Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to Listing and Trading of Shares of Reality Shares Isolated Dividend Growth Index ETF Under NYSE Arca Equities Rule 5.2(j)(3), 24475-24483 [2014-09808]
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Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices
2014–15 and should be submitted on or
before May 21, 2014.
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
IV. Solicitation of Comments
[FR Doc. 2014–09806 Filed 4–29–14; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MIAX–2014–15 on the subject line.
Paper Comments
mstockstill on DSK4VPTVN1PROD with NOTICES
• 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–MIAX–2014–15. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of MIAX. 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–MIAX–
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72015; File No. SR–
NYSEArca–2014–41]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Relating to Listing and
Trading of Shares of Reality Shares
Isolated Dividend Growth Index ETF
Under NYSE Arca Equities Rule
5.2(j)(3)
April 24, 2014.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on April 11,
2014, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of the following under
NYSE Arca Equities Rule 5.2(j)(3)
(‘‘Investment Company Units’’): Reality
Shares Isolated Dividend Growth Index
ETF. The text of the proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
PO 00000
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24475
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade shares (‘‘Shares’’) of the following
under NYSE Arca Equities Rule 5.2(j)(3),
which governs the listing and trading of
Investment Company Units on the
Exchange: Reality Shares Isolated
Dividend Growth Index ETF (the
‘‘Fund’’).4 The Shares of the Fund will
be offered by the Reality Shares ETF
Trust (formerly, the ERNY Financial
ETF Trust) (the ‘‘Trust’’). The Trust will
be registered with the Commission as an
open-end management investment
company.5 Reality Shares Advisors, LLC
(formerly, ERNY Financial Advisors,
LLC) will serve as the investment
adviser to the Fund (the ‘‘Adviser’’).
ALPS Distributors, Inc. (the
‘‘Distributor’’) will be the principal
underwriter and distributor of the
Fund’s Shares. The Bank of New York
Mellon (the ‘‘Administrator,’’ ‘‘Transfer
Agent’’ or ‘‘Custodian’’) will serve as
administrator, custodian and transfer
agent for the Fund.
As described in more detail below,
the Fund will seek long-term capital
appreciation by tracking the
performance of the Reality Shares
Isolated Dividend Growth Index (the
‘‘Index’’). The Index was developed and
is maintained by Reality Shares, Inc.
4 NYSE Arca Equities Rule 5.2(j)(3)(A) provides
that an Investment Company Unit is a security that
represents an interest in a registered investment
company that holds securities comprising, or
otherwise based on or representing an interest in,
an index or portfolio of securities (or holds
securities in another registered investment
company that holds securities comprising, or
otherwise based on or representing an interest in,
an index or portfolio of securities).
5 The Trust will be registered under the
Investment Company Act of 1940 (the ‘‘1940 Act’’)
(15 U.S.C. 80a–1). On February 6, 2014, the Trust
filed a registration statement on Form N–1A under
the Securities Act of 1933 (the ‘‘1933 Act’’) (15
U.S.C. 77a), and under the 1940 Act relating to the
Fund, as amended by Pre-Effective Amendment
Number 1, filed with the Commission on February
6, 2014 (File Nos. 333–192288 and 811–22911) (the
‘‘Registration Statement’’). The description of the
operation of the Trust and the Fund herein is based,
in part, on the Registration Statement. In addition,
the Commission has issued an order granting
certain exemptive relief to the Trust under the 1940
Act. Investment Company Act Release No. 30678
(August 27, 2013) (‘‘Exemptive Order’’).
Investments made by the Fund will comply with
the conditions set forth in the Exemptive Order.
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(the ‘‘Index Provider’’).6 The Adviser is
a wholly-owned subsidiary of the Index
Provider.
Commentary .01(b)(1) to Rule 5.2(j)(3)
provides that, if the applicable index is
maintained by a fund advisor or a
broker-dealer, such fund advisor or
broker-dealer shall erect a ‘‘fire wall’’
around the personnel who have access
to information concerning changes and
adjustments to the index, and the index
shall be calculated by a third party who
is not a broker-dealer or fund advisor.7
The Index Provider is not registered as
an investment adviser or broker dealer
and is not affiliated with any brokerdealers. The Adviser is not registered as
a broker-dealer and is not affiliated with
any broker-dealers.8 In the event (a) the
Adviser, any sub-adviser or the Index
Provider becomes registered as a brokerdealer or newly affiliated with a brokerdealer, or (b) any new adviser, subadviser or Index Provider is a registered
broker-dealer or becomes affiliated with
a broker-dealer, they will implement a
fire wall with respect to their relevant
personnel or broker-dealer affiliate
regarding access to information
concerning the composition and/or
changes to the portfolio, and will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio.
The Exchange is submitting this
proposed rule change because the Index
6 The Index will be calculated by International
Data Corporation (‘‘IDC’’), which is not affiliated
with the Adviser or Index Provider, and which is
not a broker-dealer or fund advisor.
7 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.
8 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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for the Fund does not meet all of the
‘‘generic’’ listing requirements of
Commentary .01(a)(A) to NYSE Arca
Equities Rule 5.2(j)(3) applicable to the
listing of Investment Company Units
based upon an index of ‘‘US Component
Stocks’’.9 Specifically, Commentary
.01(a)(A) to NYSE Arca Equities Rule
5.2(j)(3) sets forth the requirements to be
met by components of an index or
portfolio of US Component Stocks. As
discussed in more detail herein, the
Index is calculated using a proprietary,
rules-based methodology designed to
track market expectations for dividend
growth conveyed in real-time using bidask prices on exchange-listed S&P 500
Index options and exchange-listed
options on exchange traded funds
(‘‘ETFs’’) designed to track the S&P 500
Index.10 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 S&P 500 Index and
OTC options, futures and forward
contracts on ETFs that track the S&P 500
Index. Because the Index will consist
primarily of S&P 500 Index options and
options on ETFs designed to track the
S&P 500 Index, and not US Component
Stocks, the Index does not satisfy the
requirements of Commentary
.01(a)(A).11
9 NYSE Arca Equities Rule 5.2(j)(3) defines the
term ‘‘US Component Stock’’ to mean an equity
security that is registered under Sections 12(b) or
12(g) of the Act or an American Depositary Receipt,
the underlying equity security of which is
registered under Sections 12(b) or 12(g) of the Act.
10 For purposes of this proposed rule change,
such ETFs include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3)) and
Portfolio Depositary Receipts (as described in NYSE
Arca Equities Rule 8.100). The ETFs all will be
listed and traded in the U.S. on registered
exchanges. The Fund may not invest in leveraged
or inverse leveraged (e.g., 2X, –2X, 3X or –3X) ETFs
or options on such ETFs.
11 The Exchange notes that the S&P 500 Index has
been previously approved by the Commission
under Section 19(b)(2) of the Act in connection
with the listing and trading of index options and
Portfolio Depositary Receipts, as well as other
securities. See e.g., Securities Exchange Act Release
Nos. 19907 (June 24, 1983), 48 FR 30814 (July 5,
1983) (approving the listing and trading of options
on the S&P 500 Index); 31591 (December 18, 1992),
57 FR 60253 (December 18, 1992) (approving the
listing and trading of Portfolio Depositary Receipts
based on the S&P 500 Index). NYSE Arca Equities
Rule 5.2(j)(3), Commentary .01(a)(A)(5) provides
that all securities in the applicable index or
portfolio shall be US Component Stocks listed on
a national securities exchange and shall be NMS
Stocks as defined in Rule 600 under Regulation
NMS of the Act. Each component stock of the S&P
500 Index is a US 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 Investment
Company Units in Rule 5.2(j)(3) and the
requirements of Commentary .01, except the
requirements in Commentary .01(a)(A)(1)–(5), as the
Index consists of options on US Component Stocks.
PO 00000
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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
strategy of taking both a long position in
a security through its ex-dividend date
(the last date an investor can own the
security and receive dividends paid on
the security) and a corresponding short
position in the same security
immediately thereafter is designed to
allow the Fund to isolate its exposure to
the growth of the level of dividends
expected to be paid on such security
while minimizing its exposure to
changes in the trading price of such
security.
The Fund will buy and sell U.S.
exchange-listed options on the S&P 500
Index and U.S. exchange-listed options
on ETFs designed to track the S&P 500
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 S&P 500 Index and options on
ETFs tracking the S&P 500 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 realThe S&P 500 Index consists of Component Stocks
and satisfies the requirements of Commentary
.01(a)(A)(1)–(5).
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time using the mid-point of the bid-ask
spread on S&P 500 Index options and
options on ETFs designed to track the
S&P 500 Index.12 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.
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 S&P
500 Index or options on S&P 500 ETFs)
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
reflected in options on the S&P 500
Index and options on ETFs tracking the
S&P 500 Index while neutralizing the
impact of 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 Shares). 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 expiration
dates of the near-term and long-term
option contracts. Over time, the Index
12 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 Commission’s Web
site and on the Fund’s Web site,
www.realityshares.com.
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Jkt 232001
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 based
on the S&P 500 Index and ETFs
designed to track the S&P 500 Index and
forward contracts based on the S&P 500
Index and ETFs designed to track the
S&P 500 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
S&P 500 Index and options on ETFs
tracking the S&P 500 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 S&P 500 Index
and on ETFs designed to track the S&P
500 Index.
The Fund may enter into dividend
and total return swap transactions
(including equity swap transactions)
based on the S&P 500 Index and ETFs
designed to track the S&P 500 Index.13
In a typical swap transaction, one party
agrees to make periodic payments to
another party (‘‘counterparty’’) based on
the change in market value or level of
a specified rate, index, or asset. In
return, the counterparty agrees to make
periodic payments to the first party
based on the return of a different
specified rate, index, or asset. Swap
transactions are usually done on a net
basis, the Fund receiving or paying only
the net amount of the two payments. In
a typical dividend swap transaction, the
Fund would pay the swap counterparty
a premium and would be entitled to
receive the value of the actual dividends
paid on the subject index during the
term of the swap contract. In a typical
total return swap, the Fund might
exchange long or short exposures to the
return of the underlying securities or
index to isolate the value of the
dividends paid on the underlying
13 The Fund will transact only with swap dealers
that have in place an ISDA agreement with the
Fund.
PO 00000
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Sfmt 4703
24477
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) 14 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 S&P 500 Index and ETFs designed
to track the S&P 500 Index will be
backed by investments in cash, highquality 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 15 and bonds that are rated
BBB or higher.
14 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.
15 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
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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, shortterm debt securities and money market
instruments for cash management
purposes.16 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 and bonds that are rated
BBB or higher.
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.17
The Fund’s investments in swaps,
futures contracts, forward contracts and
options will be consistent with the
Fund’s investment objective and with
the requirements of the 1940 Act.18
and the fund is delayed or prevented from
exercising its rights to dispose of the collateral
securities.
16 The Fund may invest in shares of money
market mutual funds to the extent permitted by the
1940 Act.
17 The Fund will seek, where possible, to use
counterparties, as applicable, whose financial status
is such that the risk of default is reduced; however,
the risk of losses resulting from default is still
possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser will evaluate each approved
counterparty using various methods of analysis,
such as, for example, the counterparty’s liquidity in
the event of default, the counterparty’s reputation,
the Adviser’s past experience with the
counterparty, and the counterparty’s share of
market participation.
18 To limit the potential risk associated with such
transactions, the Fund will segregate or ‘‘earmark’’
assets determined to be liquid by the Adviser in
accordance with procedures established by the
Trust’s Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to
cover its obligations arising from such transactions.
These procedures have been adopted consistent
with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Fund will
include appropriate risk disclosure in its offering
documents, including leveraging risk. Leveraging
risk is the risk that certain transactions of the Fund,
including the Fund’s use of derivatives, may give
rise to leverage, causing the Fund to be more
volatile than if it had not been leveraged. To
mitigate leveraging risk, the Adviser will segregate
or ‘‘earmark’’ liquid assets or otherwise cover the
transactions that may give rise to such risk.
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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.19 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.20
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
19 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).
20 The Commission has stated that long-standing
Commission guidelines have required open-end
funds to hold no more than 15% of their net assets
in illiquid securities and other illiquid assets. See
Investment Company Act Release No. 28193 (March
11, 2008), 73 FR 14618 (March 18, 2008), footnote
34. See also, Investment Company Act Release No.
5847 (October 21, 1969), 35 FR 19989 (December
31, 1970) (Statement Regarding ‘‘Restricted
Securities’’); Investment Company Act Release No.
18612 (March 12, 1992), 57 FR 9828 (March 20,
1992) (Revisions of Guidelines to Form N–1A). A
fund’s portfolio security is illiquid if it cannot be
disposed of in the ordinary course of business
within seven days at approximately the value
ascribed to it by the fund. See Investment Company
Act Release No. 14983 (March 12, 1986), 51 FR
9773 (March 21, 1986) (adopting amendments to
Rule 2a–7 under the 1940 Act); Investment
Company Act Release No. 17452 (April 23, 1990),
55 FR 17933 (April 30, 1990) (adopting Rule 144A
under the 1933 Act).
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to agreements requiring that the loans
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 ‘‘nondiversified’’ investment company under
the 1940 Act.21
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.22
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.
Creation and Redemption of Shares
According to the Registration
Statement, the Fund will issue and
redeem Shares only in Creation Units at
the net asset value (‘‘NAV’’) next
determined after receipt of an order on
a continuous basis every business day.
Creation Unit size is 25,000 Shares per
Creation Unit. The Creation Unit size for
the Fund may change.
The consideration for purchase of a
Creation Unit of the Fund generally will
consist of either (i) the in-kind deposit
of a designated portfolio of securities
(the ‘‘Deposit Securities’’) per each
Creation Unit and the ‘‘Cash
Component’’ (defined below), computed
as described below or (ii) the cash value
of the Deposit Securities (‘‘Deposit
Cash’’) and the ‘‘Cash Component,’’
computed as described below. Because
non-exchange traded derivatives 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 inkind purchaser. Together, the Deposit
Securities or Deposit Cash, as
applicable, and the Cash Component
constitute the ‘‘Fund Deposit,’’ which
represents the minimum initial and
21 The diversification standard is set forth in
Section 5(b)(1) of the 1940 Act.
22 26 U.S.C. 851 et seq.
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subsequent investment amount for a
Creation Unit of the Fund. The Cash
Component is an amount equal to the
difference between the NAV of the
Shares (per Creation Unit) and the
market value of the Deposit Securities or
Deposit Cash, as applicable. The Cash
Component serves the function of
compensating for any differences
between the NAV per Creation Unit and
the market value of the Deposit
Securities or Deposit Cash, as
applicable.
A portfolio composition file, to be
sent via the National Securities Clearing
Corporation (‘‘NSCC’’), will be made
available on each business day, prior to
the opening of business on the Exchange
(currently 9:30 a.m., Eastern time)
containing a list of the names and the
required 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.
The Fund Deposit will be applicable
for purchases of Creation Units of the
Fund until such time as the nextannounced 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
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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.23 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,
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 New York Stock Exchange
(‘‘NYSE’’) is closed (other than
customary weekend and holiday
closings); (ii) for any period during
which trading on the NYSE is
suspended or restricted; (iii) for any
period during which an emergency
exists as a result of which disposal of
the Shares or determination of the
Fund’s NAV is not reasonably
practicable; or (iv) in such other
circumstances as permitted by the
Commission.
23 The Adviser represents that, to the extent the
Trust effects the redemption of Shares in cash, such
transactions will be effected in the same manner for
all Authorized Participants.
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24479
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.
Determination of Net Asset Value
The Fund will calculate its NAV by:
(i) Taking the current market value of its
total assets; (ii) subtracting any
liabilities; and (iii) dividing that amount
by the total number of Shares
outstanding. The Fund will calculate
NAV once each business day as of the
regularly scheduled close of trading on
the NYSE (normally, 4:00 p.m., Eastern
Time) as described in its Registration
Statement.
In calculating the Fund’s NAV per
Share, the Fund’s investments will be
valued in accordance with procedures
approved by the Trust’s Board of
Trustees. These procedures, which may
be changed by the Trust’s Board of
Trustees from time to time, generally
require investments to be valued using
market valuations. A market valuation
generally means a valuation (i) obtained
from an exchange, an independent
pricing service, or a major market maker
(or dealer), (ii) based on a price
quotation or other equivalent indication
of value supplied by an exchange, an
independent pricing service, or a major
market maker (or dealer) or (iii) based
on amortized cost. The Trust may use
various independent pricing services, or
discontinue the use of any independent
pricing service, as determined by the
Trust’s Board of Trustees from time to
time.
The Trust will generally value
exchange-listed equity securities (which
include common stocks and ETFs) and
exchange-listed options, including
options on the S&P 500 Index and
options on ETFs, at market closing
prices. 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-exchangetraded derivatives, including OTC
options, swap transactions and forward
transactions, will normally be valued on
the basis of quotations or equivalent
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indication of value supplied by an
independent pricing service or major
market makers or dealers. Debt
securities and money market
instruments generally will be valued
based on prices provided by
independent pricing services, which
may use valuation models or matrix
pricing to determine current value.
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
the Trust or Adviser believes such
valuations do not reflect current market
value, the Trust’s procedures require
that a security’s fair value be
determined in accordance with the 1940
Act.24 In determining such value the
Trust or the Adviser may consider,
among other things, (i) price
comparisons among multiple sources,
(ii) a review of corporate actions and
news events, and (iii) a review of
relevant financial indicators (e.g.,
interest rates or market indices). In these
cases, the Fund’s NAV may reflect
certain portfolio securities’ fair values
rather than their market prices. Fair
value pricing involves subjective
judgments and it is possible that the fair
value determination for a security is
materially different than the value that
could be realized upon the sale of the
security.
Availability of Information
The Fund’s Web site,
www.realityshares.com, which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for the Fund that may
be downloaded. The Fund’s Web site
will include additional quantitative
information updated on a daily basis,
including, for the Fund, (1) the prior
business day’s reported closing price,
NAV and mid-point of the bid/ask
spread at the time of calculation of such
NAV (the ‘‘Bid/Ask Price’’),25 and a
calculation of the premium and
discount of the Bid/Ask Price against
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24 The
Trust’s Board of Trustees has established
Fair Value Procedures, in accordance with the 1940
Act, governing the valuation of any portfolio
investments for which market quotations or prices
are not readily available. The Fund has
implemented procedures designed to prevent the
use and dissemination of material, non-public
information regarding valuation of any portfolio
investments.
25 The Bid/Ask Price of the Fund will be
determined using the mid-point of the highest bid
and the lowest offer on the Exchange as of the time
of calculation of the Fund’s NAV. The records
relating to Bid/Ask Prices will be retained by the
Fund and its service providers.
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Jkt 232001
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 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
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 holding in the Fund’s portfolio.
The Web site information will be
publicly available at no charge.
In addition, a portfolio 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 the NYSE via NSCC. The
portfolio composition file will represent
one Creation Unit of Shares of the Fund.
Investors can also obtain the Trust’s
Statement of Additional Information
(‘‘SAI’’), the Fund’s Shareholder
Reports, and the Trust’s Form N–CSR
and Form N–SAR, filed twice a year.
The Trust’s SAI and Shareholder
Reports are available free upon request
from the Trust, and those documents
and the Form N–CSR and Form N–SAR
may be viewed on-screen or
downloaded from the Commission’s
Web site at www.sec.gov. Information
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. Quotation and last sale
information for the Shares will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line.
Information relating to U.S. exchangelisted options is available via the
Options Price Reporting Authority. The
value of the Index will be published by
one or more major market data vendors
every 15 seconds during the NYSE Arca
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Sfmt 4703
Core Trading Session of 9:30 a.m. E.T.
to 4:00 p.m. E.T. 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, the Intraday Indicative
Value (‘‘IIV’’) as defined in NYSE Arca
Equities Rule 5.2(j)(3), Commentary
01(c), will be widely disseminated at
least every 15 seconds during the Core
Trading Session by one or more major
market data vendors.26
The dissemination of the IIV will
allow investors to determine the value
of the underlying portfolio of the Fund
on a daily basis and will provide a close
estimate of that value throughout the
trading day. The intra-day, closing and
settlement prices of the portfolio
securities and other Fund investments,
including futures and exchange-traded
equities, ETFs and exchange-traded
options, will also be readily available
from the national securities exchanges
trading such securities, automated
quotation systems, published or other
public sources, and, with respect to
OTC options, swap transactions and
forward transactions, from third party
pricing sources, or on-line information
services such as Bloomberg or Reuters.
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. Price information regarding
investment company securities,
including ETFs, will be available from
on-line information services and from
the Web site for the applicable
investment company security.
Additional information regarding the
Trust and the Shares, including
investment strategies, risks, creation and
redemption procedures, fees, portfolio
holdings disclosure policies,
distributions and taxes is included in
the Registration Statement. All terms
relating to the Fund that are referred to,
but not defined in, this proposed rule
change are defined in the Registration
Statement.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares of
the Fund.27 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule
26 Currently, it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available IIVs taken from the CTA
or other data feeds.
27 See NYSE Arca Equities Rule 7.12.
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7.12 have been reached. Trading also
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments comprising
the portfolio of the Fund; or (2) whether
other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present.
If the 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
halt trading no later than the beginning
of the trading day following the
interruption. The Exchange will obtain
a representation from the Fund that the
NAV for the Fund will be calculated
daily and will be made available to all
market participants at the same time.
Under NYSE Arca Equities Rule
7.34(a)(5), if the Exchange becomes
aware that the NAV for the Fund is not
being disseminated to all market
participants at the same time, it will halt
trading in the Shares until such time as
the NAV is available to all market
participants.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m. Eastern time in
accordance with NYSE Arca Equities
Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, Commentary .03,
the minimum price variation (‘‘MPV’’)
for quoting and entry of orders in equity
securities traded on the NYSE Arca
Marketplace is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
The Shares will conform to the initial
and continued listing criteria under
NYSE Arca Equities Rules 5.2(j)(3) and
5.5(g)(2), except that the Index will not
meet the requirements of NYSE Arca
Equities Rule 5.2(j)(3), Commentary
.01(a)(A)(1)–(5) in that the Index will
consist of options based on US
Component Stocks (i.e., ETFs based on
the S&P 500 Index) and options on an
index of US Component Stocks (i.e.,
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S&P 500 Index options), rather than US
Component Stocks themselves. The
Index will include a minimum of 20
components and, therefore, would meet
the numerical requirement of NYSE
Arca Equities Rule 5.2(j)(3),
Commentary .01(a)(A)(4) (a minimum of
13 index or portfolio components). The
Exchange represents that, for initial
and/or continued listing, the Fund will
be in compliance with Rule 10A–3 28
under the Act, as provided by NYSE
Arca Equities Rule 5.3. A minimum of
100,000 Shares for the Fund will be
outstanding at the commencement of
trading on the Exchange. The Exchange
will obtain a representation from the
issuer of the Shares that the NAV per
Share will be calculated daily and will
be made available to all market
participants at the same time.
Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by the Financial Industry
Regulatory Authority (‘‘FINRA’’) on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws.29 The Exchange
represents that these procedures are
adequate to properly monitor Exchange
trading of the Shares in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange.
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, exchange-listed
equity securities, ETFs, futures contracts
and exchange-traded options contracts
with other markets and other entities
that are members of the Intermarket
Surveillance Group (‘‘ISG’’), and FINRA,
on behalf of the Exchange, may obtain
trading information regarding trading in
the Shares, exchange-listed equity
securities, ETFs, futures contracts and
exchange-traded options contracts from
such markets and other entities. In
28 17
CFR 240.10A–3.
29 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.
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24481
addition, the Exchange may obtain
information regarding trading in the
Shares, exchange-listed equity
securities, ETFs, futures contracts and
exchange-traded options contracts from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.30 All
exchange-listed equity securities, ETFs,
futures contracts and options held by
the Fund will be traded on U.S.
exchanges, all of which are members of
ISG or are exchanges with which the
Exchange has in place a comprehensive
surveillance sharing agreement. In
addition, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by the Fund
reported to FINRA’s Trade Reporting
and Compliance Engine (‘‘TRACE’’).
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit (‘‘ETP’’) Holders
in an Information Bulletin (‘‘Bulletin’’)
of the special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation Unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Equities Rule 9.2(a),
which imposes a duty of due diligence
on its ETP Holders to learn the essential
facts relating to every customer prior to
trading the Shares; (3) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated IIV or Index value will
not be calculated or publicly
disseminated; (4) how information
regarding the IIV and Index value will
be disseminated; (5) the requirement
that ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
30 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the portfolio for the Fund may trade
on markets that are members of ISG or with which
the Exchange has in place a comprehensive
surveillance sharing agreement.
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Act. The Bulletin will also disclose that
the NAV for the Shares will be
calculated after 4:00 p.m. Eastern time
each trading day.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 31 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 5.2(j)(3), except that the Index will
consist of options based on US
Component Stocks (i.e., ETFs based on
the S&P 500 Index) and options on an
index of US Component Stocks (i.e., the
S&P 500 Index), rather than US
Component Stocks themselves. The
Shares will be subject to the existing
trading surveillances, administered by
FINRA on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and federal securities
laws applicable to trading on the
Exchange. The Index Provider is not
registered as an investment adviser or
broker dealer and is not affiliated with
any broker-dealers. The Adviser is not
registered as a broker-dealer and is not
affiliated with any broker-dealers. In the
event (a) the Adviser, any sub-adviser,
or the Index Provider becomes
registered as a broker-dealer or 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,
they will implement a fire wall with
respect to their relevant personnel or
broker-dealer affiliate regarding access
to information concerning the
composition and/or changes to the
Index or portfolio, and will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding such Index
or portfolio. The Adviser and Index
Provider have implemented procedures
designed to prevent the use and
dissemination of material, non-public
information regarding 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
31 15
U.S.C. 78f(b)(5).
VerDate Mar<15>2010
17:41 Apr 29, 2014
Jkt 232001
investment) deemed illiquid by the
Adviser, consistent with Commission
guidance [sic] All exchange-listed
equity securities, ETFs, options and
futures contracts held by the Fund will
be traded on U.S. exchanges, all of
which are members of ISG or are
exchanges with which the Exchange has
in place a comprehensive surveillance
sharing agreement.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV 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. Moreover, the IIV
will be widely disseminated by one or
more major market data vendors at least
every 15 seconds during the Exchange’s
Core Trading Session. On each business
day, before commencement of trading in
Shares in the Core Trading Session on
the Exchange, the Fund will disclose on
its Web site the portfolio that will form
the basis for the Fund’s calculation of
NAV at the end of the business day.
Information regarding market price and
trading volume of the Shares will be
continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services, and quotation and last sale
information will be available via the
CTA high-speed line. Information
relating to U.S. exchange-listed options
is available via the Options Price
Reporting Authority. The intra-day,
closing and settlement prices of the
portfolio securities and other Fund
investments, including futures and
exchange-traded equities and options,
will also be readily available from the
national securities exchanges trading
such securities, automated quotation
systems, published or other public
sources, and, with respect to swap
transactions and forward transactions,
from third party pricing sources, or online information services such as
Bloomberg or Reuters. The intra-day,
closing and settlement prices of debt
securities and money market
instruments will be readily available
from published and other public sources
or on-line information services. The
Web site for the Fund will include the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.
Moreover, prior to the commencement
of trading, the Exchange will inform its
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
ETP Holders in an Information Bulletin
of the special characteristics and risks
associated with trading the Shares.
Trading in Shares of the Fund will be
halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have
been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. In addition, as
noted above, investors will have ready
access to information regarding the
Fund’s holdings, the IIV, the Fund’s
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 issue of
Investment Company Units that will
enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Shares will be subject to the existing
trading surveillances, administered by
FINRA on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and federal securities
laws applicable to trading on the
Exchange. FINRA, on behalf of the
Exchange, will communicate as needed
regarding trading in the Shares,
exchange-traded equity securities, ETFs,
futures contracts and exchange-traded
options contracts with other markets
and other entities that are members of
the ISG, and FINRA, on behalf of the
Exchange, may obtain trading
information regarding trading in the
Shares, exchange-traded equity
securities, ETFs, futures contracts and
exchange-traded options contracts from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares, exchange-traded equity
securities, ETFs, futures contracts and
exchange-traded options contracts from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. In
addition, as noted above, investors will
have ready access to information
regarding the Fund’s holdings, the IIV,
and quotation and last sale information
for the Shares.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
E:\FR\FM\30APN1.SGM
30APN1
Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Notices
additional type of issue of Investment
Company Units that will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (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.
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca-2014–41 on the subject line.
mstockstill on DSK4VPTVN1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca-2014–41. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
17:41 Apr 29, 2014
Jkt 232001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–09808 Filed 4–29–14; 8:45 am]
BILLING CODE 8011–01–P
IV. Solicitation of Comments
VerDate Mar<15>2010
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2014–41 and should be
submitted on or before May 21, 2014.
SMALL BUSINESS ADMINISTRATION
Contemporary Healthcare Senior Lien
Fund I, LP; License No. 02/02–0649;
Notice Seeking Exemption Under
Section 312 of the Small Business
Investment Act, Conflicts of Interest
Notice is hereby given that
Contemporary Healthcare Senior Lien
Fund I, LP, 1040 Broad Street, Suite
103, Shrewsbury, NJ 07702, a Federal
Licensee under the Small Business
Investment Act of 1958, as amended
(‘‘the Act’’), in connection with the
financing of a small concern, has sought
an exemption under Section 312 of the
Act and Section 107.730, Financings
which constitute Conflicts of Interest of
the Small Business Administration
(‘‘SBA’’) Rules and Regulations (13 CFR
107). Contemporary Healthcare Senior
Lien Fund I, LP proposes to provide
debt financing to CWP Hermann Park,
LLC and HP SNF OPCO, LLC, 5600
Chenevert Street, Houston, TX 77004.
The financing is brought within the
purview of § 107.730(a)(4) of the
Regulations because the proceeds will
be used to discharge an obligation to
Contemporary Healthcare Fund I, LP, an
Associate of Contemporary Healthcare
Senior Lien Fund I, LP. Therefore this
32 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00113
Fmt 4703
Sfmt 4703
24483
transaction requires prior SBA
exemption.
Notice is hereby given that any
interested person may submit written
comments on the transaction, within
fifteen days of the date of this
publication, to the Associate
Administrator for Investment and
Innovation, U.S. Small Business
Administration, 409 Third Street SW.,
Washington, DC 20416.
Javier E. Saade,
Associate Administrator for Office of
Investment and Innovation.
[FR Doc. 2014–09816 Filed 4–29–14; 8:45 am]
BILLING CODE P
DEPARTMENT OF STATE
[Public Notice: 8709]
60-Day Notice of Proposed Information
Collection: Affidavit Regarding a
Change of Name
Notice of request for public
comment.
ACTION:
The Department of State is
seeking Office of Management and
Budget (OMB) approval for the
information collection described below.
In accordance with the Paperwork
Reduction Act of 1995, we are
requesting comments on this collection
from all interested individuals and
organizations. The purpose of this
notice is to allow 60 days for public
comment preceding submission of the
collection to OMB.
DATES: The Department will accept
comments from the public up to June
30, 2014.
ADDRESSES: You may submit comments
by any of the following methods:
• Web: Persons with access to the
Internet may use the Federal Docket
Management System (FDMS) to
comment on this notice by going to
www.Regulations.gov. You can search
for the document by entering ‘‘Public
Notice 8709’’ in the Search bar. If
necessary, use the Narrow by Agency
filter option on the Results page.
• Email: PPTFormsOfficer@state.gov
• Mail: PPT Forms Officer, U.S.
Department of State, 2201 C Street NW.,
Washington, DC 20520.
• Fax: (202) 485–6496 (include a
cover sheet addressed to ‘‘PPT Forms
Officer’’ referencing the DS form
number, information collection title,
and OMB control number).
• Hand Delivery or Courier: PPT
Forms Officer, U.S. Department of State,
2201 C Street NW., Washington, DC
20520.
SUMMARY:
E:\FR\FM\30APN1.SGM
30APN1
]]>Agencies
[Federal Register Volume 79, Number 83 (Wednesday, April 30, 2014)]
[Notices]
[Pages 24475-24483]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09808]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72015; File No. SR-NYSEArca-2014-41]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to Listing and Trading of Shares of
Reality Shares Isolated Dividend Growth Index ETF Under NYSE Arca
Equities Rule 5.2(j)(3)
April 24, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 11, 2014, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Equities Rule 5.2(j)(3) (``Investment Company Units''):
Reality Shares Isolated Dividend Growth Index ETF. The text of the
proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 5.2(j)(3), which governs the
listing and trading of Investment Company Units on the Exchange:
Reality Shares Isolated Dividend Growth Index ETF (the ``Fund'').\4\
The Shares of the Fund will be offered by the Reality Shares ETF Trust
(formerly, the ERNY Financial ETF Trust) (the ``Trust''). The Trust
will be registered with the Commission as an open-end management
investment company.\5\ Reality Shares Advisors, LLC (formerly, ERNY
Financial Advisors, LLC) will serve as the investment adviser to the
Fund (the ``Adviser''). ALPS Distributors, Inc. (the ``Distributor'')
will be the principal underwriter and distributor of the Fund's Shares.
The Bank of New York Mellon (the ``Administrator,'' ``Transfer Agent''
or ``Custodian'') will serve as administrator, custodian and transfer
agent for the Fund.
---------------------------------------------------------------------------
\4\ NYSE Arca Equities Rule 5.2(j)(3)(A) provides that an
Investment Company Unit is a security that represents an interest in
a registered investment company that holds securities comprising, or
otherwise based on or representing an interest in, an index or
portfolio of securities (or holds securities in another registered
investment company that holds securities comprising, or otherwise
based on or representing an interest in, an index or portfolio of
securities).
\5\ The Trust will be registered under the Investment Company
Act of 1940 (the ``1940 Act'') (15 U.S.C. 80a-1). On February 6,
2014, the Trust filed a registration statement on Form N-1A under
the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund, as amended by Pre-Effective
Amendment Number 1, filed with the Commission on February 6, 2014
(File Nos. 333-192288 and 811-22911) (the ``Registration
Statement''). The description of the operation of the Trust and the
Fund herein is based, in part, on the Registration Statement. In
addition, the Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act. Investment Company
Act Release No. 30678 (August 27, 2013) (``Exemptive Order'').
Investments made by the Fund will comply with the conditions set
forth in the Exemptive Order.
---------------------------------------------------------------------------
As described in more detail below, the Fund will seek long-term
capital appreciation by tracking the performance of the Reality Shares
Isolated Dividend Growth Index (the ``Index''). The Index was developed
and is maintained by Reality Shares, Inc.
[[Page 24476]]
(the ``Index Provider'').\6\ The Adviser is a wholly-owned subsidiary
of the Index Provider.
---------------------------------------------------------------------------
\6\ The Index will be calculated by International Data
Corporation (``IDC''), which is not affiliated with the Adviser or
Index Provider, and which is not a broker-dealer or fund advisor.
---------------------------------------------------------------------------
Commentary .01(b)(1) to Rule 5.2(j)(3) provides that, if the
applicable index is maintained by a fund advisor or a broker-dealer,
such fund advisor or broker-dealer shall erect a ``fire wall'' around
the personnel who have access to information concerning changes and
adjustments to the index, and the index shall be calculated by a third
party who is not a broker-dealer or fund advisor.\7\ The Index Provider
is not registered as an investment adviser or broker dealer and is not
affiliated with any broker-dealers. The Adviser is not registered as a
broker-dealer and is not affiliated with any broker-dealers.\8\ In the
event (a) the Adviser, any sub-adviser or the Index Provider becomes
registered as a broker-dealer or 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, they will
implement a fire wall with respect to their relevant personnel or
broker-dealer affiliate regarding access to information concerning the
composition and/or changes to the portfolio, and will be subject to
procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio.
---------------------------------------------------------------------------
\7\ 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.
\8\ 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.
---------------------------------------------------------------------------
The Exchange is submitting this proposed rule change because the
Index for the Fund does not meet all of the ``generic'' listing
requirements of Commentary .01(a)(A) to NYSE Arca Equities Rule
5.2(j)(3) applicable to the listing of Investment Company Units based
upon an index of ``US Component Stocks''.\9\ Specifically, Commentary
.01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) sets forth the
requirements to be met by components of an index or portfolio of US
Component Stocks. As discussed in more detail herein, the Index is
calculated using a proprietary, rules-based methodology designed to
track market expectations for dividend growth conveyed in real-time
using bid-ask prices on exchange-listed S&P 500 Index options and
exchange-listed options on exchange traded funds (``ETFs'') designed to
track the S&P 500 Index.\10\ 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 S&P 500 Index and OTC
options, futures and forward contracts on ETFs that track the S&P 500
Index. Because the Index will consist primarily of S&P 500 Index
options and options on ETFs designed to track the S&P 500 Index, and
not US Component Stocks, the Index does not satisfy the requirements of
Commentary .01(a)(A).\11\
---------------------------------------------------------------------------
\9\ NYSE Arca Equities Rule 5.2(j)(3) defines the term ``US
Component Stock'' to mean an equity security that is registered
under Sections 12(b) or 12(g) of the Act or an American Depositary
Receipt, the underlying equity security of which is registered under
Sections 12(b) or 12(g) of the Act.
\10\ For purposes of this proposed rule change, such ETFs
include Investment Company Units (as described in NYSE Arca Equities
Rule 5.2(j)(3)) and Portfolio Depositary Receipts (as described in
NYSE Arca Equities Rule 8.100). The ETFs all will be listed and
traded in the U.S. on registered exchanges. The Fund may not invest
in leveraged or inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs or
options on such ETFs.
\11\ The Exchange notes that the S&P 500 Index has been
previously approved by the Commission under Section 19(b)(2) of the
Act in connection with the listing and trading of index options and
Portfolio Depositary Receipts, as well as other securities. See
e.g., Securities Exchange Act Release Nos. 19907 (June 24, 1983), 48
FR 30814 (July 5, 1983) (approving the listing and trading of
options on the S&P 500 Index); 31591 (December 18, 1992), 57 FR
60253 (December 18, 1992) (approving the listing and trading of
Portfolio Depositary Receipts based on the S&P 500 Index). NYSE Arca
Equities Rule 5.2(j)(3), Commentary .01(a)(A)(5) provides that all
securities in the applicable index or portfolio shall be US
Component Stocks listed on a national securities exchange and shall
be NMS Stocks as defined in Rule 600 under Regulation NMS of the
Act. Each component stock of the S&P 500 Index is a US 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 Investment Company Units in Rule 5.2(j)(3) and the
requirements of Commentary .01, except the requirements in
Commentary .01(a)(A)(1)-(5), as the Index consists of options on US
Component Stocks. The S&P 500 Index consists of Component Stocks and
satisfies the requirements of Commentary .01(a)(A)(1)-(5).
---------------------------------------------------------------------------
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 strategy
of taking both a long position in a security through its ex-dividend
date (the last date an investor can own the security and receive
dividends paid on the security) and a corresponding short position in
the same security immediately thereafter is designed to allow the Fund
to isolate its exposure to the growth of the level of dividends
expected to be paid on such security while minimizing its exposure to
changes in the trading price of such security.
The Fund will buy and sell U.S. exchange-listed options on the S&P
500 Index and U.S. exchange-listed options on ETFs designed to track
the S&P 500 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 S&P 500 Index and options on ETFs
tracking the S&P 500 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-
[[Page 24477]]
time using the mid-point of the bid-ask spread on S&P 500 Index options
and options on ETFs designed to track the S&P 500 Index.\12\ 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.
---------------------------------------------------------------------------
\12\ 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 Commission's Web site and on the Fund's Web site,
www.realityshares.com.
---------------------------------------------------------------------------
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 S&P 500 Index or options on S&P 500 ETFs) 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 reflected in
options on the S&P 500 Index and options on ETFs tracking the S&P 500
Index while neutralizing the impact of 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 Shares).
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 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 based
on the S&P 500 Index and ETFs designed to track the S&P 500 Index and
forward contracts based on the S&P 500 Index and ETFs designed to track
the S&P 500 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 S&P 500 Index and options on ETFs tracking the S&P 500
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 S&P 500 Index and on ETFs designed to track the S&P 500 Index.
The Fund may enter into dividend and total return swap transactions
(including equity swap transactions) based on the S&P 500 Index and
ETFs designed to track the S&P 500 Index.\13\ In a typical swap
transaction, one party agrees to make periodic payments to another
party (``counterparty'') based on the change in market value or level
of a specified rate, index, or asset. In return, the counterparty
agrees to make periodic payments to the first party based on the return
of a different specified rate, index, or asset. Swap transactions are
usually done on a net basis, the Fund receiving or paying only the net
amount of the two payments. In a typical dividend swap transaction, the
Fund would pay the swap counterparty a premium and would be entitled to
receive the value of the actual dividends paid on the subject index
during the term of the swap contract. In a typical total return swap,
the Fund might exchange long or short exposures to the return of the
underlying securities or index to isolate the value of the dividends
paid on the underlying securities or index constituents. The Fund also
may engage in interest rate swap transactions. In a typical interest
rate swap transaction one stream of future interest payments is
exchanged for another. Such transactions often take the form of an
exchange of a fixed payment for a variable payment based on a future
interest rate. The Fund intends to use interest rate swap transactions
to manage or hedge exposure to interest rate fluctuations.
---------------------------------------------------------------------------
\13\ The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund.
---------------------------------------------------------------------------
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) \14\ 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.
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
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 S&P 500 Index and
ETFs designed to track the S&P 500 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 \15\ and bonds
that are rated BBB or higher.
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\15\ 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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[[Page 24478]]
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.\16\ 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 and bonds that are rated BBB or higher.
---------------------------------------------------------------------------
\16\ The Fund may invest in shares of money market mutual funds
to the extent permitted by the 1940 Act.
---------------------------------------------------------------------------
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.\17\
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\17\ The Fund will seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser will
evaluate each approved counterparty using various methods of
analysis, such as, for example, the counterparty's liquidity in the
event of default, the counterparty's reputation, the Adviser's past
experience with the counterparty, and the counterparty's share of
market participation.
---------------------------------------------------------------------------
The Fund's investments in swaps, futures contracts, forward
contracts and options will be consistent with the Fund's investment
objective and with the requirements of the 1940 Act.\18\
---------------------------------------------------------------------------
\18\ To limit the potential risk associated with such
transactions, the Fund will segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Trust's Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations arising from
such transactions. These procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, the Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of the Fund, including the Fund's
use of derivatives, may give rise to leverage, causing the Fund to
be more volatile than if it had not been leveraged. To mitigate
leveraging risk, the Adviser will segregate or ``earmark'' liquid
assets or otherwise cover the transactions that may give rise to
such risk.
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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.\19\ 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.\20\
---------------------------------------------------------------------------
\19\ 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).
\20\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------
The Fund may 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 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.\21\
---------------------------------------------------------------------------
\21\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------
The Fund intends to qualify for and to elect treatment as a
separate regulated investment company (``RIC'') under Subchapter M of
the Internal Revenue Code.\22\
---------------------------------------------------------------------------
\22\ 26 U.S.C. 851 et seq.
---------------------------------------------------------------------------
The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns.
Creation and Redemption of Shares
According to the Registration Statement, the Fund will issue and
redeem Shares only in Creation Units at the net asset value (``NAV'')
next determined after receipt of an order on a continuous basis every
business day. Creation Unit size is 25,000 Shares per Creation Unit.
The Creation Unit size for the Fund may change.
The consideration for purchase of a Creation Unit of the Fund
generally will consist of either (i) the in-kind deposit of a
designated portfolio of securities (the ``Deposit Securities'') per
each Creation Unit and the ``Cash Component'' (defined below), computed
as described below or (ii) the cash value of the Deposit Securities
(``Deposit Cash'') and the ``Cash Component,'' computed as described
below. Because non-exchange traded derivatives 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 constitute the ``Fund Deposit,'' which represents
the minimum initial and
[[Page 24479]]
subsequent investment amount for a Creation Unit of the Fund. The Cash
Component is an amount equal to the difference between the NAV of the
Shares (per Creation Unit) and the market value of the Deposit
Securities or Deposit Cash, as applicable. The Cash Component serves
the function of compensating for any differences between the NAV per
Creation Unit and the market value of the Deposit Securities or Deposit
Cash, as applicable.
A portfolio composition file, to be sent via the National
Securities Clearing Corporation (``NSCC''), will be made available on
each business day, prior to the opening of business on the Exchange
(currently 9:30 a.m., Eastern time) containing a list of the names and
the required 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.
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.\23\ 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, 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.
---------------------------------------------------------------------------
\23\ The Adviser represents that, to the extent the Trust
effects the redemption of Shares in cash, such transactions will be
effected in the same manner for all Authorized Participants.
---------------------------------------------------------------------------
The right of redemption may be suspended or the date of payment
postponed: (i) For any period during which the New York Stock Exchange
(``NYSE'') is closed (other than customary weekend and holiday
closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency
exists as a result of which disposal of the Shares or determination of
the Fund's NAV is not reasonably practicable; or (iv) in such other
circumstances as permitted by the Commission.
For an order involving a Creation Unit to be effectuated at the
Fund's NAV on a particular day, it must be received by the Distributor
by or before the deadline for such order (``Order Cut-Off Time''). The
Order Cut-Off Time for creation and redemption orders for the Fund 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.
Determination of Net Asset Value
The Fund will calculate its NAV by: (i) Taking the current market
value of its total assets; (ii) subtracting any liabilities; and (iii)
dividing that amount by the total number of Shares outstanding. The
Fund will calculate NAV once each business day as of the regularly
scheduled close of trading on the NYSE (normally, 4:00 p.m., Eastern
Time) as described in its Registration Statement.
In calculating the Fund's NAV per Share, the Fund's investments
will be valued in accordance with procedures approved by the Trust's
Board of Trustees. These procedures, which may be changed by the
Trust's Board of Trustees from time to time, generally require
investments to be valued using market valuations. A market valuation
generally means a valuation (i) obtained from an exchange, an
independent pricing service, or a major market maker (or dealer), (ii)
based on a price quotation or other equivalent indication of value
supplied by an exchange, an independent pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. The Trust
may use various independent pricing services, or discontinue the use of
any independent pricing service, as determined by the Trust's Board of
Trustees from time to time.
The Trust will generally value exchange-listed equity securities
(which include common stocks and ETFs) and exchange-listed options,
including options on the S&P 500 Index and options on ETFs, at market
closing prices. 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
[[Page 24480]]
indication of value supplied by an independent pricing service or major
market makers or dealers. Debt securities and money market instruments
generally will be valued based on prices provided by independent
pricing services, which may use valuation models or matrix pricing to
determine current value. 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 the Trust or Adviser believes such valuations do not
reflect current market value, the Trust's procedures require that a
security's fair value be determined in accordance with the 1940
Act.\24\ In determining such value the Trust or the Adviser may
consider, among other things, (i) price comparisons among multiple
sources, (ii) a review of corporate actions and news events, and (iii)
a review of relevant financial indicators (e.g., interest rates or
market indices). 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.
---------------------------------------------------------------------------
\24\ The Trust's Board of Trustees has established Fair Value
Procedures, in accordance with the 1940 Act, governing the valuation
of any portfolio investments for which market quotations or prices
are not readily available. The Fund has implemented procedures
designed to prevent the use and dissemination of material, non-
public information regarding valuation of any portfolio investments.
---------------------------------------------------------------------------
Availability of Information
The Fund's Web site, www.realityshares.com, which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's Web
site will include additional quantitative information updated on a
daily basis, including, for the Fund, (1) the prior business day's
reported closing price, NAV and mid-point of the bid/ask spread at the
time of calculation of such NAV (the ``Bid/Ask Price''),\25\ 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.
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\25\ The Bid/Ask Price of the Fund will be determined using the
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
---------------------------------------------------------------------------
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 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 holding in the Fund's portfolio. The
Web site information will be publicly available at no charge.
In addition, a portfolio 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 the NYSE via NSCC. The portfolio composition file will
represent one Creation Unit of Shares of the Fund.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and
Shareholder Reports are available free upon request from the Trust, and
those documents and the Form N-CSR and Form N-SAR may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the Consolidated Tape Association
(``CTA'') high-speed line. Information relating to U.S. exchange-listed
options is available via the Options Price Reporting Authority. The
value of the Index will be published by one or more major market data
vendors every 15 seconds during the NYSE Arca Core Trading Session of
9:30 a.m. E.T. to 4:00 p.m. E.T. 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, the Intraday Indicative Value (``IIV'') as defined in
NYSE Arca Equities Rule 5.2(j)(3), Commentary 01(c), will be widely
disseminated at least every 15 seconds during the Core Trading Session
by one or more major market data vendors.\26\
---------------------------------------------------------------------------
\26\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available IIVs
taken from the CTA or other data feeds.
---------------------------------------------------------------------------
The dissemination of the IIV will allow investors to determine the
value of the underlying portfolio of the Fund on a daily basis and will
provide a close estimate of that value throughout the trading day. The
intra-day, closing and settlement prices of the portfolio securities
and other Fund investments, including futures and exchange-traded
equities, ETFs and exchange-traded options, will also be readily
available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, and, with respect to OTC options, swap transactions and
forward transactions, from third party pricing sources, or on-line
information services such as Bloomberg or Reuters. 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. Price information regarding
investment company securities, including ETFs, will be available from
on-line information services and from the Web site for the applicable
investment company security.
Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statement. All terms relating
to the Fund that are referred to, but not defined in, this proposed
rule change are defined in the Registration Statement.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\27\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Equities
Rule
[[Page 24481]]
7.12 have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. These may include: (1) The extent to
which trading is not occurring in the securities and/or the financial
instruments comprising the portfolio of the Fund; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present.
---------------------------------------------------------------------------
\27\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------
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 halt
trading no later than the beginning of the trading day following the
interruption. The Exchange will obtain a representation from the Fund
that the NAV for the Fund will be calculated daily and will be made
available to all market participants at the same time. Under NYSE Arca
Equities Rule 7.34(a)(5), if the Exchange becomes aware that the NAV
for the Fund is not being disseminated to all market participants at
the same time, it will halt trading in the Shares until such time as
the NAV is available to all market participants.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. Eastern time in
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00 for which the
MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except
that the Index will not meet the requirements of NYSE Arca Equities
Rule 5.2(j)(3), Commentary .01(a)(A)(1)-(5) in that the Index will
consist of options based on US Component Stocks (i.e., ETFs based on
the S&P 500 Index) and options on an index of US Component Stocks
(i.e., S&P 500 Index options), rather than US Component Stocks
themselves. The Index will include a minimum of 20 components and,
therefore, would meet the numerical requirement of NYSE Arca Equities
Rule 5.2(j)(3), Commentary .01(a)(A)(4) (a minimum of 13 index or
portfolio components). The Exchange represents that, for initial and/or
continued listing, the Fund will be in compliance with Rule 10A-3 \28\
under the Act, as provided by NYSE Arca Equities Rule 5.3. A minimum of
100,000 Shares for the Fund will be outstanding at the commencement of
trading on the Exchange. The Exchange will obtain a representation from
the issuer of the Shares that the NAV per Share will be calculated
daily and will be made available to all market participants at the same
time.
---------------------------------------------------------------------------
\28\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\29\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
---------------------------------------------------------------------------
\29\ 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, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts with
other markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares, exchange-
listed equity securities, ETFs, futures contracts and exchange-traded
options contracts from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares,
exchange-listed equity securities, ETFs, futures contracts and
exchange-traded options contracts from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\30\ All exchange-listed
equity securities, ETFs, futures contracts and options held by the Fund
will be traded on U.S. exchanges, all of which are members of ISG or
are exchanges with which the Exchange has in place a comprehensive
surveillance sharing agreement. In addition, FINRA, on behalf of the
Exchange, is able to access, as needed, trade information for certain
fixed income securities held by the Fund reported to FINRA's Trade
Reporting and Compliance Engine (``TRACE'').
---------------------------------------------------------------------------
\30\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
portfolio for the Fund may trade on markets that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement.
---------------------------------------------------------------------------
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin will discuss the
following: (1) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated IIV or Index value will not be calculated or
publicly disseminated; (4) how information regarding the IIV and Index
value will be disseminated; (5) the requirement that ETP Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the
[[Page 24482]]
Act. The Bulletin will also disclose that the NAV for the Shares will
be calculated after 4:00 p.m. Eastern time each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \31\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\31\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
5.2(j)(3), except that the Index will consist of options based on US
Component Stocks (i.e., ETFs based on the S&P 500 Index) and options on
an index of US Component Stocks (i.e., the S&P 500 Index), rather than
US Component Stocks themselves. The Shares will be subject to the
existing trading surveillances, administered by FINRA on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
federal securities laws applicable to trading on the Exchange. The
Index Provider is not registered as an investment adviser or broker
dealer and is not affiliated with any broker-dealers. The Adviser is
not registered as a broker-dealer and is not affiliated with any
broker-dealers. In the event (a) the Adviser, any sub-adviser, or the
Index Provider becomes registered as a broker-dealer or 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, they will implement a fire wall with respect to
their relevant personnel or broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the Index or
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding such
Index or portfolio. The Adviser and Index Provider have implemented
procedures designed to prevent the use and dissemination of material,
non-public information regarding 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 [sic] All exchange-listed equity
securities, ETFs, options and futures contracts held by the Fund will
be traded on U.S. exchanges, all of which are members of ISG or are
exchanges with which the Exchange has in place a comprehensive
surveillance sharing agreement.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
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. Moreover, the IIV will be widely disseminated by one or
more major market data vendors at least every 15 seconds during the
Exchange's Core Trading Session. On each business day, before
commencement of trading in Shares in the Core Trading Session on the
Exchange, the Fund will disclose on its Web site the portfolio that
will form the basis for the Fund's calculation of NAV at the end of the
business day. Information regarding market price and trading volume of
the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services, and quotation and last sale information will be available via
the CTA high-speed line. Information relating to U.S. exchange-listed
options is available via the Options Price Reporting Authority. The
intra-day, closing and settlement prices of the portfolio securities
and other Fund investments, including futures and exchange-traded
equities and options, will also be readily available from the national
securities exchanges trading such securities, automated quotation
systems, published or other public sources, and, with respect to swap
transactions and forward transactions, from third party pricing
sources, or on-line information services such as Bloomberg or Reuters.
The intra-day, closing and settlement prices of debt securities and
money market instruments will be readily available from published and
other public sources or on-line information services. The Web site for
the Fund will include the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.
Moreover, prior to the commencement of trading, the Exchange will
inform its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares. Trading
in Shares of the Fund will be halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have been reached or because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. In addition, as noted above,
investors will have ready access to information regarding the Fund's
holdings, the IIV, the Fund's 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 issue of Investment Company Units that will
enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange. FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange-traded equity securities,
ETFs, futures contracts and exchange-traded options contracts with
other markets and other entities that are members of the ISG, and
FINRA, on behalf of the Exchange, may obtain trading information
regarding trading in the Shares, exchange-traded equity securities,
ETFs, futures contracts and exchange-traded options contracts from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, exchange-traded equity
securities, ETFs, futures contracts and exchange-traded options
contracts from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. In addition, as noted above, investors will have
ready access to information regarding the Fund's holdings, the IIV, and
quotation and last sale information for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
[[Page 24483]]
additional type of issue of Investment Company Units that will enhance
competition among market participants, to the benefit of investors and
the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2014-41 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-41. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2014-41 and should
be submitted on or before May 21, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09808 Filed 4-29-14; 8:45 am]
BILLING CODE 8011-01-P
