Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of Shares of Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month ETF Under NYSEArca Equities Rule 8.600, 24789-24798 [2014-09924]
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Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
comments more efficiently, please use
only one method.
The Commission will post all
comments on the Commission’s Internet
Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all
subsequent amendments, all written
statements with respect to the proposed
rule change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
publicly available. All submissions
should refer to File Number SR–
NYSEMKT–2014–17 and should be
submitted on or before May 22, 2014.
VI. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause for
approving the proposed rule change, as
amended by Amendment No. 2, prior to
the 30th day after the date of
publication of notice in the Federal
Register. Amendment No. 2: (1)
Clarified that Exchange-sponsored Floor
Broker systems are not enabled to accept
orders into the CUBE Auction
mechanism from Floor Brokers; (2)
revised the rule text to clarify that
unrelated quotes and orders will never
trade through their limit prices; and (3)
revised the rule text to clarify that the
Contra Order may not be cancelled or
modified. As to the first item,
Amendment No. 2 provides additional
clarity in the discussion concerning the
analysis of the original proposal’s
compliance with the requirements of
Section 11(a) of the Act. As to the
second item, Amendment No. 2 merely
clarifies the rule text. As to the third
item, Amendment No. 2 merely
conforms the rule text to the description
of the limitation in the Notice. The
CUBE Auction will function in a
manner substantially similar to that
described in the Notice and Amendment
No. 2 simply provides additional clarity
regarding a few features of the proposal.
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VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,121 that the
proposed rule change, as modified by
Amendment No. 2 (SR–NYSEMKT–
2014–17) is approved on an accelerated
basis, except that (1) paragraphs
(b)(1)(B) and (b)(8) of Rule 971.1NY are
approved on a pilot basis until April 25,
2015; and (2) there shall be no
minimum size requirements for orders
entered into the CUBE Auction for a
pilot period expiring on April 25, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.122
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–09921 Filed 4–30–14; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72028; File No. SR–
NYSEArca–2014–42]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Relating to the Listing
and Trading of Shares of Schwab
Active Short Duration Income ETF;
Schwab TargetDuration 2-Month ETF;
Schwab TargetDuration 9-Month ETF;
and Schwab TargetDuration 12-Month
ETF Under NYSEArca Equities Rule
8.600
April 25, 2014.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on April 14,
2014, NYSE Arca, Inc. (‘‘Exchange’’ or
‘‘NYSE Arca’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by 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 (‘‘Shares’’) of the following
under NYSE Arca Equities Rule 8.600,
which governs the listing and trading of
121 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
122 17
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24789
Managed Fund Shares 4 on the
Exchange: Schwab Active Short
Duration Income ETF; Schwab
TargetDuration 2-Month ETF; Schwab
TargetDuration 9-Month ETF; and
Schwab TargetDuration 12-Month ETF
(each a ‘‘Fund’’ and collectively, the
‘‘Funds’’). 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 8.600,
which governs the listing and trading of
Managed Fund Shares 5 on the
4 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that
correspond generally to the price and yield
performance of a specific foreign or domestic stock
index, fixed income securities index or combination
thereof.
5 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that
correspond generally to the price and yield
performance of a specific foreign or domestic stock
index, fixed income securities index or combination
thereof.
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Exchange: Schwab Active Short
Duration Income ETF; Schwab
TargetDuration 2-Month ETF; Schwab
TargetDuration 9-Month ETF; and
Schwab TargetDuration 12-Month ETF
(each a ‘‘Fund’’ and collectively, the
‘‘Funds’’).6
Each Fund is a series of the Schwab
Strategic Trust (‘‘Trust’’), a statutory
trust organized under the laws of the
State of Delaware and registered with
the Commission as an open-end
management investment company.7
Each Fund will be advised by Charles
Schwab Investment Management, Inc.
(‘‘CSIM’’ or the ‘‘Adviser’’).
Commentary .06 to Rule 8.600
provides that, if the investment adviser
to the investment company issuing
Managed Fund Shares is affiliated with
a broker-dealer, such investment adviser
shall erect a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.8 In addition,
6 The Commission has previously approved
listing and trading on the Exchange of actively
managed funds under Rule 8.600. See, e.g.,
Securities Exchange Act Release Nos. 57801 (May
8, 2008), 73 FR 27878 (May 14, 2008) (SR–
NYSEArca–2008–31) (order approving Exchange
listing and trading of twelve actively-managed
funds of the WisdomTree Trust); 66321 (February
3, 2012), 77 FR 6850 (February 9, 2012) (SR–
NYSEArca–2011–95) (order approving listing and
trading of PIMCO Total Return Exchange Traded
Fund); 66670 (March 28, 2012), 77 FR 20087 (April
3, 2012) (SR–NYSEArca–2012–09) (order approving
listing and trading of PIMCO Global Advantage
Inflation-Linked Bond Strategy Fund).
7 The Trust is registered under the 1940 Act. On
November 21, 2012, the Trust filed with the
Commission a registration statement on Form N–1A
under the Securities Act of 1933 (15 U.S.C. 77a)
(‘‘Securities Act’’) and the 1940 Act relating to the
Schwab Active Short Duration Income ETF (File
Nos. 333–160595 and 811–22311) (the ‘‘Short
Duration Registration Statement’’). In addition, on
August 1, 2013, the Trust filed with the
Commission a registration statement on Form N–1A
under the Securities Act and the 1940 Act for the
Schwab TargetDuration 2-Month ETF; Schwab
TargetDuration 9-Month ETF; and Schwab
TargetDuration 12-Month ETF (File Nos. 333–
160595 and 811–22311) (the ‘‘TargetDuration
Registration Statement’’ and, together with the
Short Duration Registration Statement, the
‘‘Registration Statements’’). The description of the
operation of the Trust and each Fund herein is
based, in part, on the Registration Statements. In
addition, the Commission has issued an order
granting certain exemptive relief to the Adviser (as
defined herein) under the 1940 Act. See Investment
Company Act Release No. 30606 (July 23, 2013)
(File No. 812–14009) (‘‘Exemptive Order’’). Each
Fund will be offered in reliance upon the
Exemptive Order issued to the Adviser.
8 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
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Commentary .06 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material nonpublic information
regarding the open-end fund’s portfolio.
CSIM is not a broker-dealer but is
affiliated with a broker-dealer, Charles
Schwab & Co., Inc., and has
implemented and will maintain a fire
wall with respect to such broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the portfolios. In the event
(a) the Adviser becomes a registered
broker-dealer or newly affiliated with a
broker-dealer, or (b) any new adviser or
sub-adviser is a registered broker-dealer
or becomes affiliated with a brokerdealer, it will implement a fire wall
with respect to its relevant personnel or
its broker-dealer affiliate regarding
access to information concerning the
composition and/or changes to the
portfolios, and will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding such
portfolios.
Schwab Active Short Duration Income
ETF 9
Principal Investments
According to the Short Duration
Registration Statement, the investment
objective of the Fund is to seek a high
level of current income consistent with
preservation of capital and daily
liquidity.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,10
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
9 The Adviser represents that the name of the
Fund will be changed to the Schwab TargetDuration
6-Month ETF prior to commencement of listing and
trading of Shares of the Fund on the Exchange.
Such change will be reflected in an amendment to
the Short Duration Registration Statement.
10 With respect to each of the Funds, the term
‘‘under normal circumstances’’ includes, but is not
limited to, the absence of extreme volatility or
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to invest at least 90% of its net assets 11
in a portfolio of investment grade shortterm fixed income securities issued by
U.S. and foreign issuers and other shortterm investments, as described below.
The short-term fixed income securities
in which the Fund may invest include
corporate and commercial debt
instruments; 12 privately-issued
securities; 13 mortgage-backed and assetbacked securities; 14 variable- and
floating-rate fixed income securities;
repurchase agreements; 15 money market
trading halts in the fixed income markets or the
financial markets generally; events or circumstances
causing a disruption in market liquidity or orderly
markets; operational issues causing dissemination
of inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar
intervening circumstance.
11 Each Fund’s 90% investment policy may be
satisfied by the investments outlined in a Fund’s
‘‘Principal Investments’’ section. Certain ‘‘NonPrincipal Investments’’ of each Fund, as discussed
below, may also be considered within a Fund’s 90%
investment policy to the extent they are investment
grade short-term fixed income securities. See note
58.
12 The Adviser expects that under normal market
circumstances, each Fund will generally seek to
invest in corporate bond issuances that have at least
$100,000,000 par amount outstanding in developed
countries and at least $200,000,000 par amount
outstanding in emerging market countries.
13 Privately-issued securities are generally issued
under Rule 144A of the Securities Act.
14 Each Fund’s investments in each of the
following security types will be limited to 10% of
a Fund’s net assets: (1) Non-agency residential
mortgage-backed securities, (2) non-agency
commercial mortgage-backed securities and (3) nonagency asset-backed securities. Each Fund’s
aggregate investments in the following security
types will be limited to 20% of a Fund’s net assets:
(1) Non-agency residential mortgage-backed
securities, (2) non-agency commercial mortgagebacked securities, and (3) non-agency asset-backed
securities. As noted for each Fund, at least 90% of
a Fund’s net assets will be, under normal
circumstances, invested in U.S. dollar denominated
fixed income securities. All fixed income securities,
including mortgage-backed and asset-backed
securities, purchased by a Fund will be rated A¥
or higher. Neither high-yield asset-backed securities
nor high-yield mortgage-backed securities are
included in a Fund’s principal investment
strategies. The liquidity of a security, especially in
the case of asset-backed and mortgage-backed debt
securities, is a factor in each Fund’s security
selection process. Asset-backed securities backed by
a specific industry receivable are classified into
distinct industries based on the underlying credit
and liquidity structures. Asset-backed commercial
paper programs backed by multiple industry
receivables are classified within a multi-industry
category. Each Fund will limit investments in each
identified industry individually and to the multiindustry category to less than 25% of its net assets.
15 Repurchase agreements are instruments under
which a buyer acquires ownership of certain
securities (usually U.S. government securities) from
a seller who agrees to repurchase the securities at
a mutually agreed-upon time and price, thereby
determining the yield during the buyer’s holding
period. The period to maturity for repurchase
agreements is generally short (from overnight to one
week), although it may be longer. In addition, the
securities collateralizing a repurchase agreement
may have longer maturity periods.
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instruments, including, but not limited
to certificates of deposit, commercial
paper, promissory notes and assetbacked commercial paper; obligations
issued by the U.S. government and its
agencies and instrumentalities,
including but not limited to, obligations
that are not guaranteed by the U.S.
Treasury, such as those issued by
Fannie Mae and Freddie Mac; and bank
notes and similar demand deposits. To
gain exposure to short-term fixed
income securities, the Fund may invest
in other short-term investments
including (1) money market funds
(including funds that are managed by
the Adviser or one of its affiliates), (2)
other investment companies,16
including exchange-traded funds
(‘‘ETFs’’),17 that invest in securities
similar to those in which the Fund may
invest directly, and (3) cash and cash
equivalents. All of these investments
will be denominated in U.S. dollars,
including those that are issued by
foreign issuers.
All fixed income securities purchased
by the Fund will be rated A¥ or higher
by Standard & Poor’s Corporation
(‘‘S&P’’) and/or an equivalent rating by
another Nationally Recognized
Statistical Rating Organization
(‘‘NRSRO’’) such as Fitch Inc. (‘‘Fitch’’)
or Moody’s Investor Services, Inc.
(‘‘Moody’s’’), or, if unrated, determined
by the Adviser to be of equivalent
quality.18
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than six months.19 The
Adviser may adjust the Fund’s duration
16 Each Fund may invest in other investment
companies to the extent permitted by Section
12(d)(1) of the 1940 Act and rules thereunder and/
or any applicable exemption under the 1940 Act
with respect to such investments.
17 For purposes of this proposed rule change,
ETFs include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE
Arca Equities Rule 8.100); and Managed Fund
Shares (as described in NYSE Arca Equities Rule
8.600). The ETFs all will be listed and traded in the
U.S. on registered exchanges. While each Fund may
invest in inverse ETFs, a Fund will not invest in
leveraged (e.g., 2X or 3X) or leveraged inverse ETFs.
18 In determining whether a security is of
‘‘equivalent quality,’’ the Adviser may consider
various factors, including but not limited to:
Whether the issuer of the security has issued other
rated securities; whether the obligations under the
security are guaranteed by another entity and the
rating of such guarantor (if any); whether and (if
applicable) how the security is collateralized; other
forms of credit enhancement (if any); the security’s
maturity date; liquidity features (if any); relevant
cash flow(s); valuation features; and other structural
analysis.
19 Duration measures the price sensitivity of a
security to interest rate changes. The longer the
duration, the more sensitive the portfolio will be to
a change in interest rates.
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Jkt 232001
within the stated limit based on current
or anticipated changes in interest rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
of less than twelve months (1 year). For
most security types, the security’s final
maturity date (the date on which the
final principal payment of the security
is scheduled to be paid) will be used to
determine the Fund’s portfolio
maturity.20 The Fund will not purchase
any security with a maturity, or for
securitized investments, the security’s
weighted average life, of more than
twenty-four months (2 years) from the
date of acquisition. The Adviser may
adjust the Fund’s maturity within the
stated limit based on current and
anticipated changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.21
20 For securitized investments such as assetbacked and mortgage-backed securities, the
security’s weighted average life (the weighted
average time to receipt of all principal payments)
will be used to determine a Fund’s portfolio
maturity while for securities with embedded
demand features, such as puts or calls, either the
security’s demand date or the final maturity date,
depending on interest rates, yields and other market
conditions, will be used.
21 See NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02 governing fixed income based
Investment Company Units. Under normal
circumstances, each Fund’s portfolio will meet the
following criteria: (i) Components that in the
aggregate account for at least 65% of the weight of
the index or portfolio must each have a minimum
original principal amount outstanding of $100
million or more (in contrast to the requirement in
NYSE Arca Equities Rule 5.2(j)(3), Commentary
.02(a)(3) that 75% of the weight of the index or
portfolio meet such requirement); (ii) no component
fixed-income security (excluding Treasury
Securities, government-sponsored entity and other
exempted securities) will represent more than 30%
of the weight of the portfolio, and the five highest
weighted component fixed income securities
(excluding Treasury Securities, governmentsponsored entity and other exempted securities)
will not in the aggregate account for more than 65%
of the weight of the portfolio); and (iii) the portfolio
(excluding Treasury Securities, governmentsponsored entity and other exempted securities)
will include securities from a minimum of 13 nonaffiliated issuers. Each Fund will not be required to
meet the requirements of NYSE Arca Equities Rule
5.2(j)(3), Commentary .02(a)(3) (which relates to
convertible security index components and removal
of such components from an index or portfolio once
the convertible security converts to the underlying
security), and Commentary .02(a)(6) (which relates
to reporting, numerical, or other enumerated
requirements applicable to issuers of index
component securities).
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24791
Schwab TargetDuration 2-Month ETF
Principal Investments
According to the TargetDuration
Registration Statement, the investment
objective of the Fund is to seek current
income consistent with preservation of
capital and daily liquidity.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,22
to invest at least 90% of its net assets 23
in a portfolio of investment grade shortterm fixed income securities issued by
U.S. and foreign issuers and other shortterm investments. The fixed income
securities in which the Fund may invest
include corporate and commercial debt
instruments; 24 privately-issued
securities; 25 mortgage-backed and assetbacked securities; 26 variable- and
floating-rate fixed income securities;
repurchase agreements; 27 money market
instruments, including, but not limited
to certificates of deposit, commercial
paper, promissory notes and assetbacked commercial paper; obligations
issued by the U.S. government and its
agencies and instrumentalities,
including but not limited to, obligations
that are not guaranteed by the U.S.
Treasury, such as those issued by
Fannie Mae and Freddie Mac; and bank
notes and similar demand deposits. To
gain exposure to short-term fixed
income securities, the Fund may invest
in other short-term investments
including (1) money market funds
(including funds that are managed by
the Adviser or one of its affiliates), (2)
other investment companies,28
including ETFs,29 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed income securities purchased
by the Fund will be rated A- or higher
by S&P and/or an equivalent rating by
another NRSRO such as Fitch or
Moody’s, or, if unrated, determined by
the Adviser to be of equivalent
quality.30
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than two months.31 The
Adviser may adjust the Fund’s duration
within the stated limit based on current
22 See
note 10, supra.
note 11, supra.
24 See note 12, supra.
25 See note 13, supra.
26 See note 14, supra.
27 See note 15, supra.
28 See note 16, supra.
29 See note 17, supra.
30 See note 18, supra.
31 See note 19, supra.
23 See
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Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
and anticipated changes in interest
rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
of less than four months. For most
security types, the security’s final
maturity date (the date on which the
final principal payment of the security
is scheduled to be paid) will be used to
determine the Fund’s portfolio
maturity.32 The Fund will not purchase
any security with a maturity, or for
securitized investments, the security’s
weighted average life, of more than
eighteen months (1.5 years) from the
date of acquisition. The Adviser may
adjust the Fund’s maturity within the
stated limit based on current and
anticipated changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.33
Schwab TargetDuration 9-Month ETF
tkelley on DSK3SPTVN1PROD with NOTICES
Principal Investments
According to the TargetDuration
Registration Statement, the investment
objective of the Fund is to seek a high
level of current income consistent with
preservation of capital.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,34
to invest at least 90% of its net assets 35
in a portfolio of investment grade shortterm fixed income securities issued by
U.S. and foreign issuers and other shortterm investments. The fixed income
securities in which the Fund may invest
include corporate and commercial debt
instruments; 36 privately-issued
securities; 37 mortgage-backed and assetbacked securities; 38 variable- and
floating-rate fixed income securities;
repurchase agreements,39 money market
instruments, including, but not limited
to certificates of deposit, commercial
paper, promissory notes and assetbacked commercial paper; obligations
issued by the U.S. government and its
agencies and instrumentalities,
32 See
note 20, supra.
note 21, supra.
34 See note 10, supra.
35 See note 11, supra.
36 See note 12, supra.
37 See note 13, supra.
38 See note 14, supra.
39 See note 15, supra.
33 See
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including but not limited to, obligations
that are not guaranteed by the U.S.
Treasury, such as those issued by
Fannie Mae and Freddie Mac; and bank
notes and similar demand deposits. To
gain exposure to short-term fixed
income securities, the Fund may invest
in other short-term investments
including (1) money market funds
(including funds that are managed by
the Adviser or one of its affiliates), (2)
other investment companies,40
including ETFs,41 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed income securities purchased
by the Fund will be rated A- or higher
by S&P and/or an equivalent rating by
another NRSRO such as Fitch or
Moody’s, or, if unrated, determined by
the Adviser to be of equivalent
quality.42
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than nine months.43 The
Adviser may adjust the Fund’s duration
within the stated limit based on current
and anticipated changes in interest
rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
of less than eighteen months (1.5 years).
For most security types, the security’s
final maturity date (the date on which
the final principal payment of the
security is scheduled to be paid) will be
used to determine the Fund’s portfolio
maturity.44 The Fund will not purchase
any security with a maturity, or for
securitized investments, the security’s
weighted average life, of more than
thirty months (2.5 years) from the date
of acquisition. The Adviser may adjust
the Fund’s maturity within the stated
limit based on current and anticipated
changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed income exchange-traded
40 See
note 16, supra.
note 17, supra.
42 See note 18, supra.
43 See note 19, supra.
44 See note 20, supra.
41 See
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funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.45
Schwab TargetDuration 12-Month ETF
Principal Investments
According to the TargetDuration
Registration Statement, the investment
objective of the Fund is to seek
maximum current income consistent
with preservation of capital.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,46
to invest at least 90% of its net assets 47
in a portfolio of investment grade shortterm fixed income securities issued by
U.S. and foreign issuers and other shortterm investments. The fixed income
securities in which the Fund may invest
include corporate and commercial debt
instruments; 48 privately-issued
securities,49 mortgage-backed and assetbacked securities; 50 variable- and
floating-rate fixed income securities;
repurchase agreements; 51 money market
instruments, including, but not limited
to certificates of deposit, commercial
paper, promissory notes and assetbacked commercial paper; obligations
issued by the U.S. government and its
agencies and instrumentalities,
including but not limited to, obligations
that are not guaranteed by the U.S.
Treasury, such as those issued by
Fannie Mae and Freddie Mac; and bank
notes and similar demand deposits. To
gain exposure to short-term fixed
income securities, the Fund may invest
in other short-term investments
including (1) money market funds
(including funds that are managed by
the Adviser or one of its affiliates), (2)
other investment companies,52
including ETFs,53 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed income securities purchased
by the Fund will be rated A- or higher
by S&P and/or an equivalent rating by
another NRSRO such as Fitch or
Moody’s, or, if unrated, determined by
the Adviser to be of equivalent
quality.54
Under normal circumstances, the
Fund will generally maintain a portfolio
45 See
note 21, supra.
note 10, supra.
47 See note 11, supra.
48 See note 12, supra.
49 See note 13, supra.
50 See note 14, supra.
51 See note 15, supra.
52 See note 16, supra.
53 See note 17, supra.
54 See note 18, supra.
46 See
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duration of less than twelve months (1
year).55 The Adviser may adjust the
Fund’s duration within the stated limit
based on current and anticipated
changes in interest rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
of less than twenty-four months (2
years). For most security types, the
security’s final maturity date (the date
on which the final principal payment of
the security is scheduled to be paid)
will be used to determine the Fund’s
portfolio maturity.56 The Fund will not
purchase any security with a maturity,
or for securitized investments, the
security’s weighted average life, of more
than thirty-six months (3 years) from the
date of acquisition. The Adviser may
adjust the Fund’s maturity within the
stated limit based on current and
anticipated changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.57
Non-Principal Investments 58
According to the Registration
Statements, as part of each Fund’s nonprincipal investment strategies, a Fund
may invest in other securities such as
Build America Bonds,59 capital and
trust preferred securities,60 fixed
55 See
note 19, supra.
note 20, supra.
57 See note 21, supra.
58 Certain investments have been identified as
‘‘Non-Principal Investments’’ within the
Registration Statements given the limited extent to
which these investments are expected to comprise
of [sic] each Fund’s portfolio. These non-principal
investments, however, may be considered within a
Fund’s 90% investment policy to the extent they
are investment grade short-term fixed income
securities.
59 According to the Registration Statements, Build
America Bonds offer an alternative form of
financing to state and local governments whose
primary means for accessing the capital markets has
historically been through the issuance of tax-free
municipal bonds. Issuance of Build America Bonds
ceased on December 31, 2010. Outstanding Build
America Bonds will continue to be eligible for the
federal interest rate subsidy, which continues for
the life of the bonds.
60 According to the Registration Statements,
capital securities are certain subordinated securities
and generally rank senior to common stock and
preferred stock in an issuer’s capital structure, but
have a lower security claim than the issuer’s
corporate bonds. Trust preferred securities have the
characteristics similar to other capital securities.
They are issued by a special purpose trust
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56 See
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income securities with put features,
sinking funds 61 and zero-coupon, stepcoupon, and pay-in-kind securities.62
Also as part of each Fund’s nonprincipal investment strategies, a Fund
may borrow money in accordance with
the 1940 Act as outlined in a Fund’s
Registration Statement.
A Fund may not hold more than 15%
of its net assets in illiquid assets,
including Rule 144A securities 63 except
for Rule 144A securities deemed liquid
by the Adviser, based on criteria for
liquidity established by the Board,
consistent with Commission guidance.64
Each 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 a Fund’s net assets are held in
illiquid assets. Illiquid assets include
subsidiary backed by subordinated debt of the
corporate parent.
61 According to the Registration Statements,
sinking funds are generally established by bond
issuers to set aside a certain amount of money to
cover timely repayment of bondholders’ principal
raised through a bond issuance. By creating a
sinking fund, the issuer is able to spread repayment
of principal to numerous bondholders while
reducing reliance on its then current cash flows. A
sinking fund also may allow the issuer to annually
repurchase certain of its outstanding bonds from the
open market or repurchase certain of its bonds at
a call price named in a bond’s sinking fund
provision. This call provision allows bonds to be
prepaid or called prior to a bond’s maturity.
62 According to the Registration Statements, zerocoupon, step-coupon, and pay-in-kind securities are
fixed income securities that do not make regular
cash interest payments throughout the period prior
to maturity. Zero-coupon and step-coupon
securities are sold at a deep discount to their face
value. A zero-coupon security pays no interest to
its holders during its life. Step-coupon securities
are debt securities that, instead of having a fixed
coupon for the life of the security, have coupon or
interest payments that may increase or decrease to
predetermined rates at future dates. Pay-in-kind
securities pay interest through the issuance of
additional securities. To continue to qualify as a
‘‘regulated investment company’’ or ‘‘RIC’’ under
the Internal Revenue Code of 1986, as amended,
and avoid a certain excise tax, each Fund may be
required to distribute a portion of such discount
and income and may be required to dispose of other
portfolio securities, which may occur in periods of
adverse market prices, in order to generate cash to
meet these distribution requirements.
63 Rule 144A securities are securities which,
while privately placed, are eligible for purchase and
resale pursuant to Rule 144A of the Securities Act.
64 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).
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24793
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.65
Furthermore, a Fund may not
concentrate investments in a particular
industry or group of industries, as
concentration is defined under the 1940
Act, the rules or regulations thereunder
or any exemption therefrom, as such
statute, rules or regulations may be
amended or interpreted from time to
time.66
Each Fund will not invest in options,
futures, swaps or other derivatives or in
non-U.S. equity securities. A Fund’s
investments will be consistent with its
investment objective and will not be
used to enhance leverage.
Creation and Redemption of Shares
Each Fund will issue and redeem the
Shares only in ‘‘Creation Units,’’ which
shall be aggregations of at least 25,000
Shares or more. Only institutional
investors, who have entered into an
authorized participant agreement
(known as ‘‘Authorized Participants’’),
may purchase or redeem Creation Units
of a Fund as set forth in the Registration
Statements. Creation Units will
generally be issued and redeemed in
exchange for a specified basket of
securities approximating the holdings of
a Fund (‘‘Deposit Securities’’) and a
designated amount of cash denominated
in U.S. Dollars (the ‘‘Cash Component’’).
Together, the Deposit Securities and the
Cash Component constitute the ‘‘Fund
65 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 Securities Act).
66 According to the Registration Statements, the
Commission has defined concentration as investing
25% or more of an investment company’s total
assets in an industry or group of industries, with
certain exceptions such as with respect to
investments in obligations issued or guaranteed by
the U.S. Government or its agencies and
instrumentalities, or tax-exempt obligations of state
or municipal governments and their political
subdivisions. See, e.g., Investment Company Act
Release No. 9011 (October 30, 1975), 40 FR 54241
(November 21, 1975).
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Deposit,’’ which will represent the
minimum initial and subsequent
investment amount for a Creation Unit
of a Fund.
According to the Registration
Statements, a Fund may accept a basket
of money market instruments, non-U.S.
currency or cash denominated in U.S.
dollars that differs from the composition
of the published basket. A Fund may
permit or require the consideration for
Creation Units to consist solely of cash
or non-U.S. currency. A Fund may
permit or require the substitution of an
amount of cash denominated in U.S.
Dollars (i.e., a ‘‘cash in lieu’’ amount) to
be added to the Cash Component to
replace any Deposit Security.
The identity and amount of Deposit
Securities and Cash Component for a
Fund may change as the composition of
the Fund’s portfolio changes and as
rebalancing adjustments and corporate
action events are reflected from time to
time by CSIM with a view to the
investment objective of a Fund.
Shares of each Fund may be redeemed
only in Creation Units at their net asset
value (‘‘NAV’’) and only on a day the
NYSE Arca is open for business
(normally from 9:30 a.m. until 4:00 p.m.
Eastern time, each a ‘‘Business Day’’).
According to the Registration
Statements, Fund securities received on
redemption will generally correspond
pro rata, to the extent practicable, to the
securities in a Fund’s portfolio. Fund
securities received on redemption may
not be identical to Deposit Securities
that are applicable to creations of
Creation Units.
Net Asset Value
According to the Registration
Statements, each Fund will calculate its
NAV at the close of the regular trading
session of each Business Day using the
values of the respective Fund’s portfolio
securities.
In valuing their securities, each Fund
will use market quotes or official closing
prices if they are readily available. In
cases where quotes are not readily
available, a Fund may value securities
based on fair values developed using
methods approved by the Funds’ Board
of Trustees (as discussed below). When
valuing fixed income securities with
remaining maturities of more than 60
days, each Fund will use the value of
the security provided by independent
pricing services. The pricing services
may value fixed income securities at an
evaluated price by employing
methodologies that use actual market
transactions, broker-supplied
valuations, or other methodologies
designed to identify the market value for
such securities. When valuing fixed
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income securities with remaining
maturities of 60 days or less, each Fund
may use the security’s amortized cost,
which approximates the security’s
market value.
Corporate and commercial debt
instruments; privately-issued securities;
mortgage-backed and asset-backed
securities; variable- and floating-rate
fixed income securities; repurchase
agreements; money market instruments;
obligations issued by the U.S.
government and its agencies and
instrumentalities; bank notes and
similar demand deposits; Build America
Bonds; fixed income securities with put
features; sinking funds; over-the-counter
capital and trust preferred securities;
and step-coupons will be valued based
on price quotations or other equivalent
indications of value provided by a thirdparty pricing service. Any such thirdparty pricing service may use a variety
of methodologies to value some or all of
a Fund’s debt securities to determine
the market price. For example, the
prices of securities with characteristics
similar to those held by each Fund may
be used to assist with the pricing
process. In addition, the pricing service
may use proprietary pricing models. A
Fund’s debt securities may be valued at
the mean between the last available bid
and ask prices for such securities or, if
such prices are not available, at prices
for securities of comparable maturity,
quality, and type. Short-term securities
for which market quotations are not
readily available will be valued at
amortized cost, which approximates
market value. ETFs and exchange-traded
capital and trust preferred securities
will be valued at market value, which
will generally be determined using the
last reported official closing or last
trading price on the exchange or market
on which the security is primarily
traded at the time of valuation.
Investment company securities,
including money market funds, (other
than ETFs) will be valued at NAV.
When market prices for securities are
not ‘‘readily available’’ or are unreliable,
the securities will be valued at fair
value. For example, a Fund may fair
value a security when a security is delisted or its trading is halted or
suspended; when a security’s primary
pricing source is unable or unwilling to
provide a price; when a security’s
primary trading market is closed during
regular market hours; or when a
security’s value is materially affected by
events occurring after the close of the
security’s primary trading market. By
fair valuing securities whose prices may
have been affected by events occurring
after the close of trading, each Fund will
seek to establish prices that investors
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might expect to realize upon the current
sales of these securities. Each Fund’s
fair value methodologies seek to ensure
that the prices at which each Fund’s
Shares are purchased and redeemed are
fair and do not result in dilution of
shareholder interest or other harm to
shareholders. Generally, when fair
valuing a security, a Fund will take into
account all reasonably available
information that may be relevant to a
particular valuation including, but not
limited to, fundamental analytical data
regarding the issuer, information
relating to the issuer’s business, recent
trades or offers of the security, general
and specific market conditions and the
specific facts giving rise to the need to
fair value the security. Each Fund will
make fair value determinations in good
faith and in accordance with the fair
value methodologies included in the
Board of Trustees’ adopted valuation
procedures and in accordance with the
1940 Act.
Portfolio Indicative Value
The Portfolio Indicative Value (‘‘PIV’’)
as defined in NYSE Arca Equities Rule
8.600(c)(3) of Shares of each Fund will
be widely disseminated by one or more
major market data vendors at least every
fifteen seconds during the Exchange’s
Core Trading Session. Such
approximate value generally will be
determined by using current market
quotations and/or price quotations
obtained from broker-dealers that may
trade in the portfolio securities held by
a Fund. This approximate value should
not be viewed as a ‘‘real-time’’ update
of the NAV per Share of a Fund because
the approximate value may not be
calculated in the same manner as the
NAV, which is computed once a day,
generally at the end of the Business Day.
The PIV will be based upon the current
value for the components of a Fund’s
Disclosed Portfolio, as defined in NYSE
Arca Equities Rule 8.600(c)(2).
Availability of Information
The Funds’ Web site
(www.schwabetfs.com), which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for each Fund that
may be downloaded
(www.schwabetfs.com/prospectus). The
Funds’ Web site will include additional
quantitative information updated on a
daily basis, including, for each Fund, (1)
daily trading volume, 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
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‘‘Bid/Ask Price’’),67 and a calculation of
the premium and discount of the Bid/
Ask Price against the NAV, and (2) data
in chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. On each Business Day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Adviser will disclose on
each Fund’s Web site the Disclosed
Portfolio for each Fund as defined in
NYSE Arca Equities Rule 8.600(c)(2)
that will form the basis for a Fund’s
calculation of NAV at the end of the
Business Day.68
Each Fund’s portfolio holdings will be
disclosed on its Web site daily after the
close of trading on the Exchange and
prior to the opening of trading on the
Exchange the following day.
On a daily basis, the Adviser will
disclose on behalf of each Fund [sic]
each portfolio security and other
financial instrument of each Fund the
following information: Ticker symbol (if
applicable), name of security and
financial instrument, number of shares,
if applicable, and dollar value of
securities and financial instruments
held in the portfolio, and percentage
weighting of the security and financial
instrument in the portfolio. The Web
site information will be publicly
available at no charge. In addition, intraday and end-of-day prices for all
securities and other financial
instruments held by each Fund will be
available through major market data
vendors or broker-dealers or on the
exchanges on which they are traded.
In addition, a basket composition file
disclosing each Fund’s Securities [sic],
which includes the security names and
share quantities required to be delivered
in exchange for Fund Shares, together
with estimates and actual cash
components, will be publicly
disseminated daily prior to the opening
of the New York Stock Exchange via the
National Securities Clearing
Corporation. The basket represents one
Creation Unit of a Fund. Investors can
also obtain the Trust’s Statement of
67 The Bid/Ask Price of a Fund’s Shares 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 a Fund’s NAV. The records relating
to Bid/Ask Prices will be retained by each Fund and
its service providers.
68 Under accounting procedures to be followed by
each Fund, trades made on the prior Business Day
(‘‘T’’) generally will be booked and reflected in
NAV on the current Business Day (‘‘T+1’’).
Accordingly, each Fund will be able to disclose at
the beginning of the business day the portfolio that
will form the basis for the NAV calculation at the
end of the Business Day.
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Additional Information (‘‘SAI’’), each
Fund’s Shareholder Report, and its
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 for the Shares regarding the
previous day’s closing price and trading
volume information will be published
daily in the financial section of
newspapers or available via the
respective newspapers’ Web sites and
other such sources. Quotation and last
sale information for the Shares will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line.
Intra-day and closing price information
regarding corporate and commercial
debt instruments; privately-issued
securities; mortgage-backed and assetbacked securities; variable- and floatingrate fixed income securities; repurchase
agreements; money market instruments;
obligations issued by the U.S.
government and its agencies and
instrumentalities; bank notes and
similar demand deposits; Build America
Bonds; fixed income securities with put
features; sinking funds; capital and trust
preferred securities; and step-coupons
will be available from major market data
vendors. Price information for ETFs and
exchange-traded capital and trust
preferred securities will be available
from the applicable exchange or major
market data vendors. Price information
for other investment company securities
(including money market funds) will be
available from major market data
vendors. In addition, as noted above, the
PIV will be widely disseminated by one
or more major market data vendors at
least every 15 seconds during the Core
Trading Session.69 The dissemination of
the PIV, together with the Disclosed
Portfolio, will allow investors to
determine the value of the underlying
portfolio of each Fund on a daily basis
and will provide a close estimate of that
value throughout the trading day.
Additional information regarding the
Trust and the Shares of each Fund,
including investment strategies, risks,
creation and redemption procedures,
fees, portfolio holdings disclosure
69 Currently, it is the Exchange’s understanding
that several major market data vendors widely
disseminate PIVs taken from CTA or other data
feeds.
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24795
policies, distributions and taxes is
included in the Registration Statements.
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
a Fund.70 Trading in Shares of a Fund
will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares of a Fund inadvisable. These
may include: (1) The extent to which
trading is not occurring in the securities
and/or the financial instruments
comprising the Disclosed Portfolio of a
Fund; or (2) whether other unusual
conditions or circumstances detrimental
to the maintenance of a fair and orderly
market are present. Trading in the
Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares
of a Fund may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m. Eastern Time in
accordance with NYSE Arca Equities
Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, Commentary .03,
the minimum price variation (‘‘MPV’’)
for quoting and entry of orders in equity
securities traded on the NYSE Arca
Marketplace is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
The Shares of each Fund will conform
to the initial and continued listing
criteria under NYSE Arca Equities Rule
8.600. The Exchange represents that, for
initial and/or continued listing, each
Fund will be in compliance with Rule
10A–3 71 under the Act, as provided by
NYSE Arca Equities Rule 5.3. A
minimum of 100,000 Shares of each
Fund will be outstanding at the
commencement of trading on the
Exchange. The Exchange will obtain a
representation from the issuer of the
Shares of each Fund that the NAV and
70 See NYSE Arca Equities Rule 7.12,
Commentary .04.
71 17 CFR 240 10A–3.
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the Disclosed Portfolio will be made
available to all market participants at
the same time.
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Surveillance
The Exchange represents that trading
in the Shares of each Fund 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.72 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, ETFs, exchangetraded capital and trust preferred
securities, and other exchange-listed
assets, as applicable, 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 such
Shares, ETFs, exchange-traded capital
and trust preferred securities, and other
exchange-listed assets, as applicable,
from such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in such
Shares, ETFs, exchange-traded capital
and trust preferred securities, and other
exchange-listed assets, as applicable,
from markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.73 In
addition, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by each Fund
72 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.
73 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio for each
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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17:30 Apr 30, 2014
Jkt 232001
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 of
each Fund. Specifically, the Bulletin
will discuss the following: (1) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (2) NYSE Arca Equities
Rule 9.2(a), which imposes a duty of
due diligence on its ETP Holders to
learn the essential facts relating to every
customer prior to trading the Shares; (3)
the risks involved in trading the Shares
during the Opening and Late Trading
Sessions when an updated PIV will not
be calculated or publicly disseminated;
(4) how information regarding the PIV is
disseminated; (5) the requirement that
ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will
reference that each Fund is subject to
various fees and expenses described in
the Registration Statements. The
Bulletin will discuss any exemptive, noaction, and interpretive relief granted by
the Commission from any rules under
the Act. The Bulletin will also disclose
that the NAV for the Shares of each
Fund 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) 74 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. Each Fund will not
invest in non-U.S. equity securities.
Each Fund will not invest in leveraged
or leveraged inverse ETFs. A Fund’s
investments will be consistent with the
Funds’ investment objective and will
not be used to enhance leverage. Each
Fund will, under normal market
circumstances, invest at least 90% of its
74 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00130
Fmt 4703
net assets in a portfolio of investment
grade short-term fixed income securities
issued by U.S. and foreign issuers and
other short-term investments as
described above. All debt securities
purchased by each Fund will be rated
A¥ or higher by S&P and/or an
equivalent rating by another NRSRO
such as Fitch or Moody’s, or, if unrated,
determined by the Adviser to be of
equivalent quality. Each Fund’s
investments in each of the following
security types will be limited to 10% of
a Fund’s net assets: (1) Non-agency
residential mortgage-backed securities,
(2) non-agency commercial mortgagebacked securities and (3) non-agency
asset-backed securities. Each Fund’s
aggregate investments in the following
security types will be limited to 20% of
a Fund’s net assets: (1) Non-agency
residential mortgage-backed securities,
(2) non-agency commercial mortgagebacked securities, and (3) non-agency
asset-backed securities. A Fund may not
hold more than 15% of its net assets in
illiquid assets, including Rule 144A
securities except for Rule 144A
securities deemed liquid by the Adviser,
based on criteria for liquidity
established by the Board, consistent
with Commission guidance. The
Adviser expects that under normal
market circumstances, each Fund will
generally seek to invest in corporate
bond issuances that have at least
$100,000,000 par amount outstanding in
developed countries and at least
$200,000,000 par amount outstanding in
emerging market countries. Each Fund
will not invest in options, futures,
swaps or other derivatives. Each Fund’s
portfolio, under normal circumstances,
will meet certain criteria similar to
those applicable to index-based, fixed
income exchange-traded funds
contained in NYSE Arca Equities Rule
5.2(j)(3), Commentary .02.75
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 8.600. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares of each Fund in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange. Additionally, FINRA, on
behalf of the Exchange, will
communicate as needed regarding
trading in the Shares, ETFs, exchangetraded capital and trust preferred
75 See
Sfmt 4703
E:\FR\FM\01MYN1.SGM
note 21, supra.
01MYN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
securities, and other exchange-listed
assets, as applicable, 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 such
Shares, ETFs, exchange-traded capital
and trust preferred securities, and other
exchange-listed assets, as applicable,
from such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in such
Shares, ETFs, exchange-traded capital
and trust preferred securities, and other
exchange-listed securities, as applicable,
from markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. In
addition, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by a Fund
reported to FINRA’s TRACE.
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 Adviser is not
a broker-dealer but is affiliated with a
broker-dealer and has represented that it
has implemented a fire wall with
respect to its broker-dealer affiliate
regarding access to information
concerning the composition and/or
changes to the portfolios. The Exchange
will obtain a representation from the
issuer of the Shares of each Fund that
the NAV per Share will be calculated
daily and that the NAV and the
Disclosed Portfolio will be made
available to all market participants at
the same time. In addition, a large
amount of information is publicly
available regarding each Fund and the
respective Shares, thereby promoting
market transparency. Each Fund’s
portfolio holdings will be disclosed on
its Web site daily after the close of
trading on the Exchange and prior to the
opening of trading on the Exchange the
following day. Intra-day and end-of-day
prices for all securities or other financial
instruments held by each Fund will be
available through major market data
vendors or broker-dealers or on the
exchanges on which they are traded.
Moreover, the PIV will be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Exchange’s Core
Trading Session. On each Business Day,
before commencement of trading in
Shares in the Core Trading Session on
the Exchange, each Fund will disclose
on the Funds’ Web site the Disclosed
Portfolio that will form the basis for
each Fund’s calculation of NAV at the
end of the Business Day. Information
VerDate Mar<15>2010
17:30 Apr 30, 2014
Jkt 232001
regarding market price and trading
volume of the Shares of each Fund will
be continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services, and quotation and last sale
information will be available via the
CTA high-speed line. The Web site for
the Funds will include a form of the
prospectus for each 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 of
each Fund. Trading in Shares of each
Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule
7.12 have been reached or because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable, and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares
of each Fund may be halted. In addition,
as noted above, investors will have
ready access to information regarding a
Fund’s holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale
information for the respective 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 additional types of actively-managed
exchange-traded products that will
enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Exchange has in place surveillance
procedures relating to trading in the
Shares of each Fund and may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. In addition, as noted
above, investors will have ready access
to information regarding each Fund’s
holdings, the PIV, the Disclosed
Portfolio for each Fund, and quotation
and last sale information for the Shares
of each Fund.
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
additional types of actively-managed
exchange-traded products that hold
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
24797
fixed income securities and that will
enhance competition among market
participants, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (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–2014–42 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–2014–42. 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
E:\FR\FM\01MYN1.SGM
01MYN1
24798
Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices
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 Section, 100 F Street NE.,
Washington, DC 20549, on official
business days between 10:00 a.m. and
3:00 p.m. Copies of the filing will also
be available for inspection and copying
at the principal office of NYSE. 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–2014–42 and
should be submitted on or before May
22, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–09924 Filed 4–30–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72019; File No. SR–MSRB–
2014–03]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Consisting of New Rule A–11,
on Assessments for Municipal Advisor
Professionals
tkelley on DSK3SPTVN1PROD with NOTICES
April 25, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 17,
2014, the Municipal Securities
Rulemaking Board (the ‘‘MSRB’’ or
‘‘Board’’) filed with the Securities and
Exchange Commission (the ‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the MSRB. The MSRB has
designated the proposed rule change as
changing fees imposed by the MSRB
under Section 19(b)(3)(A)(ii) of the Act,3
which renders the proposal effective
upon receipt of this filing by the
Commission. The Commission is
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
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 MSRB is filing with the
Commission a proposed rule change
consisting of new Rule A–11, on
assessments for municipal advisor
professionals (the ‘‘proposed rule
change’’).
The text of the proposed rule change
is available on the MSRB’s Web site at
www.msrb.org/Rules-andInterpretations/SEC-Filings/2014Filings.aspx, at the MSRB’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
MSRB 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 these statements
may be examined at the places specified
in Item IV below. The MSRB has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change consists of
new Rule A–11, on assessments for
municipal advisor professionals. In the
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010
(‘‘Dodd-Frank Act’’),4 Congress charged
the SEC and MSRB with the regulation
of municipal advisors. The Dodd-Frank
Act specifically amended the Exchange
Act to grant the MSRB authority to
charge municipal advisors reasonable
fees to defray the costs of the operation
of the MSRB. The purpose of the
proposed rule change is to assess a
reasonable fee on municipal advisors to
help defray the costs and expenses of
operating and administering the MSRB,
particularly the increased costs as a
result of the regulation of municipal
advisors. New Rule A–11 will charge
each municipal advisor an annual fee of
$300 for each Form MA–I on file with
the SEC in the relevant year.5 This fee
76 17
1 15
VerDate Mar<15>2010
17:30 Apr 30, 2014
4 Public
Law 111–203, 124 Stat. 1376 (2010).
17 CFR 240.15Ba1–2(b) (setting forth
requirements to file Form MA–I with the SEC).
5 See
Jkt 232001
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
is separate from the initial $100 and
annual $500 registration fees the MSRB
charges all market participants subject
to MSRB regulation 6 and is a step
towards the MSRB’s goal to provide for
assessments that are fairly and equitably
apportioned among all such registrants.7
Section (a) of Rule A–11 establishes
an annual municipal advisor
professional fee. This section provides
that, beginning with the MSRB’s fiscal
year 2015 (which begins October 1,
2014), each municipal advisor that is
registered with the Commission will be
required to pay a recurring annual fee of
$300 for each Form MA–I filed with the
Commission as of January 31 of the
relevant year by the municipal advisor.
Section (a) further provides that the
professional fee will be due by April 30
of each year and will be payable in the
manner provided by the MSRB
Registration Manual.
Section (b) of Rule A–11 provides for
a late fee for any municipal advisor that
fails to pay timely in full any
professional fee due under section (a) or
(c) of the proposed rule. The total late
fee will equal twenty-five dollars
monthly for each $300 assessment not
paid in full, plus a late fee on the total
overdue balance based on the prime rate
as provided for in the MSRB
Registration Manual.
Section (c) of Rule A–11 provides for
a transitional municipal advisor
professional fee. This transitional fee
takes account of the timing of the
phased-in compliance period for the
SEC’s permanent registration process,
which begins in the second half of
calendar year 2014, and which entails
the first filings of Forms MA–I by
municipal advisors. Each municipal
advisor registered, either temporarily or
permanently, with the SEC on or before
September 30, 2014 (the last day of the
MSRB’s fiscal year 2014), will be
required to pay an assessment of $300
for each Form MA–I filed with the SEC
by the municipal advisor in connection
with its permanent registration. The
transitional fee will be payable in the
manner provided by the MSRB
6 See MSRB Rules A–12 and A–14. See also
MSRB Notice 2014–05 (Feb. 27, 2014) (describing
SEC-approved amendments to MSRB Rule A–12
and deletion of Rule A–14 to consolidate MSRB
registration requirements in Rule A–12, which will
become effective on May 12, 2014).
7 On July 26, 2011, the MSRB filed a proposed
rule change with the SEC that would have
established an interim $300 per professional
assessment of municipal advisors and would have
required municipal advisors to complete a survey
for the MSRB to use in establishing a permanent
assessment for municipal advisor professionals.
This filing was subsequently withdrawn due to the
SEC’s continuing consideration of the definition of
the term ‘‘municipal advisor’’ under the Act. See
MSRB Notice 2011–51 (Sept. 12, 2011).
E:\FR\FM\01MYN1.SGM
01MYN1
]]>Agencies
[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24789-24798]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09924]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72028; File No. SR-NYSEArca-2014-42]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of Shares
of Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-
Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration
12-Month ETF Under NYSEArca Equities Rule 8.600
April 25, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on April 14, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by 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 (``Shares'') of the
following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares \4\ on the Exchange: Schwab
Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF;
Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month
ETF (each a ``Fund'' and collectively, the ``Funds''). 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.
---------------------------------------------------------------------------
\4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
---------------------------------------------------------------------------
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 8.600, which governs the
listing and trading of Managed Fund Shares \5\ on the
[[Page 24790]]
Exchange: Schwab Active Short Duration Income ETF; Schwab
TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and
Schwab TargetDuration 12-Month ETF (each a ``Fund'' and collectively,
the ``Funds'').\6\
---------------------------------------------------------------------------
\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\6\ The Commission has previously approved listing and trading
on the Exchange of actively managed funds under Rule 8.600. See,
e.g., Securities Exchange Act Release Nos. 57801 (May 8, 2008), 73
FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving
Exchange listing and trading of twelve actively-managed funds of the
WisdomTree Trust); 66321 (February 3, 2012), 77 FR 6850 (February 9,
2012) (SR-NYSEArca-2011-95) (order approving listing and trading of
PIMCO Total Return Exchange Traded Fund); 66670 (March 28, 2012), 77
FR 20087 (April 3, 2012) (SR-NYSEArca-2012-09) (order approving
listing and trading of PIMCO Global Advantage Inflation-Linked Bond
Strategy Fund).
---------------------------------------------------------------------------
Each Fund is a series of the Schwab Strategic Trust (``Trust''), a
statutory trust organized under the laws of the State of Delaware and
registered with the Commission as an open-end management investment
company.\7\ Each Fund will be advised by Charles Schwab Investment
Management, Inc. (``CSIM'' or the ``Adviser'').
---------------------------------------------------------------------------
\7\ The Trust is registered under the 1940 Act. On November 21,
2012, the Trust filed with the Commission a registration statement
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a)
(``Securities Act'') and the 1940 Act relating to the Schwab Active
Short Duration Income ETF (File Nos. 333-160595 and 811-22311) (the
``Short Duration Registration Statement''). In addition, on August
1, 2013, the Trust filed with the Commission a registration
statement on Form N-1A under the Securities Act and the 1940 Act for
the Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month
ETF; and Schwab TargetDuration 12-Month ETF (File Nos. 333-160595
and 811-22311) (the ``TargetDuration Registration Statement'' and,
together with the Short Duration Registration Statement, the
``Registration Statements''). The description of the operation of
the Trust and each Fund herein is based, in part, on the
Registration Statements. In addition, the Commission has issued an
order granting certain exemptive relief to the Adviser (as defined
herein) under the 1940 Act. See Investment Company Act Release No.
30606 (July 23, 2013) (File No. 812-14009) (``Exemptive Order'').
Each Fund will be offered in reliance upon the Exemptive Order
issued to the Adviser.
---------------------------------------------------------------------------
Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\8\ In addition,
Commentary .06 further requires that personnel who make decisions on
the open-end fund's portfolio composition must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the open-end fund's portfolio. CSIM is not a
broker-dealer but is affiliated with a broker-dealer, Charles Schwab &
Co., Inc., and has implemented and will maintain a fire wall with
respect to such broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolios. In the
event (a) the Adviser becomes a registered broker-dealer or newly
affiliated with a broker-dealer, or (b) any new adviser or sub-adviser
is a registered broker-dealer or becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to its relevant
personnel or its broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the
portfolios, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding such
portfolios.
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\8\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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Schwab Active Short Duration Income ETF \9\
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\9\ The Adviser represents that the name of the Fund will be
changed to the Schwab TargetDuration 6-Month ETF prior to
commencement of listing and trading of Shares of the Fund on the
Exchange. Such change will be reflected in an amendment to the Short
Duration Registration Statement.
---------------------------------------------------------------------------
Principal Investments
According to the Short Duration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\10\ to invest at least 90% of its net assets \11\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments, as
described below. The short-term fixed income securities in which the
Fund may invest include corporate and commercial debt instruments; \12\
privately-issued securities; \13\ mortgage-backed and asset-backed
securities; \14\ variable- and floating-rate fixed income securities;
repurchase agreements; \15\ money market
[[Page 24791]]
instruments, including, but not limited to certificates of deposit,
commercial paper, promissory notes and asset-backed commercial paper;
obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\16\ including exchange-
traded funds (``ETFs''),\17\ that invest in securities similar to those
in which the Fund may invest directly, and (3) cash and cash
equivalents. All of these investments will be denominated in U.S.
dollars, including those that are issued by foreign issuers.
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\10\ With respect to each of the Funds, the term ``under normal
circumstances'' includes, but is not limited to, the absence of
extreme volatility or trading halts in the fixed income markets or
the financial markets generally; events or circumstances causing a
disruption in market liquidity or orderly markets; operational
issues causing dissemination of inaccurate market information; or
force majeure type events such as systems failure, natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or
labor disruption or any similar intervening circumstance.
\11\ Each Fund's 90% investment policy may be satisfied by the
investments outlined in a Fund's ``Principal Investments'' section.
Certain ``Non-Principal Investments'' of each Fund, as discussed
below, may also be considered within a Fund's 90% investment policy
to the extent they are investment grade short-term fixed income
securities. See note 58.
\12\ The Adviser expects that under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances
that have at least $100,000,000 par amount outstanding in developed
countries and at least $200,000,000 par amount outstanding in
emerging market countries.
\13\ Privately-issued securities are generally issued under Rule
144A of the Securities Act.
\14\ Each Fund's investments in each of the following security
types will be limited to 10% of a Fund's net assets: (1) Non-agency
residential mortgage-backed securities, (2) non-agency commercial
mortgage-backed securities and (3) non-agency asset-backed
securities. Each Fund's aggregate investments in the following
security types will be limited to 20% of a Fund's net assets: (1)
Non-agency residential mortgage-backed securities, (2) non-agency
commercial mortgage-backed securities, and (3) non-agency asset-
backed securities. As noted for each Fund, at least 90% of a Fund's
net assets will be, under normal circumstances, invested in U.S.
dollar denominated fixed income securities. All fixed income
securities, including mortgage-backed and asset-backed securities,
purchased by a Fund will be rated A- or higher. Neither high-yield
asset-backed securities nor high-yield mortgage-backed securities
are included in a Fund's principal investment strategies. The
liquidity of a security, especially in the case of asset-backed and
mortgage-backed debt securities, is a factor in each Fund's security
selection process. Asset-backed securities backed by a specific
industry receivable are classified into distinct industries based on
the underlying credit and liquidity structures. Asset-backed
commercial paper programs backed by multiple industry receivables
are classified within a multi-industry category. Each Fund will
limit investments in each identified industry individually and to
the multi-industry category to less than 25% of its net assets.
\15\ Repurchase agreements are instruments under which a buyer
acquires ownership of certain securities (usually U.S. government
securities) from a seller who agrees to repurchase the securities at
a mutually agreed-upon time and price, thereby determining the yield
during the buyer's holding period. The period to maturity for
repurchase agreements is generally short (from overnight to one
week), although it may be longer. In addition, the securities
collateralizing a repurchase agreement may have longer maturity
periods.
\16\ Each Fund may invest in other investment companies to the
extent permitted by Section 12(d)(1) of the 1940 Act and rules
thereunder and/or any applicable exemption under the 1940 Act with
respect to such investments.
\17\ For purposes of this proposed rule change, ETFs include
Investment Company Units (as described in NYSE Arca Equities Rule
5.2(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); and Managed Fund Shares (as described in NYSE
Arca Equities Rule 8.600). The ETFs all will be listed and traded in
the U.S. on registered exchanges. While each Fund may invest in
inverse ETFs, a Fund will not invest in leveraged (e.g., 2X or 3X)
or leveraged inverse ETFs.
---------------------------------------------------------------------------
All fixed income securities purchased by the Fund will be rated A-
or higher by Standard & Poor's Corporation (``S&P'') and/or an
equivalent rating by another Nationally Recognized Statistical Rating
Organization (``NRSRO'') such as Fitch Inc. (``Fitch'') or Moody's
Investor Services, Inc. (``Moody's''), or, if unrated, determined by
the Adviser to be of equivalent quality.\18\
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\18\ In determining whether a security is of ``equivalent
quality,'' the Adviser may consider various factors, including but
not limited to: Whether the issuer of the security has issued other
rated securities; whether the obligations under the security are
guaranteed by another entity and the rating of such guarantor (if
any); whether and (if applicable) how the security is
collateralized; other forms of credit enhancement (if any); the
security's maturity date; liquidity features (if any); relevant cash
flow(s); valuation features; and other structural analysis.
---------------------------------------------------------------------------
Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than six months.\19\ The Adviser may adjust
the Fund's duration within the stated limit based on current or
anticipated changes in interest rates.
---------------------------------------------------------------------------
\19\ Duration measures the price sensitivity of a security to
interest rate changes. The longer the duration, the more sensitive
the portfolio will be to a change in interest rates.
---------------------------------------------------------------------------
Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
twelve months (1 year). For most security types, the security's final
maturity date (the date on which the final principal payment of the
security is scheduled to be paid) will be used to determine the Fund's
portfolio maturity.\20\ The Fund will not purchase any security with a
maturity, or for securitized investments, the security's weighted
average life, of more than twenty-four months (2 years) from the date
of acquisition. The Adviser may adjust the Fund's maturity within the
stated limit based on current and anticipated changes in interest
rates.
---------------------------------------------------------------------------
\20\ For securitized investments such as asset-backed and
mortgage-backed securities, the security's weighted average life
(the weighted average time to receipt of all principal payments)
will be used to determine a Fund's portfolio maturity while for
securities with embedded demand features, such as puts or calls,
either the security's demand date or the final maturity date,
depending on interest rates, yields and other market conditions,
will be used.
---------------------------------------------------------------------------
The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\21\
---------------------------------------------------------------------------
\21\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02
governing fixed income based Investment Company Units. Under normal
circumstances, each Fund's portfolio will meet the following
criteria: (i) Components that in the aggregate account for at least
65% of the weight of the index or portfolio must each have a minimum
original principal amount outstanding of $100 million or more (in
contrast to the requirement in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02(a)(3) that 75% of the weight of the index or
portfolio meet such requirement); (ii) no component fixed-income
security (excluding Treasury Securities, government-sponsored entity
and other exempted securities) will represent more than 30% of the
weight of the portfolio, and the five highest weighted component
fixed income securities (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will not in the
aggregate account for more than 65% of the weight of the portfolio);
and (iii) the portfolio (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will include
securities from a minimum of 13 non-affiliated issuers. Each Fund
will not be required to meet the requirements of NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02(a)(3) (which relates to convertible
security index components and removal of such components from an
index or portfolio once the convertible security converts to the
underlying security), and Commentary .02(a)(6) (which relates to
reporting, numerical, or other enumerated requirements applicable to
issuers of index component securities).
---------------------------------------------------------------------------
Schwab TargetDuration 2-Month ETF Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek current income consistent
with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\22\ to invest at least 90% of its net assets \23\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \24\ privately-issued securities; \25\
mortgage-backed and asset-backed securities; \26\ variable- and
floating-rate fixed income securities; repurchase agreements; \27\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\28\ including ETFs,\29\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
---------------------------------------------------------------------------
\22\ See note 10, supra.
\23\ See note 11, supra.
\24\ See note 12, supra.
\25\ See note 13, supra.
\26\ See note 14, supra.
\27\ See note 15, supra.
\28\ See note 16, supra.
\29\ See note 17, supra.
---------------------------------------------------------------------------
All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\30\
---------------------------------------------------------------------------
\30\ See note 18, supra.
---------------------------------------------------------------------------
Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than two months.\31\ The Adviser may adjust
the Fund's duration within the stated limit based on current
[[Page 24792]]
and anticipated changes in interest rates.
---------------------------------------------------------------------------
\31\ See note 19, supra.
---------------------------------------------------------------------------
Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than four
months. For most security types, the security's final maturity date
(the date on which the final principal payment of the security is
scheduled to be paid) will be used to determine the Fund's portfolio
maturity.\32\ The Fund will not purchase any security with a maturity,
or for securitized investments, the security's weighted average life,
of more than eighteen months (1.5 years) from the date of acquisition.
The Adviser may adjust the Fund's maturity within the stated limit
based on current and anticipated changes in interest rates.
---------------------------------------------------------------------------
\32\ See note 20, supra.
---------------------------------------------------------------------------
The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\33\
---------------------------------------------------------------------------
\33\ See note 21, supra.
---------------------------------------------------------------------------
Schwab TargetDuration 9-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\34\ to invest at least 90% of its net assets \35\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \36\ privately-issued securities; \37\
mortgage-backed and asset-backed securities; \38\ variable- and
floating-rate fixed income securities; repurchase agreements,\39\ money
market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\40\ including ETFs,\41\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
---------------------------------------------------------------------------
\34\ See note 10, supra.
\35\ See note 11, supra.
\36\ See note 12, supra.
\37\ See note 13, supra.
\38\ See note 14, supra.
\39\ See note 15, supra.
\40\ See note 16, supra.
\41\ See note 17, supra.
---------------------------------------------------------------------------
All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\42\
---------------------------------------------------------------------------
\42\ See note 18, supra.
---------------------------------------------------------------------------
Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than nine months.\43\ The Adviser may adjust
the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
---------------------------------------------------------------------------
\43\ See note 19, supra.
---------------------------------------------------------------------------
Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
eighteen months (1.5 years). For most security types, the security's
final maturity date (the date on which the final principal payment of
the security is scheduled to be paid) will be used to determine the
Fund's portfolio maturity.\44\ The Fund will not purchase any security
with a maturity, or for securitized investments, the security's
weighted average life, of more than thirty months (2.5 years) from the
date of acquisition. The Adviser may adjust the Fund's maturity within
the stated limit based on current and anticipated changes in interest
rates.
---------------------------------------------------------------------------
\44\ See note 20, supra.
---------------------------------------------------------------------------
The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\45\
---------------------------------------------------------------------------
\45\ See note 21, supra.
---------------------------------------------------------------------------
Schwab TargetDuration 12-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek maximum current income
consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\46\ to invest at least 90% of its net assets \47\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \48\ privately-issued securities,\49\
mortgage-backed and asset-backed securities; \50\ variable- and
floating-rate fixed income securities; repurchase agreements; \51\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\52\ including ETFs,\53\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
---------------------------------------------------------------------------
\46\ See note 10, supra.
\47\ See note 11, supra.
\48\ See note 12, supra.
\49\ See note 13, supra.
\50\ See note 14, supra.
\51\ See note 15, supra.
\52\ See note 16, supra.
\53\ See note 17, supra.
---------------------------------------------------------------------------
All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\54\
---------------------------------------------------------------------------
\54\ See note 18, supra.
---------------------------------------------------------------------------
Under normal circumstances, the Fund will generally maintain a
portfolio
[[Page 24793]]
duration of less than twelve months (1 year).\55\ The Adviser may
adjust the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
---------------------------------------------------------------------------
\55\ See note 19, supra.
---------------------------------------------------------------------------
Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
twenty-four months (2 years). For most security types, the security's
final maturity date (the date on which the final principal payment of
the security is scheduled to be paid) will be used to determine the
Fund's portfolio maturity.\56\ The Fund will not purchase any security
with a maturity, or for securitized investments, the security's
weighted average life, of more than thirty-six months (3 years) from
the date of acquisition. The Adviser may adjust the Fund's maturity
within the stated limit based on current and anticipated changes in
interest rates.
---------------------------------------------------------------------------
\56\ See note 20, supra.
---------------------------------------------------------------------------
The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\57\
---------------------------------------------------------------------------
\57\ See note 21, supra.
---------------------------------------------------------------------------
Non-Principal Investments \58\
---------------------------------------------------------------------------
\58\ Certain investments have been identified as ``Non-Principal
Investments'' within the Registration Statements given the limited
extent to which these investments are expected to comprise of [sic]
each Fund's portfolio. These non-principal investments, however, may
be considered within a Fund's 90% investment policy to the extent
they are investment grade short-term fixed income securities.
---------------------------------------------------------------------------
According to the Registration Statements, as part of each Fund's
non-principal investment strategies, a Fund may invest in other
securities such as Build America Bonds,\59\ capital and trust preferred
securities,\60\ fixed income securities with put features, sinking
funds \61\ and zero-coupon, step-coupon, and pay-in-kind
securities.\62\ Also as part of each Fund's non-principal investment
strategies, a Fund may borrow money in accordance with the 1940 Act as
outlined in a Fund's Registration Statement.
---------------------------------------------------------------------------
\59\ According to the Registration Statements, Build America
Bonds offer an alternative form of financing to state and local
governments whose primary means for accessing the capital markets
has historically been through the issuance of tax-free municipal
bonds. Issuance of Build America Bonds ceased on December 31, 2010.
Outstanding Build America Bonds will continue to be eligible for the
federal interest rate subsidy, which continues for the life of the
bonds.
\60\ According to the Registration Statements, capital
securities are certain subordinated securities and generally rank
senior to common stock and preferred stock in an issuer's capital
structure, but have a lower security claim than the issuer's
corporate bonds. Trust preferred securities have the characteristics
similar to other capital securities. They are issued by a special
purpose trust subsidiary backed by subordinated debt of the
corporate parent.
\61\ According to the Registration Statements, sinking funds are
generally established by bond issuers to set aside a certain amount
of money to cover timely repayment of bondholders' principal raised
through a bond issuance. By creating a sinking fund, the issuer is
able to spread repayment of principal to numerous bondholders while
reducing reliance on its then current cash flows. A sinking fund
also may allow the issuer to annually repurchase certain of its
outstanding bonds from the open market or repurchase certain of its
bonds at a call price named in a bond's sinking fund provision. This
call provision allows bonds to be prepaid or called prior to a
bond's maturity.
\62\ According to the Registration Statements, zero-coupon,
step-coupon, and pay-in-kind securities are fixed income securities
that do not make regular cash interest payments throughout the
period prior to maturity. Zero-coupon and step-coupon securities are
sold at a deep discount to their face value. A zero-coupon security
pays no interest to its holders during its life. Step-coupon
securities are debt securities that, instead of having a fixed
coupon for the life of the security, have coupon or interest
payments that may increase or decrease to predetermined rates at
future dates. Pay-in-kind securities pay interest through the
issuance of additional securities. To continue to qualify as a
``regulated investment company'' or ``RIC'' under the Internal
Revenue Code of 1986, as amended, and avoid a certain excise tax,
each Fund may be required to distribute a portion of such discount
and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in
order to generate cash to meet these distribution requirements.
---------------------------------------------------------------------------
A Fund may not hold more than 15% of its net assets in illiquid
assets, including Rule 144A securities \63\ except for Rule 144A
securities deemed liquid by the Adviser, based on criteria for
liquidity established by the Board, consistent with Commission
guidance.\64\ Each 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 a 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.\65\
---------------------------------------------------------------------------
\63\ Rule 144A securities are securities which, while privately
placed, are eligible for purchase and resale pursuant to Rule 144A
of the Securities Act.
\64\ 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).
\65\ 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 Securities Act).
---------------------------------------------------------------------------
Furthermore, a Fund may not concentrate investments in a particular
industry or group of industries, as concentration is defined under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.\66\
---------------------------------------------------------------------------
\66\ According to the Registration Statements, the Commission
has defined concentration as investing 25% or more of an investment
company's total assets in an industry or group of industries, with
certain exceptions such as with respect to investments in
obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities, or tax-exempt obligations of state
or municipal governments and their political subdivisions. See,
e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40
FR 54241 (November 21, 1975).
---------------------------------------------------------------------------
Each Fund will not invest in options, futures, swaps or other
derivatives or in non-U.S. equity securities. A Fund's investments will
be consistent with its investment objective and will not be used to
enhance leverage.
Creation and Redemption of Shares
Each Fund will issue and redeem the Shares only in ``Creation
Units,'' which shall be aggregations of at least 25,000 Shares or more.
Only institutional investors, who have entered into an authorized
participant agreement (known as ``Authorized Participants''), may
purchase or redeem Creation Units of a Fund as set forth in the
Registration Statements. Creation Units will generally be issued and
redeemed in exchange for a specified basket of securities approximating
the holdings of a Fund (``Deposit Securities'') and a designated amount
of cash denominated in U.S. Dollars (the ``Cash Component''). Together,
the Deposit Securities and the Cash Component constitute the ``Fund
[[Page 24794]]
Deposit,'' which will represent the minimum initial and subsequent
investment amount for a Creation Unit of a Fund.
According to the Registration Statements, a Fund may accept a
basket of money market instruments, non-U.S. currency or cash
denominated in U.S. dollars that differs from the composition of the
published basket. A Fund may permit or require the consideration for
Creation Units to consist solely of cash or non-U.S. currency. A Fund
may permit or require the substitution of an amount of cash denominated
in U.S. Dollars (i.e., a ``cash in lieu'' amount) to be added to the
Cash Component to replace any Deposit Security.
The identity and amount of Deposit Securities and Cash Component
for a Fund may change as the composition of the Fund's portfolio
changes and as rebalancing adjustments and corporate action events are
reflected from time to time by CSIM with a view to the investment
objective of a Fund.
Shares of each Fund may be redeemed only in Creation Units at their
net asset value (``NAV'') and only on a day the NYSE Arca is open for
business (normally from 9:30 a.m. until 4:00 p.m. Eastern time, each a
``Business Day''). According to the Registration Statements, Fund
securities received on redemption will generally correspond pro rata,
to the extent practicable, to the securities in a Fund's portfolio.
Fund securities received on redemption may not be identical to Deposit
Securities that are applicable to creations of Creation Units.
Net Asset Value
According to the Registration Statements, each Fund will calculate
its NAV at the close of the regular trading session of each Business
Day using the values of the respective Fund's portfolio securities.
In valuing their securities, each Fund will use market quotes or
official closing prices if they are readily available. In cases where
quotes are not readily available, a Fund may value securities based on
fair values developed using methods approved by the Funds' Board of
Trustees (as discussed below). When valuing fixed income securities
with remaining maturities of more than 60 days, each Fund will use the
value of the security provided by independent pricing services. The
pricing services may value fixed income securities at an evaluated
price by employing methodologies that use actual market transactions,
broker-supplied valuations, or other methodologies designed to identify
the market value for such securities. When valuing fixed income
securities with remaining maturities of 60 days or less, each Fund may
use the security's amortized cost, which approximates the security's
market value.
Corporate and commercial debt instruments; privately-issued
securities; mortgage-backed and asset-backed securities; variable- and
floating-rate fixed income securities; repurchase agreements; money
market instruments; obligations issued by the U.S. government and its
agencies and instrumentalities; bank notes and similar demand deposits;
Build America Bonds; fixed income securities with put features; sinking
funds; over-the-counter capital and trust preferred securities; and
step-coupons will be valued based on price quotations or other
equivalent indications of value provided by a third-party pricing
service. Any such third-party pricing service may use a variety of
methodologies to value some or all of a Fund's debt securities to
determine the market price. For example, the prices of securities with
characteristics similar to those held by each Fund may be used to
assist with the pricing process. In addition, the pricing service may
use proprietary pricing models. A Fund's debt securities may be valued
at the mean between the last available bid and ask prices for such
securities or, if such prices are not available, at prices for
securities of comparable maturity, quality, and type. Short-term
securities for which market quotations are not readily available will
be valued at amortized cost, which approximates market value. ETFs and
exchange-traded capital and trust preferred securities will be valued
at market value, which will generally be determined using the last
reported official closing or last trading price on the exchange or
market on which the security is primarily traded at the time of
valuation. Investment company securities, including money market funds,
(other than ETFs) will be valued at NAV.
When market prices for securities are not ``readily available'' or
are unreliable, the securities will be valued at fair value. For
example, a Fund may fair value a security when a security is de-listed
or its trading is halted or suspended; when a security's primary
pricing source is unable or unwilling to provide a price; when a
security's primary trading market is closed during regular market
hours; or when a security's value is materially affected by events
occurring after the close of the security's primary trading market. By
fair valuing securities whose prices may have been affected by events
occurring after the close of trading, each Fund will seek to establish
prices that investors might expect to realize upon the current sales of
these securities. Each Fund's fair value methodologies seek to ensure
that the prices at which each Fund's Shares are purchased and redeemed
are fair and do not result in dilution of shareholder interest or other
harm to shareholders. Generally, when fair valuing a security, a Fund
will take into account all reasonably available information that may be
relevant to a particular valuation including, but not limited to,
fundamental analytical data regarding the issuer, information relating
to the issuer's business, recent trades or offers of the security,
general and specific market conditions and the specific facts giving
rise to the need to fair value the security. Each Fund will make fair
value determinations in good faith and in accordance with the fair
value methodologies included in the Board of Trustees' adopted
valuation procedures and in accordance with the 1940 Act.
Portfolio Indicative Value
The Portfolio Indicative Value (``PIV'') as defined in NYSE Arca
Equities Rule 8.600(c)(3) of Shares of each Fund will be widely
disseminated by one or more major market data vendors at least every
fifteen seconds during the Exchange's Core Trading Session. Such
approximate value generally will be determined by using current market
quotations and/or price quotations obtained from broker-dealers that
may trade in the portfolio securities held by a Fund. This approximate
value should not be viewed as a ``real-time'' update of the NAV per
Share of a Fund because the approximate value may not be calculated in
the same manner as the NAV, which is computed once a day, generally at
the end of the Business Day. The PIV will be based upon the current
value for the components of a Fund's Disclosed Portfolio, as defined in
NYSE Arca Equities Rule 8.600(c)(2).
Availability of Information
The Funds' Web site (www.schwabetfs.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for each Fund that may be downloaded
(www.schwabetfs.com/prospectus). The Funds' Web site will include
additional quantitative information updated on a daily basis,
including, for each Fund, (1) daily trading volume, 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
[[Page 24795]]
``Bid/Ask Price''),\67\ and a calculation of the premium and discount
of the Bid/Ask Price against the NAV, and (2) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid/Ask Price against the NAV, within appropriate ranges, for
each of the four previous calendar quarters. On each Business Day,
before commencement of trading in Shares in the Core Trading Session on
the Exchange, the Adviser will disclose on each Fund's Web site the
Disclosed Portfolio for each Fund as defined in NYSE Arca Equities Rule
8.600(c)(2) that will form the basis for a Fund's calculation of NAV at
the end of the Business Day.\68\
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\67\ The Bid/Ask Price of a Fund's Shares 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 a Fund's NAV. The records
relating to Bid/Ask Prices will be retained by each Fund and its
service providers.
\68\ Under accounting procedures to be followed by each Fund,
trades made on the prior Business Day (``T'') generally will be
booked and reflected in NAV on the current Business Day (``T+1'').
Accordingly, each Fund will be able to disclose at the beginning of
the business day the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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Each Fund's portfolio holdings will be disclosed on its Web site
daily after the close of trading on the Exchange and prior to the
opening of trading on the Exchange the following day.
On a daily basis, the Adviser will disclose on behalf of each Fund
[sic] each portfolio security and other financial instrument of each
Fund the following information: Ticker symbol (if applicable), name of
security and financial instrument, number of shares, if applicable, and
dollar value of securities and financial instruments held in the
portfolio, and percentage weighting of the security and financial
instrument in the portfolio. The Web site information will be publicly
available at no charge. In addition, intra-day and end-of-day prices
for all securities and other financial instruments held by each Fund
will be available through major market data vendors or broker-dealers
or on the exchanges on which they are traded.
In addition, a basket composition file disclosing each Fund's
Securities [sic], which includes the security names and share
quantities required to be delivered in exchange for Fund Shares,
together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the New York Stock Exchange
via the National Securities Clearing Corporation. The basket represents
one Creation Unit of a Fund. Investors can also obtain the Trust's
Statement of Additional Information (``SAI''), each Fund's Shareholder
Report, and its 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 for the Shares regarding the previous day's
closing price and trading volume information will be published daily in
the financial section of newspapers or available via the respective
newspapers' Web sites and other such sources. Quotation and last sale
information for the Shares will be available via the Consolidated Tape
Association (``CTA'') high-speed line. Intra-day and closing price
information regarding corporate and commercial debt instruments;
privately-issued securities; mortgage-backed and asset-backed
securities; variable- and floating-rate fixed income securities;
repurchase agreements; money market instruments; obligations issued by
the U.S. government and its agencies and instrumentalities; bank notes
and similar demand deposits; Build America Bonds; fixed income
securities with put features; sinking funds; capital and trust
preferred securities; and step-coupons will be available from major
market data vendors. Price information for ETFs and exchange-traded
capital and trust preferred securities will be available from the
applicable exchange or major market data vendors. Price information for
other investment company securities (including money market funds) will
be available from major market data vendors. In addition, as noted
above, the PIV will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the Core Trading
Session.\69\ The dissemination of the PIV, together with the Disclosed
Portfolio, will allow investors to determine the value of the
underlying portfolio of each Fund on a daily basis and will provide a
close estimate of that value throughout the trading day.
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\69\ Currently, it is the Exchange's understanding that several
major market data vendors widely disseminate PIVs taken from CTA or
other data feeds.
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Additional information regarding the Trust and the Shares of each
Fund, including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statements.
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 a Fund.\70\ Trading in Shares of a Fund will
be halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares of a Fund inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of a Fund; or
(2) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present. Trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which Shares of a Fund may be
halted.
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\70\ See NYSE Arca Equities Rule 7.12, Commentary .04.
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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 of each Fund will conform to the initial and continued
listing criteria under NYSE Arca Equities Rule 8.600. The Exchange
represents that, for initial and/or continued listing, each Fund will
be in compliance with Rule 10A-3 \71\ under the Act, as provided by
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares of each Fund
will be outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares of
each Fund that the NAV and
[[Page 24796]]
the Disclosed Portfolio will be made available to all market
participants at the same time.
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\71\ 17 CFR 240 10A-3.
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Surveillance
The Exchange represents that trading in the Shares of each Fund
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.\72\ 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.
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\72\ 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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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, ETFs, exchange-traded capital and
trust preferred securities, and other exchange-listed assets, as
applicable, 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 such
Shares, ETFs, exchange-traded capital and trust preferred securities,
and other exchange-listed assets, as applicable, from such markets and
other entities. In addition, the Exchange may obtain information
regarding trading in such Shares, ETFs, exchange-traded capital and
trust preferred securities, and other exchange-listed assets, as
applicable, from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.\73\ In addition, FINRA, on behalf of the Exchange,
is able to access, as needed, trade information for certain fixed
income securities held by each Fund reported to FINRA's Trade Reporting
and Compliance Engine (``TRACE'').
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\73\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for each 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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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 of each Fund. Specifically, the Bulletin will
discuss the following: (1) The procedures for purchases and redemptions
of Shares in Creation Units (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (4) how information regarding the PIV is disseminated;
(5) the requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that each Fund is subject
to various fees and expenses described in the Registration Statements.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares of each Fund
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) \74\ 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. Each
Fund will not invest in non-U.S. equity securities. Each Fund will not
invest in leveraged or leveraged inverse ETFs. A Fund's investments
will be consistent with the Funds' investment objective and will not be
used to enhance leverage. Each Fund will, under normal market
circumstances, invest at least 90% of its net assets in a portfolio of
investment grade short-term fixed income securities issued by U.S. and
foreign issuers and other short-term investments as described above.
All debt securities purchased by each Fund will be rated A- or higher
by S&P and/or an equivalent rating by another NRSRO such as Fitch or
Moody's, or, if unrated, determined by the Adviser to be of equivalent
quality. Each Fund's investments in each of the following security
types will be limited to 10% of a Fund's net assets: (1) Non-agency
residential mortgage-backed securities, (2) non-agency commercial
mortgage-backed securities and (3) non-agency asset-backed securities.
Each Fund's aggregate investments in the following security types will
be limited to 20% of a Fund's net assets: (1) Non-agency residential
mortgage-backed securities, (2) non-agency commercial mortgage-backed
securities, and (3) non-agency asset-backed securities. A Fund may not
hold more than 15% of its net assets in illiquid assets, including Rule
144A securities except for Rule 144A securities deemed liquid by the
Adviser, based on criteria for liquidity established by the Board,
consistent with Commission guidance. The Adviser expects that under
normal market circumstances, each Fund will generally seek to invest in
corporate bond issuances that have at least $100,000,000 par amount
outstanding in developed countries and at least $200,000,000 par amount
outstanding in emerging market countries. Each Fund will not invest in
options, futures, swaps or other derivatives. Each Fund's portfolio,
under normal circumstances, will meet certain criteria similar to those
applicable to index-based, fixed income exchange-traded funds contained
in NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.\75\
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\74\ 15 U.S.C. 78f(b)(5).
\75\ See note 21, supra.
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares of each Fund in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.
Additionally, FINRA, on behalf of the Exchange, will communicate as
needed regarding trading in the Shares, ETFs, exchange-traded capital
and trust preferred
[[Page 24797]]
securities, and other exchange-listed assets, as applicable, 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 such Shares, ETFs, exchange-traded capital and trust
preferred securities, and other exchange-listed assets, as applicable,
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in such Shares, ETFs, exchange-
traded capital and trust preferred securities, and other exchange-
listed securities, as applicable, from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by a Fund reported to FINRA's
TRACE.
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 Adviser is not a broker-dealer but is affiliated with a
broker-dealer and has represented that it has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the
portfolios. The Exchange will obtain a representation from the issuer
of the Shares of each Fund that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made
available to all market participants at the same time. In addition, a
large amount of information is publicly available regarding each Fund
and the respective Shares, thereby promoting market transparency. Each
Fund's portfolio holdings will be disclosed on its Web site daily after
the close of trading on the Exchange and prior to the opening of
trading on the Exchange the following day. Intra-day and end-of-day
prices for all securities or other financial instruments held by each
Fund will be available through major market data vendors or broker-
dealers or on the exchanges on which they are traded. Moreover, the PIV
will be widely disseminated by one or more major market data vendors at
least every 15 seconds during the Exchange's Core Trading Session. On
each Business Day, before commencement of trading in Shares in the Core
Trading Session on the Exchange, each Fund will disclose on the Funds'
Web site the Disclosed Portfolio that will form the basis for each
Fund's calculation of NAV at the end of the Business Day. Information
regarding market price and trading volume of the Shares of each Fund
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services, and
quotation and last sale information will be available via the CTA high-
speed line. The Web site for the Funds will include a form of the
prospectus for each 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 of each Fund. Trading in Shares of
each Fund will be halted if the circuit breaker parameters in NYSE Arca
Equities Rule 7.12 have been reached or because of market conditions or
for reasons that, in the view of the Exchange, make trading in the
Shares inadvisable, and trading in the Shares will be subject to NYSE
Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under
which Shares of each Fund may be halted. In addition, as noted above,
investors will have ready access to information regarding a Fund's
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale
information for the respective 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
additional types of actively-managed exchange-traded products that will
enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares of each
Fund and may obtain information via ISG from other exchanges that are
members of ISG or with which the Exchange has entered into a
comprehensive surveillance sharing agreement. In addition, as noted
above, investors will have ready access to information regarding each
Fund's holdings, the PIV, the Disclosed Portfolio for each Fund, and
quotation and last sale information for the Shares of each Fund.
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
additional types of actively-managed exchange-traded products that hold
fixed income securities and that will enhance competition among market
participants, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (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-2014-42 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-2014-42. 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
[[Page 24798]]
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 Section, 100 F Street
NE., Washington, DC 20549, on official business days between 10:00 a.m.
and 3:00 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of NYSE. 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-2014-42 and should
be submitted on or before May 22, 2014.
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\76\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09924 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P
