ``real 
time'' update of the NAV per Share of the Fund, which is calculated 
only once a day.
---------------------------------------------------------------------------

    \32\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service, 
offering real-time updates, daily summary messages, and access to 
widely followed indexes and Intraday Indicative Values for ETFs. 
GIDS provides investment professionals with the daily information 
needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-
party partner indexes and ETFs.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, 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.
    Intra-day, executable price quotations on the securities and other 
assets held by the Fund will be available from major broker-dealer 
firms or on the exchange on which they are traded, as applicable. 
Intra-day price information will also be available through subscription 
services, such as Bloomberg, Markit and Thomson Reuters, which can be 
accessed by Authorized Participants and other investors. Specifically, 
the intra-day, closing and settlement prices of the portfolio 
securities and other Fund investments, including exchange-listed equity 
securities (which include common stocks and ETFs), exchange-listed 
futures, and exchange-listed options, will 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 and 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.
    In addition, a basket composition file, which includes the security 
names and quantities, as applicable, 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 
NASDAQ via NSCC. The basket will represent one Creation Unit of the 
Fund.
    Investors will also be able to obtain the Fund's Statement of 
Additional Information (``SAI''), the Fund's annual and semi-annual 
reports (together, ``Shareholder Reports''), and its Form N-CSR and 
Form N-SAR, filed twice a year. The Fund's SAI and Shareholder Reports 
will be available free upon request from the Fund, 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 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 NASDAQ 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association plans 
for the Shares and any underlying exchange-traded products. The value 
of the Index will be published by one or more major market data vendors 
every 15 seconds during the Regular Market Session. Information about 
the Index constituents, the weighting of the constituents, the Index's 
methodology and the Index's rules will be available at no charge on the 
Index Provider's Web site at www.realityshares.com.
    In addition, for the Fund, an estimated value, defined in Rule 
5705(b)(3)(C) as the ``Intraday Indicative Value,'', [sic] will be 
disseminated. Additional information regarding the Fund and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, Fund 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.
Initial and Continued Listing
    The Shares will be subject to Rule 5705, which sets forth the 
initial and continued listing criteria applicable to Index Fund Shares. 
The Exchange represents that, for initial and/or continued listing, the 
Fund must be in compliance with Rule 10A-3 \33\ under the Act. A 
minimum of 100,000 Shares will be outstanding at the commencement of 
trading on the Exchange. The Exchange will obtain a representation from 
the issuer of the Shares that the NAV 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.
---------------------------------------------------------------------------

    \33\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts and Trading Pauses
    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. NASDAQ will halt or pause trading in 
the Shares under the conditions specified in NASDAQ Rules 4120 and 
4121, including the trading pauses under NASDAQ Rules 4120(a)(11) and 
(12). Trading 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 
constituting 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 also will be 
subject to Rules 5705(b)(1)(B) and 5705(b)(9)(B), which sets forth 
circumstances under which Shares of the Fund may be halted.
    If the IIV, the Index Value or the value of the Index Components is 
not being disseminated as required, the Exchange may halt trading 
during the day in which the disruption occurs; if the interruption 
persists past the day in which it occurred, the Exchange will

[[Page 24472]]

halt trading no later than the beginning of the trading day following 
the interruption. The Exchange will obtain a representation from the 
Fund that the NAV for the Fund will be calculated daily and will be 
made available to all market participants at the same time.
Trading Rules
    NASDAQ deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to NASDAQ's existing rules governing the 
trading of equity securities. NASDAQ will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m. Eastern time. The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. As provided in Rule 4613(a)(2)(I), the minimum 
quotation increment for quotations of $1.00 and above in Shares on the 
Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both NASDAQ and 
also 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 applicable federal securities 
laws.
---------------------------------------------------------------------------

    \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 and in the U.S. exchange-traded 
options, exchange-traded futures, exchange-traded equities, and 
exchange-traded investment company securities which the Fund will buy 
or write with other markets. FINRA may obtain trading information 
regarding trading in the Shares and in such U.S. exchange-traded 
options from such markets and other entities. In addition, the Exchange 
may obtain information regarding trading in the Shares, and in 
exchange-traded securities from markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG'') or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.\35\ The Exchange may also obtain information from the Trade 
Reporting and Compliance Engine (``TRACE''), which is the FINRA 
developed vehicle that facilitates mandatory reporting of OTC secondary 
market transactions in eligible fixed income securities.\36\
---------------------------------------------------------------------------

    \35\ A list of ISG members, which includes all U.S. national 
securities exchanges and certain foreign exchanges, and which 
enables ISG members to share surveillance data regarding trades on 
the respective member exchanges, is available at www.isgportal.org.
    \36\ All broker/dealers who are FINRA member firms have an 
obligation to report transactions in corporate bonds to TRACE.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) NASDAQ Rule 2111A, which imposes 
suitability obligations on NASDAQ members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Index Value and Intraday Indicative Value will be disseminated; (4) 
the risks involved in trading the Shares during the Pre-Market and 
Post-Market Sessions when an updated Index Value and Intraday 
Indicative Value will not be calculated or publicly disseminated; (5) 
the requirement that members 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 Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from the Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the 
Distributor's Web site.
2. Statutory Basis
    NASDAQ believes that the proposal is consistent with Section 6(b) 
of the Act \37\ in general and Section 6(b)(5) of the Act \38\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f.
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 NASDAQ Rule 5705, except that 
the Index will consist of options based on U.S. Component Stocks (i.e., 
ETFs based on the NASDAQ-100 Index) and options on an index of U.S. 
Component Stocks (i.e., the NASDAQ-100 Index), rather than U.S. 
Component Stocks themselves. The Exchange believes that its 
surveillance procedures are adequate to properly monitor the trading of 
the Shares on NASDAQ during all trading sessions and to deter and 
detect violations of Exchange rules and the applicable federal 
securities laws.
    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 will be publicly available regarding the Fund and the 
Shares, thereby promoting market transparency. The Intraday Indicative 
Value, available on the NASDAQ OMX Information LLC

[[Page 24473]]

proprietary index data service, will be widely disseminated by one or 
more major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. On each business day, before 
commencement of trading in Shares in the Regular Market Session on the 
Exchange, the Fund will disclose on the Distributor's 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 for 
the Shares will also be available via NASDAQ proprietary quote and 
trade services, as well as in accordance with the Unlisted Trading 
Privileges and the Consolidated Tape Association plans for the Shares 
and any underlying exchange-traded products. Intra-day, executable 
price quotations of the securities and other assets held by the Fund 
will be available from major broker-dealer firms or on the exchange on 
which they are traded, if applicable. Intra-day price information will 
also be available through subscription services, such as Bloomberg, 
Markit and Thomson Reuters, which can be accessed by Authorized 
Participants and other investors.
    The Distributor's Web site for the Fund will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information. Trading in Shares of the Fund will 
be halted or paused under the conditions specified in NASDAQ Rules 4120 
and 4121, including the trading pauses under NASDAQ Rules 4120(a)(11) 
and (12). Trading may be halted 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 NASDAQ Rule 
5705(b)(1)(B), 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 Intraday 
Indicative Value, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.
    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 exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace. In addition, as noted above, investors will have ready 
access to information regarding the Fund's holdings, the Intraday 
Indicative Value, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.
    For the above reasons, NASDAQ believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

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 purposes of the Act. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of exchange-traded fund 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-038 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-NASDAQ-2014-038. 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 (http://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-NASDAQ-2014-038 and should 
be submitted on or before May 21, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09807 Filed 4-29-14; 8:45 am]
BILLING CODE 8011-01-P