Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating To Listing and Trading of Shares of the PIMCO Income Exchange-Traded Fund Under NYSE Arca Equities Rule 8.600, 29231-29241 [2014-11724]

Download as PDF Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72170; File No. SR– NYSEArca–2014–56] 1. Purpose Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating To Listing and Trading of Shares of the PIMCO Income Exchange-Traded Fund Under NYSE Arca Equities Rule 8.600 May 15, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on May 1, 2014, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the PIMCO Income Exchange-Traded Fund under NYSE Arca Equities Rule 8.600 (‘‘Managed Fund Shares’’). 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. mstockstill on DSK4VPTVN1PROD with NOTICES 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. 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 The Exchange proposes to list and trade shares (‘‘Shares’’) of the PIMCO Income Exchange-Traded Fund (the ‘‘Fund’’) under NYSE Arca Equities Rule 8.600,4 which governs the listing and trading of Managed Fund Shares.5 The Shares will be offered by PIMCO ETF Trust (the ‘‘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.6 The investment manager to the Fund will be Pacific Investment Management Company LLC (‘‘PIMCO’’ or the ‘‘Adviser’’). PIMCO Investments LLC will serve as the distributor for the Fund (‘‘Distributor’’). State Street Bank & Trust Co. will serve as the custodian and transfer agent for the Fund (‘‘Custodian’’ or ‘‘Transfer Agent’’). Commentary .06 to Rule 8.600 provides that, if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with 4 The Commission has previously approved the listing and trading on the Exchange of other actively managed funds under Rule 8.600. See, e.g., Securities Exchange Act Release Nos. 60981 (November 10, 2009), 74 FR 59594 (November 18, 2009) (SR–NYSEArca–2009–79) (order approving Exchange listing and trading of five fixed income funds of the PIMCO ETF 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). 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 Trust is registered under the 1940 Act. On January 27, 2014, the Trust filed an amendment to its registration statement on Form N–1A under the Securities Act of 1933 (15 U.S.C. 77a) (‘‘1933 Act’’) and the 1940 Act relating to the Fund (File Nos. 333–155395 and 811–22250) (the ‘‘Registration Statement’’). The description of the operation of the Trust and the Fund herein is based, in part, on the Registration Statement. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 28993 (November 10, 2009) (File No. 812–13571) (‘‘Exemptive Order’’). PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 29231 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.7 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. The Adviser is not registered as a broker-dealer, but is affiliated with a broker-dealer, and will implement a ‘‘fire wall’’ with respect to such brokerdealer regarding access to information concerning the composition and/or changes to the Fund’s portfolio. If PIMCO elects to hire a sub-adviser for the Fund that is registered as a brokerdealer or is affiliated with a brokerdealer, such sub-adviser will implement a fire wall with respect to its relevant personnel or broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. In the event (a) the Adviser becomes registered as a broker-dealer or newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser is a registered broker-dealer, or becomes affiliated with a broker-dealer, 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 7 An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Adviser and its related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violations, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. E:\FR\FM\21MYN1.SGM 21MYN1 29232 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. Characteristics of the Fund 8 According to the Registration Statement, in selecting investments for the Fund, PIMCO will develop an outlook for interest rates, currency exchange rates and the economy, will analyze credit and call risks, and will use other investment selection techniques. The proportion of the Fund’s assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or maturity) will vary based on PIMCO’s outlook for the U.S. economy and the economies of other countries in the world, the financial markets and other factors. In seeking to identify undervalued currencies, PIMCO may consider many factors, including, but not limited to, longer-term analysis of relative interest rates, inflation rates, real exchange rates, purchasing power parity, trade account balances and current account balances, as well as other factors that influence exchange rates such as flows, market technical trends and government policies. With respect to fixed income investing, PIMCO will attempt to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO will identify these areas by grouping fixed income investments into sectors such as money markets, governments, corporates, mortgages, asset-backed and international. Sophisticated proprietary software will then assist in evaluating sectors and pricing specific investments. Once investment opportunities are identified, PIMCO will shift assets among sectors depending upon changes in relative valuations, credit spreads and other factors. mstockstill on DSK4VPTVN1PROD with NOTICES Fixed Income Instruments Among other investments described in more detail herein, the Fund may invest in Fixed Income Instruments, which include: • Securities issued or guaranteed by the U.S. Government, its agencies or government-sponsored enterprises (‘‘U.S. Government Securities’’); • corporate debt securities of U.S. and non-U.S. issuers, including convertible 8 Many of the investment strategies of the Fund are discretionary, which means that PIMCO can decide from time to time whether to use them or not. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 securities and corporate commercial paper; 9 • mortgage-backed and other assetbacked securities; 10 • inflation-indexed bonds issued both by governments and corporations; 11 • structured notes, including hybrid or ‘‘indexed’’ securities and eventlinked bonds; 12 • bank capital and trust preferred securities; 13 • loan participations and assignments; 14 9 With respect to the Fund, while non-emerging markets corporate debt securities (excluding commercial paper) generally must have $100 million or more par amount outstanding and significant par value traded to be considered as an eligible investment for the Fund, at least 80% of issues of such securities held by the Fund must have $100 million or more par amount outstanding (aggregated by issuer or group of related issuers) at the time of investment. See also note 20, infra, regarding emerging market corporate debt securities. 10 Mortgage-related and other asset-backed securities include collateralized mortgage obligations (‘‘CMO’’s), commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals, stripped mortgage-backed securities and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. A to-beannounced (‘‘TBA’’) transaction is a method of trading mortgage-backed securities. In a TBA transaction, the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount and price. The actual pools delivered generally are determined two days prior to the settlement date. 11 Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) are fixed income securities whose principal value is periodically adjusted according to the rate of inflation (e.g., Treasury Inflation Protected Securities (‘‘TIPS’’)). Municipal inflation-indexed securities are municipal bonds that pay coupons based on a fixed rate plus the Consumer Price Index for All Urban Consumers (‘‘CPI’’). With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is reflected in the semi-annual coupon payment. 12 The Fund may obtain event-linked exposure by investing in ‘‘event-linked bonds’’ or ‘‘event-linked swaps’’ or by implementing ‘‘event-linked strategies.’’ Event-linked exposure results in gains or losses that typically are contingent, or formulaically related to defined trigger events. Examples of trigger events include hurricanes, earthquakes, weather-related phenomena, or statistics relating to such events. Some event-linked bonds are commonly referred to as ‘‘catastrophe bonds.’’ If a trigger event occurs, the Fund may lose a portion or its entire principal invested in the bond or notional amount on a swap. 13 There are two common types of bank capital: Tier I and Tier II. Bank capital is generally, but not always, of investment grade quality. According to the Registration Statement, Tier I securities often take the form of trust preferred securities. Tier II securities are commonly thought of as hybrids of debt and preferred stock, are often perpetual (with no maturity date), callable and, under certain conditions, allow for the issuer bank to withhold payment of interest until a later date. However, such deferred interest payments generally earn interest. 14 The Fund may invest in fixed- and floating-rate loans, which investments generally will be in the PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 • delayed funding loans and revolving credit facilities; • bank certificates of deposit, fixed time deposits and bankers’ acceptances; • repurchase agreements on Fixed Income Instruments and reverse repurchase agreements on Fixed Income Instruments; • debt securities issued by states or local governments and their agencies, authorities and other governmentsponsored enterprises (‘‘Municipal Bonds’’); • obligations of non-U.S. governments or their subdivisions, agencies and government-sponsored enterprises; and • obligations of international agencies or supranational entities. Use of Derivatives by the Fund The Fund’s investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund’s investment objective and policies. With respect to the Fund, derivative instruments primarily will include forwards,15 exchange-traded and over-the-counter (‘‘OTC’’) options contracts, exchange-traded futures contracts, swap agreements and options on futures contracts and swap agreements. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. The Fund may, but is not required to, use derivative instruments for risk management purposes or as part of its investment strategies. As described further below, the Fund will typically use derivative instruments as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Fund may also use derivative instruments to enhance returns. To limit the potential risk associated with such transactions, the Fund will segregate or ‘‘earmark’’ assets determined to be liquid by PIMCO in accordance with procedures established by the Trust’s Board of Trustees (‘‘Board’’) and in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its obligations under derivative instruments. These procedures have been adopted form of loan participations and assignments of portions of such loans. 15 Forwards are contracts to purchase or sell securities for a fixed price at a future date beyond normal settlement time (forward commitments). E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, each [sic] Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that certain transactions of the Fund, including the Fund’s use of derivatives, may give rise to leverage, causing the Fund to be more volatile than if it had not been leveraged.16 Because the markets for certain securities, or the securities themselves, may be unavailable or cost prohibitive as compared to derivative instruments, suitable derivative transactions may be an efficient alternative for a [sic] Fund to obtain the desired asset exposure. The Adviser believes that derivatives can be an economically attractive substitute for an underlying physical security that the Fund would otherwise purchase. For example, the Fund could purchase Treasury futures contracts instead of physical Treasuries or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transaction costs or attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields). The Adviser further believes that derivatives can be used as a more liquid means of adjusting portfolio duration as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities (e.g., interest rate swaps may have lower transaction costs than physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or ‘‘tail risks’’) in the Fund. The Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps (CDX) can be used to gain exposure to a basket of credit risk by ‘‘selling protection’’ against default or other credit events, or to hedge broad market credit risk by ‘‘buying protection.’’ Single name credit default swaps (CDS) can be used to allow the Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. The Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange 16 To mitigate leveraging risk, the Adviser will segregate or ‘‘earmark’’ liquid assets or otherwise cover the transactions that may give rise to such risk. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 for paying a financing cost. A total return swap may be much more efficient than buying underlying securities of an index, potentially lowering transaction costs.17 The Adviser believes that the use of derivatives will allow the Fund to selectively add diversifying sources of return from selling options. Option purchases and sales can also be used to hedge specific exposures in the portfolio, and can provide access to return streams available to long-term investors such as the persistent difference between implied and realized volatility. Option strategies can generate income or improve execution prices (i.e., covered calls). Principal Investments of the Fund According to the Registration Statement, the Fund will seek to maximize current income; long-term capital appreciation will be a secondary objective. The Fund will seek to maintain a high and consistent level of dividend income by investing in a broad array of fixed income sectors and utilizing income efficient implementation strategies. The capital appreciation sought by the Fund generally will arise from decreases in interest rates or improving credit fundamentals for a particular sector or security. The Fund will seek to achieve its investment objective by investing, under normal circumstances,18 at least 65% of its total assets in a multi-sector portfolio of Fixed Income Instruments of varying maturities, which may be represented by derivatives based on Fixed Income Instruments (the ‘‘65% policy’’). The 17 The Fund will seek, where possible, to use counterparties whose financial status is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible. PIMCO’s Counterparty Risk Committee evaluates the creditworthiness of counterparties on an ongoing basis. In addition to information provided by credit agencies, PIMCO credit analysts evaluate each approved counterparty using various methods of analysis, including company visits, earnings updates, the broker-dealer’s reputation, PIMCO’s past experience with the broker-dealer, market levels for the counterparty’s debt and equity, the counterparty’s liquidity and its share of market participation. According to the Registration Statement, the Fund has adopted procedures that are consistent with Section 18 of the 1940 Act and related Commission guidance, which require that a fund’s derivative instruments be fully collateralized by liquid assets of the fund. 18 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; operational issues causing dissemination of inaccurate market information; or force majeure type events such as a systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 29233 average portfolio duration 19 of the Fund normally will vary from zero to eight years based on PIMCO’s forecast for interest rates. The Fund, as described further below, will generally allocate its assets among several investment sectors, without limitation, which may include: (i) High yield securities (‘‘junk bonds’’) and investment grade corporate bonds of issuers located in the United States and non-U.S. countries, including emerging market countries; (ii) fixed income securities issued by the U.S. and nonU.S. governments (including emerging market governments), their agencies and instrumentalities; (iii) mortgage-related and other asset backed securities; and (iv) foreign currencies, including those of emerging market countries. However, the Fund will not be required to gain exposure to any one investment sector, and the Fund’s exposure to any one investment sector will vary over time. The Fund may invest up to 50% of its total assets in high yield securities rated below investment grade but rated at least Caa by Moody’s Investors Service, Inc. (‘‘Moody’s’’), or equivalently rated by Standard & Poor’s Ratings Services (‘‘S&P’’) or Fitch, Inc. (‘‘Fitch’’), or if unrated, determined by PIMCO to be of comparable quality 20 (except such limitation shall not apply to the Fund’s investments in mortgage- and assetbacked securities). The Fund may invest up to 20% of its total assets in securities and instruments that are economically tied to emerging market countries.21 19 Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates. 20 Securities rated Ba or lower by Moody’s, or equivalently rated by S&P or Fitch, are sometimes referred to as ‘‘high yield securities’’ or ‘‘junk bonds’’ while securities rated Baa or higher are referred to as ‘‘investment grade.’’ Unrated securities may be less liquid than comparable rated securities and involve the risk that the Fund’s portfolio manager may not accurately evaluate the security’s comparative credit rating. To the extent that the Fund invests in unrated securities, the Fund’s success in achieving its investment objective may depend more heavily on the portfolio manager’s creditworthiness analysis than if that Fund invested exclusively in rated securities. In determining whether a security is of comparable quality the Adviser will consider, for example, whether the issuer of the security has issued other rated securities; whether the obligations under the security are guaranteed by another entity and 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; other structural analysis; macroeconomic analysis; and sector or industry analysis. 21 PIMCO will generally consider an instrument to be economically tied to an emerging market country if the security’s ‘‘country of exposure’’ is E:\FR\FM\21MYN1.SGM Continued 21MYN1 29234 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES The Fund may invest in securities and instruments that are economically tied to foreign (non-U.S.) countries.22 The Fund may invest, without limitation, in securities denominated in foreign currencies. The Fund will normally limit its foreign currency exposure (from non-U.S. dollar-denominated securities or currencies) to 10% of its total assets. In furtherance of the 65% policy, or with respect to the Fund’s other an emerging market country, as determined by the criteria set forth in the Registration Statement. Alternatively, such as when a ‘‘country of exposure’’ is not available or when PIMCO believes the following tests more accurately reflect which country the security is economically tied to, PIMCO may consider an instrument to be economically tied to an emerging market country if the issuer or guarantor is a government of an emerging market country (or any political subdivision, agency, authority or instrumentality of such government), if the issuer or guarantor is organized under the laws of an emerging market country, or if the currency of settlement of the security is a currency of an emerging market country. With respect to derivative instruments, PIMCO will generally consider such instruments to be economically tied to emerging market countries if the underlying assets are currencies of emerging market countries (or baskets or indices of such currencies), or instruments or securities that are issued or guaranteed by governments of emerging market countries or by entities organized under the laws of emerging market countries. While emerging markets corporate debt securities (excluding commercial paper) generally must have $200 million or more par amount outstanding and significant par value traded to be considered as an eligible investment for the Fund, at least 80% of issues (aggregated by issuer or group of related issuers) of such securities held by the Fund must have $200 million or more par amount outstanding at the time of investment. PIMCO will have broad discretion to identify countries that it would consider to qualify as emerging markets. In making investments in emerging market securities, the Fund will emphasize those countries with relatively low gross national product per capita and with the potential for rapid economic growth. Emerging market countries are generally located in Asia, Africa, the Middle East, Latin America and Eastern Europe. PIMCO will select the country and currency composition based on its evaluation of relative interest rates, inflation rates, exchange rates, monetary and fiscal policies, trade and current account balances, legal and political developments and any other specific factors it believes to be relevant. 22 PIMCO will generally consider an instrument to be economically tied to a non-U.S. country if the issuer is a foreign government (or any political subdivision, agency, authority or instrumentality of such government), or if the issuer is organized under the laws of a non-U.S. country. In the case of certain money market instruments, such instruments will be considered economically tied to a non-U.S. country if either the issuer or the guarantor of such money market instrument is organized under the laws of a non-U.S. country. With respect to derivative instruments, PIMCO will generally consider such instruments to be economically tied to non-U.S. countries if the underlying assets are foreign currencies (or baskets or indexes of such currencies), or instruments or securities that are issued by foreign governments or issuers organized under the laws of a non-U.S. country (or if the underlying assets are certain money market instruments, if either the issuer or the guarantor of such money market instruments is organized under the laws of a non-U.S. country). VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 investments, the Fund may invest in derivative instruments, subject to applicable law and any other restrictions described herein. The Fund may invest up to 25% of its assets in mortgage-related and other asset-backed securities, although this 25% limitation does not apply to securities issued or guaranteed by Federal agencies and/or U.S. government sponsored instrumentalities. The Fund may engage in foreign currency transactions on a spot (cash) basis and forward basis and invest in foreign currency futures and options contracts. The Fund may enter into these contracts to hedge against foreign exchange risk, to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one currency to another. Suitable hedging transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in such transactions at any given time or from time to time. The Fund may, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls). Other (Non-Principal) Investments of the Fund The Fund may invest up to 10% of its total assets in preferred stocks, convertible securities and other equityrelated securities.23 The Fund may invest in variable and floating rate securities, which are securities that pay interest at rates that adjust whenever a specified interest rate changes and/or that reset on predetermined dates (such as the last day of a month or calendar quarter). The Fund may invest in floating rate debt 23 Convertible securities are generally preferred stocks and other securities, including fixed income securities and warrants, that are convertible into or exercisable for common stock at a stated price or rate. Equity-related investments may include investments in small-capitalization (‘‘small-cap’’), mid-capitalization (‘‘mid-cap’’) and largecapitalization (‘‘large-cap’’) companies. With respect to each [sic] Fund, a small-cap company will be defined as a company with a market capitalization of up to $1.5 billion, a mid-cap company will be defined as a company with a market capitalization of between $1.5 billion and $10 billion and a large-cap company will be defined as a company with a market capitalization above $10 billion. Not more than 10% of the net assets of a [sic] Fund in the aggregate shall consist of nonU.S. equity securities, including non-U.S. stocks into which a convertible security is converted, whose principal market is not a member of the Intermarket Surveillance Group (‘‘ISG’’) or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 instruments (‘‘floaters’’) and inverse floating rate debt instruments (‘‘inverse floaters’’) and may engage in credit spread trades. As disclosed in the Registration Statement, the Fund may also invest in trade claims,24 privately placed and unregistered securities, and structured products, including credit-linked securities, commodity-linked notes and structured notes. The Fund may invest in Brady Bonds, which are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with a debt restructuring. The Fund may purchase or sell securities which the Fund is eligible to purchase or sell on a when-issued basis, may purchase and sell such securities for delayed delivery and may make contracts to purchase or sell such securities for a fixed price at a future date beyond normal settlement time (forward commitments). The Fund may make short sales as part of its overall portfolio management strategies or to offset a potential decline in value of a security. The Fund may enter into repurchase agreements, in which the Fund purchases a security from a bank or broker-dealer, which agrees to purchase the security at the Fund’s cost plus interest within a specified time. Repurchase agreements maturing in more than seven days and which may not be terminated within seven days at approximately the amount at which the Fund has valued the agreements will be considered illiquid securities. The Fund may enter into reverse repurchase agreements and dollar rolls subject to the Fund’s limitations on borrowings.25 Reverse repurchase agreements and dollar rolls may be considered borrowing for some purposes. The Fund will segregate or ‘‘earmark’’ assets determined to be liquid by PIMCO in accordance with procedures established by the Board to cover its obligations under reverse repurchase agreements and dollar rolls. 24 Trade claims are non-securitized rights of payment arising from obligations that typically arise when vendors and suppliers extend credit to a company by offering payment terms for products and services. If the company files for bankruptcy, payments on these trade claims stop and the claims are subject to compromise along with the other debts of the company. Trade claims may be purchased directly from the creditor or through brokers. 25 A reverse repurchase agreement involves the sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price. A dollar roll is similar except that the counterparty is not obligated to return the same securities as those originally sold by the Fund but only securities that are ‘‘substantially identical.’’ E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices According to the Registration Statement, the Fund may invest, without limit, for temporary or defensive purposes, in U.S. debt securities, including taxable securities and short-term money market securities, if PIMCO deems it appropriate to do so. If PIMCO believes that economic or market conditions are unfavorable to investors, the Fund may temporarily invest up to 100% of its assets in certain defensive strategies, including holding a substantial portion of its assets in cash, cash equivalents or other highly rated short-term securities, including securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. According to the Registration Statement, the Fund may invest in, to the extent permitted by Section 12(d)(1)(A) of the 1940 Act, other affiliated and unaffiliated funds, such as open-end or closed-end management investment companies, including other exchange traded funds, provided that the Fund’s investment in units or shares of investment companies and other open-end collective investment vehicles will not exceed 10% of the Fund’s total assets. The Fund may invest securities lending collateral in one or more money market funds to the extent permitted by Rule 12d1–1 under the 1940 Act, including series of PIMCO Funds, affiliated open-end management investment companies managed by PIMCO. mstockstill on DSK4VPTVN1PROD with NOTICES Investment Restrictions The Fund’s investments, including investments in derivative instruments, will be subject to all of the restrictions under the 1940 Act, including restrictions with respect to investments in illiquid securities, that is, the limitation that a fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser, in accordance with Commission guidance.26 The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change 26 In reaching liquidity decisions, the Adviser may consider the following factors: The frequency of trades and quotes for the security; the number of dealers willing 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 trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are held in illiquid securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance.27 The Fund is non-diversified, which means that it may invest its assets in a smaller number of issuers than a diversified fund.28 The Fund’s portfolio will include a minimum of 13 non-affiliated issuers. The Fund intends to qualify annually and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code.29 The Fund will not concentrate its investments in a particular industry, as that term is used in the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction from time to time.30 The Fund’s investments, including derivatives, will be consistent with the Fund’s investment objective and the Fund’s use of derivatives may be used to enhance leverage. However, the Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund’s broad-based securities market index (as defined in Form N– 1A).31 The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600. 27 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also, Investment Company Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). A fund’s portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the 1933 Act). 28 The diversification standard is set forth in Section 5(b)(1) of the 1940 Act (15 U.S.C. 80e). 29 26 U.S.C. 851. 30 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). 31 The Fund’s broad-based securities market index will be identified in a future amendment to the Registration Statement following the Fund’s first full calendar year of performance. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 29235 Consistent with NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the Fund’s Reporting Authority will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the actual components of the Fund’s portfolio. The Exchange represents that, for initial and/or continued listing, the Fund will be in compliance with Rule 10A–3 32 under the Act, as provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the net asset value (‘‘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. Net Asset Value and Derivatives Valuation Methodology for Purposes of Determining Net Asset Value The NAV of the Fund’s Shares will be determined by dividing the total value of the Fund’s portfolio investments and other assets, less any liabilities, by the total number of Shares outstanding. The Fund’s Shares will be valued as of the close of regular trading (normally 4:00 p.m. Eastern time (‘‘E.T.’’) (the ‘‘NYSE Close’’) on each day NYSE Arca is open (‘‘Business Day’’). Information that becomes known to the Funds [sic] or its agents after the NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a portfolio asset or the NAV determined earlier that day. For purposes of calculating NAV, portfolio securities and other assets for which market quotes are readily available will be valued at market value. Market value will generally be determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Fixed Income Instruments, including those to be purchased under firm commitment agreements/delayed delivery basis, will generally be valued on the basis of quotes obtained from brokers and dealers or independent pricing services. Foreign fixed income securities will generally be valued on the basis of quotes obtained from brokers and dealers or pricing services using data reflecting the earlier closing of the principal markets for those assets. Short-term debt instruments having a remaining maturity of 60 days or less 32 17 E:\FR\FM\21MYN1.SGM CFR 240.10A–3. 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 29236 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices are generally valued at amortized cost, which approximates market value. As discussed in more detail below, derivatives will generally be valued on the basis of quotes obtained from brokers and dealers or pricing services using data reflecting the earlier closing of the principal markets for those assets. Local closing prices will be used for all instrument valuation purposes. Foreign currency-denominated derivatives are generally valued using market inputs as of the respective local region’s market close. With respect to specific derivatives: • Currency spot and forward rates will be generally determined as of the NYSE Close. • Exchange traded futures will be generally valued at the settlement price of the relevant exchange. • A total return swap on an index will be valued at the publicly available index price. The index price, in turn, will be determined by the applicable index calculation agent, which generally will value the securities underlying the index at the last reported sale price. • Equity total return swaps will generally be valued using the actual underlying equity at local market closing, while bank loan total return swaps will generally be valued using the evaluated underlying bank loan price minus the strike price of the loan. • Exchange-traded non-equity options, (for example, options on bonds, Eurodollar options and U.S. Treasury options), index options, and options on futures will generally be valued at the official settlement price determined by the relevant exchange, if available. • OTC and exchange traded equity options will generally be valued on a basis of quotes obtained from a quotation reporting system, established market makers, or pricing services. • OTC FX options will generally be valued by pricing vendors. • All other swaps such as interest rate swaps, inflation swaps, swaptions, credit default swaps, CDX/CDS will generally be valued by pricing services. Exchange-traded equity securities will be valued at the official closing price or the last trading price on the exchange or market on which the security is primarily traded at the time of valuation. If no sales or closing prices are reported during the day, equity securities are generally valued at the mean of the last available bid and ask quotation on the exchange or market on which the security is primarily traded, or using other market information obtained from quotation reporting systems, established market makers, or pricing services. Investment company VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 securities that are not exchange-traded will be valued at NAV. If a foreign security’s value has materially changed after the close of the security’s primary exchange or principal market but before the NYSE Close, the security will be valued at fair value based on procedures established and approved by the Board. Foreign securities that do not trade when the NYSE is open are also valued at fair value. Securities and other assets for which market quotes are not readily available will be valued at fair value as determined in good faith by the Board or persons acting at their direction. The Board has adopted methods for valuing securities and other assets in circumstances where market quotes are not readily available, and has delegated to PIMCO the responsibility for applying the valuation methods. In the event that market quotes are not readily available, and the security or asset cannot be valued pursuant to one of the valuation methods, the value of the security or asset will be determined in good faith by the Valuation Committee of the Board, generally based upon recommendations provided by PIMCO. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, broker quotes), including where events occur after the close of the relevant market, but prior to the NYSE Close, that materially affect the values of the Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available. The Board has delegated to PIMCO the responsibility for monitoring significant events that may materially affect the values of the Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be re-evaluated in light of such significant events. When the Fund uses fair value pricing to determine its NAV, securities will not be priced on the basis of quotes from the primary market in which they are traded, but rather may be priced by another method that the Board or persons acting at their direction believe reflects fair value. Fair value pricing may require subjective determinations about the value of a security. While the Trust’s policy is intended to result in a calculation of the Fund’s NAV that fairly reflects security values as of the PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 time of pricing, the Trust cannot ensure that fair values determined by the Board or persons acting at their direction would accurately reflect the price that the Fund could obtain for a security if it were to dispose of that security as of the time of pricing (for instance, in a forced or distressed sale). The prices used by the Fund may differ from the value that would be realized if the securities were sold. For the Fund’s 4:00 p.m. E.T. futures holdings, estimated prices from Reuters will be used if any cumulative futures margin impact is greater than $0.005 to the NAV due to futures movement after the fixed income futures market closes (3:00 p.m. E.T.) and up to the NYSE Close (generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the Chicago Mercantile Exchange (‘‘CME’’) or the Intercontinental Exchange (‘‘ICE– US’’) will use the applicable exchange closing price where available. Investments initially valued in currencies other than the U.S. dollar will be converted to the U.S. dollar using exchange rates obtained from pricing services. As a result, the NAV of the Fund’s Shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that the NYSE is closed. As a result, to the extent that the Fund holds foreign (non-U.S.) securities, the NAV of the Fund’s Shares may change when an investor cannot purchase, redeem or exchange Shares. Derivatives Valuation Methodology for Purposes of Determining Portfolio Indicative Value On each Business Day, before commencement of trading in Fund Shares on NYSE Arca, the Fund will disclose on its Web site the identities and quantities of the portfolio instruments and other assets held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day. In order to provide additional information regarding the intra-day value of Shares of the Fund, the NYSE Arca or a market data vendor will disseminate every 15 seconds through the facilities of the Consolidated Tape Association (‘‘CTA’’) or other widely disseminated means an updated Portfolio Indicative Value (‘‘PIV’’) for the Fund as calculated by an information provider or market data vendor. A third party market data provider will calculate the PIV for the Fund. For E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices the purposes of determining the PIV, the third party market data provider’s valuation of derivatives is expected to be similar to its valuation of all securities. The third party market data provider may use market quotes if available or may fair value securities against proxies (such as swap or yield curves). With respect to specific derivatives: • Foreign currency derivatives may be valued intraday using market quotes, or another proxy as determined to be appropriate by the third party market data provider. • Futures may be valued intraday using the relevant futures exchange data, or another proxy as determined to be appropriate by the third party market data provider. • Interest rate swaps may be mapped to a swap curve and valued intraday based on the swap curve, or another proxy as determined to be appropriate by the third party market data provider. • CDX/CDS may be valued using intraday data from market vendors, or based on underlying asset price, or another proxy as determined to be appropriate by the third party market data provider. • Total return swaps may be valued intraday using the underlying asset price, or another proxy as determined to be appropriate by the third party market data provider. • Exchange listed options may be valued intraday using the relevant exchange data, or another proxy as determined to be appropriate by the third party market data provider. • OTC options may be valued intraday through option valuation models (e.g., Black-Scholes) or using exchange traded options as a proxy, or another proxy as determined to be appropriate by the third party market data provider. A third party market data provider’s valuation of forwards will be similar to its valuation of the underlying securities, or another proxy as determined to be appropriate by the third party market data provider. The third party market data provider will generally use market quotes if available. Where market quotes are not available, it may fair value securities against proxies (such as swap or yield curves). The Fund’s disclosure of forward positions will include information that market participants can use to value these positions intraday. Disclosed Portfolio The Fund’s disclosure of derivative positions will include information that market participants can use to value these positions intraday. The Fund’s VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 disclosure of derivative positions in the Disclosed Portfolio will include information that market participants can use to value these positions intraday. On a daily basis, the Fund will disclose on the Fund’s Web site the following information regarding each portfolio holding, as applicable to the type of holding: Ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in the Fund’s portfolio. Impact on Arbitrage Mechanism The Adviser believes there will be minimal, if any, impact to the arbitrage mechanism for the Fund as a result of the use of derivatives. Market makers and participants should be able to value derivatives as long as the positions are disclosed with relevant information. The Adviser believes that the price at which Shares trade will continue to be disciplined by arbitrage opportunities created by the ability to purchase or redeem creation Shares at their NAV, which should ensure that Shares will not trade at a material discount or premium in relation to their NAV. The Adviser does not believe there will be any significant impacts to the settlement or operational aspects of the Fund’s arbitrage mechanism due to the use of derivatives. Because derivatives generally are not eligible for in-kind transfer, they will typically be substituted with a ‘‘cash in lieu’’ amount when the Fund processes purchases or redemptions of block-size Creation Units (as described below) inkind. Creations and Redemptions of Shares According to the Registration Statement, Shares of the Fund that trade in the secondary market will be ‘‘created’’ at NAV by Authorized Participants only in block-size creation units (‘‘Creation Units’’) of 100,000 Shares or multiples thereof.33 The Fund 33 The NAV of the Fund’s Shares generally will be calculated once daily Monday through Friday as of the close of trading on the New York Stock Exchange (‘‘NYSE’’), generally 4:00 p.m. E.T. (the ‘‘NAV Calculation Time’’) on any business day. NAV per Share is calculated by dividing the Fund’s net assets by the number of the Fund’s Shares outstanding. For more information regarding the PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 29237 will offer and issue Shares at their NAV per Share generally in exchange for a basket of debt securities held by the Fund (the ‘‘Deposit Securities’’) together with a deposit of a specified cash payment (the ‘‘Cash Component’’), or in lieu of Deposit Securities, a [sic] Fund may permit a ‘‘cash-in-lieu’’ amount for any reason at the Fund’s sole discretion. Alternatively, the Fund may issue Creation Units in exchange for a specified all-cash payment (‘‘Cash Deposit’’). Similarly, Shares can be redeemed only in Creation Units, generally in-kind for a portfolio of debt securities held by the Fund and/or for a specified amount of cash. Except when aggregated in Creation Units, Shares will not be redeemable by the Fund. The prices at which creations and redemptions occur will be based on the next calculation of NAV after an order is received. Requirements as to the timing and form of orders are described in the Authorized Participant agreement. PIMCO will make available on each Business Day via the NSCC, prior to the opening of business (subject to amendments) on the Exchange (currently 9:30 a.m., E.T.), the identity and the required amount of each Deposit Security and the amount of the Cash Component (or Cash Deposit) to be included in the current ‘‘Fund Deposit’’ 34 (based on information at the end of the previous Business Day). Creations and redemptions must be made by an Authorized Participant. Additional information regarding the Trust, the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings, disclosure policies, distributions and taxes is included in the Registration Statement. All terms relating to the Fund that are referred to but not defined in this proposed rule change are defined in the Registration Statement. Availability of Information The Trust’s Web site (www.pimcoetfs.com), which will be publicly available prior to the public offering of Shares, will include a form valuation of Fund investments in calculating the Fund’s NAV, see the Registration Statement. An ‘‘Authorized Participant’’ refers to a Participating Party (a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation (‘‘NSCC’’); or a Depository Trust Company (‘‘DTC’’) Participant who has executed a Participant Agreement (an agreement with the Distributor and Transfer Agent with respect to creations and redemptions of Creation Unit aggregations). 34 The Deposit Securities and Cash Component or, alternatively, the Cash Deposit, will constitute the Fund Deposit which will represents the investment amount for a Creation Unit of the Fund. E:\FR\FM\21MYN1.SGM 21MYN1 29238 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES of the prospectus for the Fund that may be downloaded. The Trust’s Web site will include additional quantitative information updated on a daily basis, including, for the Fund, (1) daily trading volume, the prior business day’s reported closing price, NAV and midpoint of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/ Ask Price’’),35 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 (9:30 a.m. E.T. to 4:00 p.m. E.T.) on the Exchange, the Fund will disclose on the Trust’s Web site the Disclosed Portfolio as defined in NYSE Arca Equities Rule 8.600(c)(2) that will form the basis for the Fund’s calculation of NAV at the end of the Business Day.36 As noted above, on a daily basis, the Fund will disclose on the Fund’s Web site the following information regarding each portfolio holding, as applicable to the type of holding: Ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in the Fund’s portfolio. The Web site information will be publicly available at no charge. Price information for the debt securities and other financial instruments held by the Fund will be available through major market data vendors.37 35 The Bid/Ask Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 36 Under accounting procedures followed by the Fund, trades made on the prior business day (‘‘T’’) will be booked and reflected in NAV on the current business day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day. 37 Supplementally, major market data vendors may include, but are not limited to: Thomson Reuters, JPMorgan Chase PricingDirect Inc., Markit Group Limited, Bloomberg, Interactive Data Corporation or other major data vendors. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 In addition, a basket composition file, which includes the security names and share quantities, if applicable, required to be delivered in exchange for the Fund’s Shares, together with estimates and actual cash components, will be publicly disseminated daily prior to the opening of the Exchange via the NSCC. The basket represents one Creation Unit of Shares of the Fund. The NAV of the Fund will normally be determined as of the close of the regular trading session on the Exchange (ordinarily 4:00 p.m. E.T.) on each Business Day. Authorized participants may refer to the basket composition file for information regarding Fixed Income Instruments, and any other instrument that may comprise the Fund’s basket on a given day. Investors can also obtain the Trust’s SAI, the Fund’s Shareholder Reports, and the Fund’s Forms N–CSR and Forms N–SAR, filed twice a year. The Trust’s SAI and Shareholder Reports will be available free upon request from the Trust, and those documents and the Form N–CSR, Form N–PX and Form N– SAR may be viewed on-screen or downloaded from the Commission’s Web site at www.sec.gov. Intra-day and closing price information regarding equity securities traded on an exchange, including common stocks, preferred stocks, securities convertible into stocks, closed-end funds, exchange traded funds and other equity-related securities, will be available from the exchange on which such securities are traded. Intra-day and closing price information regarding Fixed Income Instruments also will be available from major market data vendors. Price information relating to forwards will be available from major market data vendors. Information regarding market price and trading volume of the Shares will be continually available on a realtime basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last sale information for the Shares will be available via the CTA high-speed line. In addition, the PIV, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session.38 The dissemination of the PIV, together with 38 Currently, the Exchange understands that several major market data vendors display and/or make widely available PIVs taken from the CTA or other data feeds. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 the Disclosed Portfolio, may allow investors to determine an approximate value of the underlying portfolio of the Fund on a daily basis and to provide an estimate of that value throughout the trading day. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund.39 Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. 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 a.m. to 8 p.m. E.T. 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. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by the Financial Industry Regulatory Authority (‘‘FINRA’’) on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.40 The Exchange 39 See NYSE Arca Equities Rule 7.12. surveils trading on the Exchange pursuant to a regulatory services agreement. The 40 FINRA E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts with other markets that are members of the ISG and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.41 FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Funds [sic] reported to FINRA’s Trade Reporting and Compliance Engine (‘‘TRACE’’). Not more than 10% of the net assets of a [sic] Fund in the aggregate shall consist of equity securities, including stocks into which a convertible security is converted, whose principal market is not a member of the ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Furthermore, not more than 10% of the net assets of the Fund in the aggregate shall consist of futures contracts or exchange-traded options contracts whose principal market is not Exchange is responsible for FINRA’s performance under this regulatory services agreement. 41 For a list of the current members of ISG, see https://www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio for the Fund may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Bulletin Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (‘‘ETP’’) Holders in an Information Bulletin (‘‘Bulletin’’) of the special characteristics and risks associated with trading the Shares. Specifically, the Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Unit aggregations (and that Shares are not individually redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated PIV will not be calculated or publicly disseminated; (4) how information regarding the PIV is disseminated; (5) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. In addition, the Bulletin will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Bulletin will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. The Bulletin will also disclose that the NAV for the Shares will be calculated after 4:00 p.m. E.T. each trading day. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 42 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Equities 42 15 PO 00000 U.S.C. 78f(b)(5). Frm 00083 Fmt 4703 Sfmt 4703 29239 Rule 8.600. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in 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. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts with other markets that are members of the ISG and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-traded equities, exchange-traded options, futures contracts and options on futures contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. Not more than 10% of the net assets of a [sic] Fund in the aggregate shall consist of equity securities, including stocks into which a convertible security is converted, whose principal market is not a member of the ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Furthermore, not more than 10% of the net assets of the Fund in the aggregate shall consist of futures contracts or exchange-traded options contracts whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Funds [sic] reported to FINRA’s TRACE. The Fund’s investments, including derivatives, will be consistent with the Fund’s investment objective and the Fund’s use of derivatives may be used to enhance leverage. However, the Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund’s broad-based securities market index (as defined in Form N– 1A). The Fund will not invest more than 50% of its total assets in high yield securities rated below investment grade but rated at least Caa by Moody’s, S&P or Fitch, or if unrated, determined by PIMCO to be of comparable quality (except such limitation shall not apply E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 29240 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices to the Fund’s investments in mortgageand asset-backed securities. The Fund will not invest more than 20% of its total assets in securities and instruments economically tied to emerging market countries. The Fund will normally limit its foreign currency exposure (from nonU.S. dollar-denominated securities or currencies) to 10% of its total assets. The Fund will limit its investments in currencies to those currencies with a minimum average daily foreign exchange turnover of USD $1 billion as determined by the BIS Triennial Central Bank Survey. The Fund will not invest more than 15% of its net assets in illiquid assets. The Fund will not invest more than 10% of its total assets in preferred stock, convertible securities and other equity-related securities. PIMCO’s Counterparty Risk Committee will evaluate the creditworthiness of swaps counterparties on an ongoing basis. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information is publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the PIV will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Exchange’s Core Trading Session. On each business day, before commencement of trading in Shares in the Core Trading Session on the Exchange, the Fund will disclose on the Trust’s Web site the Disclosed Portfolio that will form the basis for the Fund’s calculation of NAV at the end of the business day. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services, and quotation and last sale information will be available via the CTA high-speed line. The Trust’s Web site will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the PIV, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of activelymanaged exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares 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. The Adviser is not a brokerdealer but is affiliated with a brokerdealer and has implemented a ‘‘fire wall’’ with respect to such broker-dealer regarding access to information concerning the composition and/or changes to the Fund’s portfolio. In addition, the Fund’s Reporting Authority will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the actual components of the Fund’s portfolio. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of an additional type of actively-managed exchange-traded product that, under normal circumstances, will invest principally in fixed income securities and that will enhance competition with respect to such products among market participants, to the benefit of investors and the marketplace. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 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–2014–56 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–2014–56. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices 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–2014–56 and should be submitted on or before June 11, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–11724 Filed 5–20–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72172; File No. SR– NYSEArca–2014–37] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Listing and Trading of the Shares of iShares 2020 S&P AMT-Free Municipal Series Under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 mstockstill on DSK4VPTVN1PROD with NOTICES May 15, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder, 3 notice is hereby given that, on May 2, 2014, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’), through its whollyowned subsidiary NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’ or ‘‘Corporation’’), filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. On May 14, 2014, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the proposed rule change in its entirety. The Commission is publishing this notice to solicit comments on the proposed rule change, 43 17 CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 as modified by Amendment No. 1 thereto, 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 under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, the shares of the following series of the iShares Trust: iShares 2020 S&P AMT-Free Municipal Series. 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 series of the iShares Trust (the ‘‘Trust’’) under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which governs the listing and trading of Investment Company Units (‘‘Units’’) based on fixed income securities indexes: iShares 2020 S&P AMT-Free Municipal Series (‘‘Fund’’).4 4 The Commission previously has approved a proposed rule change relating to listing and trading on the Exchange of Units based on municipal bond indexes. See Securities Exchange Act Release No. 67985 (October 4, 2012), 77 FR 61804 (October 11, 2012) (SR–NYSEArca–2012–92) (order approving proposed rule change relating to the listing and trading of iShares 2018 S&P AMT-Free Municipal Series and iShares 2019 S&P AMT-Free Municipal Series under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02). The Commission also has issued a notice of filing and immediate effectiveness of a proposed rule change relating to listing and trading on the Exchange of the iShares Taxable Municipal Bond Fund. See Securities Exchange Act Release No. 63176 (October 25, 2010), 75 FR 66815 (October 29, 2010) (SR–NYSEArca–2010–94). The Commission has approved two actively managed funds of the PIMCO ETF Trust that hold municipal bonds. See Securities Exchange Act Release No. 60981 (November 10, 2009), 74 FR 59594 (November 18, 2009) (SR–NYSEArca–2009–79) PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 29241 Blackrock Fund Advisors (‘‘BFA’’) is the investment adviser for the Fund.5 BlackRock Investments, LLC is the Fund’s distributor (‘‘Distributor’’).6 iShares 2020 S&P AMT-Free Municipal Series 7 The Fund will seek investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P AMT-Free Municipal Series 2020 Index TM (the ‘‘Index’’).8 The Fund will not seek to (order approving listing and trading of PIMCO Short-Term Municipal Bond Strategy Fund and PIMCO Intermediate Municipal Bond Strategy Fund, among others). The Commission also has approved listing and trading on the Exchange of the SPDR Nuveen S&P High Yield Municipal Bond Fund. See Securities Exchange Act Release No.63881 (February 9, 2011), 76 FR 9065 (February 16, 2011) (SR–NYSEArca–2010–120). 5 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, BFA 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 nonpublic 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. 6 See Post-Effective Amendment No. 1004 to the Trust’s registration statement on Form N–1A under the Securities Act of 1933 (15 U.S.C. 77a) and the Investment Company Act of 1940 (‘‘1940 Act’’) (15 U.S.C. 80a–1), dated December 16, 2013 (File Nos. 333–92935 and 811–09729) (the ‘‘Registration Statement’’). The description of the operation of the Trust and the Fund herein is based, in part, on the Registration Statement. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 27608 (December 21, 2006) (File No. 812–13208) (‘‘Exemptive Order’’). 7 This Amendment No. 1 to SR–NYSEArca–2014– 37 replaces SR–NYSEArca–2014–37 as originally filed and supersedes such filing in its entirety. 8 The Index is sponsored by an organization (the ‘‘Index Provider’’, as described below), that is independent of the Fund and BFA. The Index Provider determines the composition and relative weightings of the securities in the Index and publishes information regarding the market value of the Index. The Index Provider with respect to the Index is Standard & Poor’s Financial Services LLC (a subsidiary of The McGraw-Hill Companies) (‘‘S&P’’). The Index Provider is not a broker-dealer or affiliated with a broker-dealer and has implemented procedures designed to prevent the E:\FR\FM\21MYN1.SGM Continued 21MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 98 (Wednesday, May 21, 2014)]
[Notices]
[Pages 29231-29241]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11724]



[[Page 29231]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72170; File No. SR-NYSEArca-2014-56]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating To Listing and Trading of Shares of 
the PIMCO Income Exchange-Traded Fund Under NYSE Arca Equities Rule 
8.600

May 15, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 1, 2014, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the PIMCO Income 
Exchange-Traded Fund under NYSE Arca Equities Rule 8.600 (``Managed 
Fund Shares''). 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 
PIMCO Income Exchange-Traded Fund (the ``Fund'') under NYSE Arca 
Equities Rule 8.600,\4\ which governs the listing and trading of 
Managed Fund Shares.\5\ The Shares will be offered by PIMCO ETF Trust 
(the ``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.\6\
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    \4\ The Commission has previously approved the listing and 
trading on the Exchange of other actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 60981 
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving Exchange listing and trading of five fixed 
income funds of the PIMCO ETF 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).
    \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 Trust is registered under the 1940 Act. On January 27, 
2014, the Trust filed an amendment to its registration statement on 
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) (``1933 
Act'') and the 1940 Act relating to the Fund (File Nos. 333-155395 
and 811-22250) (the ``Registration Statement''). The description of 
the operation of the Trust and the Fund herein is based, in part, on 
the Registration Statement. In addition, the Commission has issued 
an order granting certain exemptive relief to the Trust under the 
1940 Act. See Investment Company Act Release No. 28993 (November 10, 
2009) (File No. 812-13571) (``Exemptive Order'').
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    The investment manager to the Fund will be Pacific Investment 
Management Company LLC (``PIMCO'' or the ``Adviser''). PIMCO 
Investments LLC will serve as the distributor for the Fund 
(``Distributor''). State Street Bank & Trust Co. will serve as the 
custodian and transfer agent for the Fund (``Custodian'' or ``Transfer 
Agent'').
    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.\7\ 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. The Adviser is not 
registered as a broker-dealer, but is affiliated with a broker-dealer, 
and will implement a ``fire wall'' with respect to such broker-dealer 
regarding access to information concerning the composition and/or 
changes to the Fund's portfolio. If PIMCO elects to hire a sub-adviser 
for the Fund that is registered as a broker-dealer or is affiliated 
with a broker-dealer, such sub-adviser will implement a fire wall with 
respect to its relevant personnel or broker-dealer affiliate regarding 
access to information concerning the composition and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding such 
portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violations, 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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    In the event (a) the Adviser becomes registered as a broker-dealer 
or newly affiliated with a broker-dealer, or (b) any new adviser or 
sub-adviser is a registered broker-dealer, or becomes affiliated with a 
broker-dealer, 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

[[Page 29232]]

changes to the portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding such portfolio.
Characteristics of the Fund \8\
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    \8\ Many of the investment strategies of the Fund are 
discretionary, which means that PIMCO can decide from time to time 
whether to use them or not.
---------------------------------------------------------------------------

    According to the Registration Statement, in selecting investments 
for the Fund, PIMCO will develop an outlook for interest rates, 
currency exchange rates and the economy, will analyze credit and call 
risks, and will use other investment selection techniques. The 
proportion of the Fund's assets committed to investment in securities 
with particular characteristics (such as quality, sector, interest rate 
or maturity) will vary based on PIMCO's outlook for the U.S. economy 
and the economies of other countries in the world, the financial 
markets and other factors.
    In seeking to identify undervalued currencies, PIMCO may consider 
many factors, including, but not limited to, longer-term analysis of 
relative interest rates, inflation rates, real exchange rates, 
purchasing power parity, trade account balances and current account 
balances, as well as other factors that influence exchange rates such 
as flows, market technical trends and government policies. With respect 
to fixed income investing, PIMCO will attempt to identify areas of the 
bond market that are undervalued relative to the rest of the market. 
PIMCO will identify these areas by grouping fixed income investments 
into sectors such as money markets, governments, corporates, mortgages, 
asset-backed and international. Sophisticated proprietary software will 
then assist in evaluating sectors and pricing specific investments. 
Once investment opportunities are identified, PIMCO will shift assets 
among sectors depending upon changes in relative valuations, credit 
spreads and other factors.
Fixed Income Instruments
    Among other investments described in more detail herein, the Fund 
may invest in Fixed Income Instruments, which include:
     Securities issued or guaranteed by the U.S. Government, 
its agencies or government-sponsored enterprises (``U.S. Government 
Securities'');
     corporate debt securities of U.S. and non-U.S. issuers, 
including convertible securities and corporate commercial paper; \9\
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    \9\ With respect to the Fund, while non-emerging markets 
corporate debt securities (excluding commercial paper) generally 
must have $100 million or more par amount outstanding and 
significant par value traded to be considered as an eligible 
investment for the Fund, at least 80% of issues of such securities 
held by the Fund must have $100 million or more par amount 
outstanding (aggregated by issuer or group of related issuers) at 
the time of investment. See also note 20, infra, regarding emerging 
market corporate debt securities.
---------------------------------------------------------------------------

     mortgage-backed and other asset-backed securities; \10\
---------------------------------------------------------------------------

    \10\ Mortgage-related and other asset-backed securities include 
collateralized mortgage obligations (``CMO''s), commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals, stripped 
mortgage-backed securities and other securities that directly or 
indirectly represent a participation in, or are secured by and 
payable from, mortgage loans on real property. A to-be-announced 
(``TBA'') transaction is a method of trading mortgage-backed 
securities. In a TBA transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
---------------------------------------------------------------------------

     inflation-indexed bonds issued both by governments and 
corporations; \11\
---------------------------------------------------------------------------

    \11\ Inflation-indexed bonds (other than municipal inflation-
indexed bonds and certain corporate inflation-indexed bonds) are 
fixed income securities whose principal value is periodically 
adjusted according to the rate of inflation (e.g., Treasury 
Inflation Protected Securities (``TIPS'')). Municipal inflation-
indexed securities are municipal bonds that pay coupons based on a 
fixed rate plus the Consumer Price Index for All Urban Consumers 
(``CPI''). With regard to municipal inflation-indexed bonds and 
certain corporate inflation-indexed bonds, the inflation adjustment 
is reflected in the semi-annual coupon payment.
---------------------------------------------------------------------------

     structured notes, including hybrid or ``indexed'' 
securities and event-linked bonds; \12\
---------------------------------------------------------------------------

    \12\ The Fund may obtain event-linked exposure by investing in 
``event-linked bonds'' or ``event-linked swaps'' or by implementing 
``event-linked strategies.'' Event-linked exposure results in gains 
or losses that typically are contingent, or formulaically related to 
defined trigger events. Examples of trigger events include 
hurricanes, earthquakes, weather-related phenomena, or statistics 
relating to such events. Some event-linked bonds are commonly 
referred to as ``catastrophe bonds.'' If a trigger event occurs, the 
Fund may lose a portion or its entire principal invested in the bond 
or notional amount on a swap.
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     bank capital and trust preferred securities; \13\
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    \13\ There are two common types of bank capital: Tier I and Tier 
II. Bank capital is generally, but not always, of investment grade 
quality. According to the Registration Statement, Tier I securities 
often take the form of trust preferred securities. Tier II 
securities are commonly thought of as hybrids of debt and preferred 
stock, are often perpetual (with no maturity date), callable and, 
under certain conditions, allow for the issuer bank to withhold 
payment of interest until a later date. However, such deferred 
interest payments generally earn interest.
---------------------------------------------------------------------------

     loan participations and assignments; \14\
---------------------------------------------------------------------------

    \14\ The Fund may invest in fixed- and floating-rate loans, 
which investments generally will be in the form of loan 
participations and assignments of portions of such loans.
---------------------------------------------------------------------------

     delayed funding loans and revolving credit facilities;
     bank certificates of deposit, fixed time deposits and 
bankers' acceptances;
     repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments;
     debt securities issued by states or local governments and 
their agencies, authorities and other government-sponsored enterprises 
(``Municipal Bonds'');
     obligations of non-U.S. governments or their subdivisions, 
agencies and government-sponsored enterprises; and
     obligations of international agencies or supranational 
entities.
Use of Derivatives by the Fund
    The Fund's investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. With respect to the Fund, derivative 
instruments primarily will include forwards,\15\ exchange-traded and 
over-the-counter (``OTC'') options contracts, exchange-traded futures 
contracts, swap agreements and options on futures contracts and swap 
agreements. Generally, derivatives are financial contracts whose value 
depends upon, or is derived from, the value of an underlying asset, 
reference rate or index, and may relate to stocks, bonds, interest 
rates, currencies or currency exchange rates, commodities, and related 
indexes. The Fund may, but is not required to, use derivative 
instruments for risk management purposes or as part of its investment 
strategies.
---------------------------------------------------------------------------

    \15\ Forwards are contracts to purchase or sell securities for a 
fixed price at a future date beyond normal settlement time (forward 
commitments).
---------------------------------------------------------------------------

    As described further below, the Fund will typically use derivative 
instruments as a substitute for taking a position in the underlying 
asset and/or as part of a strategy designed to reduce exposure to other 
risks, such as interest rate or currency risk. The Fund may also use 
derivative instruments to enhance returns. To limit the potential risk 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by PIMCO in accordance with 
procedures established by the Trust's Board of Trustees (``Board'') and 
in accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations under derivative instruments. These procedures have been 
adopted

[[Page 29233]]

consistent with Section 18 of the 1940 Act and related Commission 
guidance. In addition, each [sic] Fund will include appropriate risk 
disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Fund, 
including the Fund's use of derivatives, may give rise to leverage, 
causing the Fund to be more volatile than if it had not been 
leveraged.\16\ Because the markets for certain securities, or the 
securities themselves, may be unavailable or cost prohibitive as 
compared to derivative instruments, suitable derivative transactions 
may be an efficient alternative for a [sic] Fund to obtain the desired 
asset exposure.
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    \16\ To mitigate leveraging risk, the Adviser will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
---------------------------------------------------------------------------

    The Adviser believes that derivatives can be an economically 
attractive substitute for an underlying physical security that the Fund 
would otherwise purchase. For example, the Fund could purchase Treasury 
futures contracts instead of physical Treasuries or could sell credit 
default protection on a corporate bond instead of buying a physical 
bond. Economic benefits include potentially lower transaction costs or 
attractive relative valuation of a derivative versus a physical bond 
(e.g., differences in yields).
    The Adviser further believes that derivatives can be used as a more 
liquid means of adjusting portfolio duration as well as targeting 
specific areas of yield curve exposure, with potentially lower 
transaction costs than the underlying securities (e.g., interest rate 
swaps may have lower transaction costs than physical bonds). Similarly, 
money market futures can be used to gain exposure to short-term 
interest rates in order to express views on anticipated changes in 
central bank policy rates. In addition, derivatives can be used to 
protect client assets through selectively hedging downside (or ``tail 
risks'') in the Fund.
    The Fund also can use derivatives to increase or decrease credit 
exposure. Index credit default swaps (CDX) can be used to gain exposure 
to a basket of credit risk by ``selling protection'' against default or 
other credit events, or to hedge broad market credit risk by ``buying 
protection.'' Single name credit default swaps (CDS) can be used to 
allow the Fund to increase or decrease exposure to specific issuers, 
saving investor capital through lower trading costs. The Fund can use 
total return swap contracts to obtain the total return of a reference 
asset or index in exchange for paying a financing cost. A total return 
swap may be much more efficient than buying underlying securities of an 
index, potentially lowering transaction costs.\17\
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    \17\ The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. PIMCO's Counterparty Risk Committee evaluates the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, PIMCO credit analysts 
evaluate each approved counterparty using various methods of 
analysis, including company visits, earnings updates, the broker-
dealer's reputation, PIMCO's past experience with the broker-dealer, 
market levels for the counterparty's debt and equity, the 
counterparty's liquidity and its share of market participation. 
According to the Registration Statement, the Fund has adopted 
procedures that are consistent with Section 18 of the 1940 Act and 
related Commission guidance, which require that a fund's derivative 
instruments be fully collateralized by liquid assets of the fund.
---------------------------------------------------------------------------

    The Adviser believes that the use of derivatives will allow the 
Fund to selectively add diversifying sources of return from selling 
options. Option purchases and sales can also be used to hedge specific 
exposures in the portfolio, and can provide access to return streams 
available to long-term investors such as the persistent difference 
between implied and realized volatility. Option strategies can generate 
income or improve execution prices (i.e., covered calls).
Principal Investments of the Fund
    According to the Registration Statement, the Fund will seek to 
maximize current income; long-term capital appreciation will be a 
secondary objective. The Fund will seek to maintain a high and 
consistent level of dividend income by investing in a broad array of 
fixed income sectors and utilizing income efficient implementation 
strategies. The capital appreciation sought by the Fund generally will 
arise from decreases in interest rates or improving credit fundamentals 
for a particular sector or security.
    The Fund will seek to achieve its investment objective by 
investing, under normal circumstances,\18\ at least 65% of its total 
assets in a multi-sector portfolio of Fixed Income Instruments of 
varying maturities, which may be represented by derivatives based on 
Fixed Income Instruments (the ``65% policy''). The average portfolio 
duration \19\ of the Fund normally will vary from zero to eight years 
based on PIMCO's forecast for interest rates.
---------------------------------------------------------------------------

    \18\ 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; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as a systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
    \19\ Duration is a measure used to determine the sensitivity of 
a security's price to changes in interest rates. The longer a 
security's duration, the more sensitive it will be to changes in 
interest rates.
---------------------------------------------------------------------------

    The Fund, as described further below, will generally allocate its 
assets among several investment sectors, without limitation, which may 
include: (i) High yield securities (``junk bonds'') and investment 
grade corporate bonds of issuers located in the United States and non-
U.S. countries, including emerging market countries; (ii) fixed income 
securities issued by the U.S. and non-U.S. governments (including 
emerging market governments), their agencies and instrumentalities; 
(iii) mortgage-related and other asset backed securities; and (iv) 
foreign currencies, including those of emerging market countries. 
However, the Fund will not be required to gain exposure to any one 
investment sector, and the Fund's exposure to any one investment sector 
will vary over time.
    The Fund may invest up to 50% of its total assets in high yield 
securities rated below investment grade but rated at least Caa by 
Moody's Investors Service, Inc. (``Moody's''), or equivalently rated by 
Standard & Poor's Ratings Services (``S&P'') or Fitch, Inc. 
(``Fitch''), or if unrated, determined by PIMCO to be of comparable 
quality \20\ (except such limitation shall not apply to the Fund's 
investments in mortgage- and asset-backed securities).
---------------------------------------------------------------------------

    \20\ Securities rated Ba or lower by Moody's, or equivalently 
rated by S&P or Fitch, are sometimes referred to as ``high yield 
securities'' or ``junk bonds'' while securities rated Baa or higher 
are referred to as ``investment grade.'' Unrated securities may be 
less liquid than comparable rated securities and involve the risk 
that the Fund's portfolio manager may not accurately evaluate the 
security's comparative credit rating. To the extent that the Fund 
invests in unrated securities, the Fund's success in achieving its 
investment objective may depend more heavily on the portfolio 
manager's creditworthiness analysis than if that Fund invested 
exclusively in rated securities. In determining whether a security 
is of comparable quality the Adviser will consider, for example, 
whether the issuer of the security has issued other rated 
securities; whether the obligations under the security are 
guaranteed by another entity and 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; other structural analysis; 
macroeconomic analysis; and sector or industry analysis.
---------------------------------------------------------------------------

    The Fund may invest up to 20% of its total assets in securities and 
instruments that are economically tied to emerging market 
countries.\21\
---------------------------------------------------------------------------

    \21\ PIMCO will generally consider an instrument to be 
economically tied to an emerging market country if the security's 
``country of exposure'' is an emerging market country, as determined 
by the criteria set forth in the Registration Statement. 
Alternatively, such as when a ``country of exposure'' is not 
available or when PIMCO believes the following tests more accurately 
reflect which country the security is economically tied to, PIMCO 
may consider an instrument to be economically tied to an emerging 
market country if the issuer or guarantor is a government of an 
emerging market country (or any political subdivision, agency, 
authority or instrumentality of such government), if the issuer or 
guarantor is organized under the laws of an emerging market country, 
or if the currency of settlement of the security is a currency of an 
emerging market country. With respect to derivative instruments, 
PIMCO will generally consider such instruments to be economically 
tied to emerging market countries if the underlying assets are 
currencies of emerging market countries (or baskets or indices of 
such currencies), or instruments or securities that are issued or 
guaranteed by governments of emerging market countries or by 
entities organized under the laws of emerging market countries. 
While emerging markets corporate debt securities (excluding 
commercial paper) generally must have $200 million or more par 
amount outstanding and significant par value traded to be considered 
as an eligible investment for the Fund, at least 80% of issues 
(aggregated by issuer or group of related issuers) of such 
securities held by the Fund must have $200 million or more par 
amount outstanding at the time of investment.
    PIMCO will have broad discretion to identify countries that it 
would consider to qualify as emerging markets. In making investments 
in emerging market securities, the Fund will emphasize those 
countries with relatively low gross national product per capita and 
with the potential for rapid economic growth. Emerging market 
countries are generally located in Asia, Africa, the Middle East, 
Latin America and Eastern Europe. PIMCO will select the country and 
currency composition based on its evaluation of relative interest 
rates, inflation rates, exchange rates, monetary and fiscal 
policies, trade and current account balances, legal and political 
developments and any other specific factors it believes to be 
relevant.

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[[Page 29234]]

    The Fund may invest in securities and instruments that are 
economically tied to foreign (non-U.S.) countries.\22\ The Fund may 
invest, without limitation, in securities denominated in foreign 
currencies. The Fund will normally limit its foreign currency exposure 
(from non-U.S. dollar-denominated securities or currencies) to 10% of 
its total assets.
---------------------------------------------------------------------------

    \22\ PIMCO will generally consider an instrument to be 
economically tied to a non-U.S. country if the issuer is a foreign 
government (or any political subdivision, agency, authority or 
instrumentality of such government), or if the issuer is organized 
under the laws of a non-U.S. country. In the case of certain money 
market instruments, such instruments will be considered economically 
tied to a non-U.S. country if either the issuer or the guarantor of 
such money market instrument is organized under the laws of a non-
U.S. country. With respect to derivative instruments, PIMCO will 
generally consider such instruments to be economically tied to non-
U.S. countries if the underlying assets are foreign currencies (or 
baskets or indexes of such currencies), or instruments or securities 
that are issued by foreign governments or issuers organized under 
the laws of a non-U.S. country (or if the underlying assets are 
certain money market instruments, if either the issuer or the 
guarantor of such money market instruments is organized under the 
laws of a non-U.S. country).
---------------------------------------------------------------------------

    In furtherance of the 65% policy, or with respect to the Fund's 
other investments, the Fund may invest in derivative instruments, 
subject to applicable law and any other restrictions described herein.
    The Fund may invest up to 25% of its assets in mortgage-related and 
other asset-backed securities, although this 25% limitation does not 
apply to securities issued or guaranteed by Federal agencies and/or 
U.S. government sponsored instrumentalities.
    The Fund may engage in foreign currency transactions on a spot 
(cash) basis and forward basis and invest in foreign currency futures 
and options contracts. The Fund may enter into these contracts to hedge 
against foreign exchange risk, to increase exposure to a foreign 
currency or to shift exposure to foreign currency fluctuations from one 
currency to another. Suitable hedging transactions may not be available 
in all circumstances and there can be no assurance that the Fund will 
engage in such transactions at any given time or from time to time.
    The Fund may, without limitation, seek to obtain market exposure to 
the securities in which it primarily invests by entering into a series 
of purchase and sale contracts or by using other investment techniques 
(such as buy backs or dollar rolls).
Other (Non-Principal) Investments of the Fund
    The Fund may invest up to 10% of its total assets in preferred 
stocks, convertible securities and other equity-related securities.\23\
---------------------------------------------------------------------------

    \23\ Convertible securities are generally preferred stocks and 
other securities, including fixed income securities and warrants, 
that are convertible into or exercisable for common stock at a 
stated price or rate. Equity-related investments may include 
investments in small-capitalization (``small-cap''), mid-
capitalization (``mid-cap'') and large-capitalization (``large-
cap'') companies. With respect to each [sic] Fund, a small-cap 
company will be defined as a company with a market capitalization of 
up to $1.5 billion, a mid-cap company will be defined as a company 
with a market capitalization of between $1.5 billion and $10 billion 
and a large-cap company will be defined as a company with a market 
capitalization above $10 billion. Not more than 10% of the net 
assets of a [sic] Fund in the aggregate shall consist of non-U.S. 
equity securities, including non-U.S. stocks into which a 
convertible security is converted, whose principal market is not a 
member of the Intermarket Surveillance Group (``ISG'') or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
---------------------------------------------------------------------------

    The Fund may invest in variable and floating rate securities, which 
are securities that pay interest at rates that adjust whenever a 
specified interest rate changes and/or that reset on predetermined 
dates (such as the last day of a month or calendar quarter). The Fund 
may invest in floating rate debt instruments (``floaters'') and inverse 
floating rate debt instruments (``inverse floaters'') and may engage in 
credit spread trades.
    As disclosed in the Registration Statement, the Fund may also 
invest in trade claims,\24\ privately placed and unregistered 
securities, and structured products, including credit-linked 
securities, commodity-linked notes and structured notes. The Fund may 
invest in Brady Bonds, which are securities created through the 
exchange of existing commercial bank loans to sovereign entities for 
new obligations in connection with a debt restructuring.
---------------------------------------------------------------------------

    \24\ Trade claims are non-securitized rights of payment arising 
from obligations that typically arise when vendors and suppliers 
extend credit to a company by offering payment terms for products 
and services. If the company files for bankruptcy, payments on these 
trade claims stop and the claims are subject to compromise along 
with the other debts of the company. Trade claims may be purchased 
directly from the creditor or through brokers.
---------------------------------------------------------------------------

    The Fund may purchase or sell securities which the Fund is eligible 
to purchase or sell on a when-issued basis, may purchase and sell such 
securities for delayed delivery and may make contracts to purchase or 
sell such securities for a fixed price at a future date beyond normal 
settlement time (forward commitments). The Fund may make short sales as 
part of its overall portfolio management strategies or to offset a 
potential decline in value of a security.
    The Fund may enter into repurchase agreements, in which the Fund 
purchases a security from a bank or broker-dealer, which agrees to 
purchase the security at the Fund's cost plus interest within a 
specified time. Repurchase agreements maturing in more than seven days 
and which may not be terminated within seven days at approximately the 
amount at which the Fund has valued the agreements will be considered 
illiquid securities. The Fund may enter into reverse repurchase 
agreements and dollar rolls subject to the Fund's limitations on 
borrowings.\25\ Reverse repurchase agreements and dollar rolls may be 
considered borrowing for some purposes. The Fund will segregate or 
``earmark'' assets determined to be liquid by PIMCO in accordance with 
procedures established by the Board to cover its obligations under 
reverse repurchase agreements and dollar rolls.
---------------------------------------------------------------------------

    \25\ A reverse repurchase agreement involves the sale of a 
security by the Fund and its agreement to repurchase the instrument 
at a specified time and price. A dollar roll is similar except that 
the counterparty is not obligated to return the same securities as 
those originally sold by the Fund but only securities that are 
``substantially identical.''

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[[Page 29235]]

    According to the Registration Statement, the Fund may invest, 
without limit, for temporary or defensive purposes, in U.S. debt 
securities, including taxable securities and short-term money market 
securities, if PIMCO deems it appropriate to do so. If PIMCO believes 
that economic or market conditions are unfavorable to investors, the 
Fund may temporarily invest up to 100% of its assets in certain 
defensive strategies, including holding a substantial portion of its 
assets in cash, cash equivalents or other highly rated short-term 
securities, including securities issued or guaranteed by the U.S. 
government, its agencies or instrumentalities.
    According to the Registration Statement, the Fund may invest in, to 
the extent permitted by Section 12(d)(1)(A) of the 1940 Act, other 
affiliated and unaffiliated funds, such as open-end or closed-end 
management investment companies, including other exchange traded funds, 
provided that the Fund's investment in units or shares of investment 
companies and other open-end collective investment vehicles will not 
exceed 10% of the Fund's total assets. The Fund may invest securities 
lending collateral in one or more money market funds to the extent 
permitted by Rule 12d1-1 under the 1940 Act, including series of PIMCO 
Funds, affiliated open-end management investment companies managed by 
PIMCO.
Investment Restrictions
    The Fund's investments, including investments in derivative 
instruments, will be subject to all of the restrictions under the 1940 
Act, including restrictions with respect to investments in illiquid 
securities, that is, the limitation that a fund may hold up to an 
aggregate amount of 15% of its net assets in illiquid securities 
(calculated at the time of investment), including Rule 144A securities 
deemed illiquid by the Adviser, in accordance with Commission 
guidance.\26\ The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained, and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid securities. 
Illiquid securities include securities subject to contractual or other 
restrictions on resale and other instruments that lack readily 
available markets as determined in accordance with Commission staff 
guidance.\27\
---------------------------------------------------------------------------

    \26\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers willing 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 trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer).
    \27\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------

    The Fund is non-diversified, which means that it may invest its 
assets in a smaller number of issuers than a diversified fund.\28\
---------------------------------------------------------------------------

    \28\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80e).
---------------------------------------------------------------------------

    The Fund's portfolio will include a minimum of 13 non-affiliated 
issuers.
    The Fund intends to qualify annually and elect to be treated as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code.\29\ The Fund will not concentrate its investments in a particular 
industry, as that term is used in the 1940 Act, and as interpreted, 
modified, or otherwise permitted by regulatory authority having 
jurisdiction from time to time.\30\
---------------------------------------------------------------------------

    \29\ 26 U.S.C. 851.
    \30\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
---------------------------------------------------------------------------

    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and the Fund's use of derivatives 
may be used to enhance leverage. However, the Fund's investments will 
not be used to seek performance that is the multiple or inverse 
multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities 
market index (as defined in Form N-1A).\31\
---------------------------------------------------------------------------

    \31\ The Fund's broad-based securities market index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------

    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Fund's Reporting Authority will 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the actual components of the Fund's portfolio. The Exchange 
represents that, for initial and/or continued listing, the Fund will be 
in compliance with Rule 10A-3 \32\ under the Act, as provided by NYSE 
Arca Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding 
at the commencement of trading on the Exchange. The Exchange will 
obtain a representation from the issuer of the Shares that the net 
asset value (``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.
---------------------------------------------------------------------------

    \32\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Net Asset Value and Derivatives Valuation Methodology for Purposes of 
Determining Net Asset Value
    The NAV of the Fund's Shares will be determined by dividing the 
total value of the Fund's portfolio investments and other assets, less 
any liabilities, by the total number of Shares outstanding.
    The Fund's Shares will be valued as of the close of regular trading 
(normally 4:00 p.m. Eastern time (``E.T.'') (the ``NYSE Close'') on 
each day NYSE Arca is open (``Business Day''). Information that becomes 
known to the Funds [sic] or its agents after the NAV has been 
calculated on a particular day will not generally be used to 
retroactively adjust the price of a portfolio asset or the NAV 
determined earlier that day.
    For purposes of calculating NAV, portfolio securities and other 
assets for which market quotes are readily available will be valued at 
market value. Market value will generally be determined on the basis of 
last reported sales prices, or if no sales are reported, based on 
quotes obtained from a quotation reporting system, established market 
makers, or pricing services.
    Fixed Income Instruments, including those to be purchased under 
firm commitment agreements/delayed delivery basis, will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
independent pricing services. Foreign fixed income securities will 
generally be valued on the basis of quotes obtained from brokers and 
dealers or pricing services using data reflecting the earlier closing 
of the principal markets for those assets. Short-term debt instruments 
having a remaining maturity of 60 days or less

[[Page 29236]]

are generally valued at amortized cost, which approximates market 
value.
    As discussed in more detail below, derivatives will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
pricing services using data reflecting the earlier closing of the 
principal markets for those assets. Local closing prices will be used 
for all instrument valuation purposes. Foreign currency-denominated 
derivatives are generally valued using market inputs as of the 
respective local region's market close.
    With respect to specific derivatives:
     Currency spot and forward rates will be generally 
determined as of the NYSE Close.
     Exchange traded futures will be generally valued at the 
settlement price of the relevant exchange.
     A total return swap on an index will be valued at the 
publicly available index price. The index price, in turn, will be 
determined by the applicable index calculation agent, which generally 
will value the securities underlying the index at the last reported 
sale price.
     Equity total return swaps will generally be valued using 
the actual underlying equity at local market closing, while bank loan 
total return swaps will generally be valued using the evaluated 
underlying bank loan price minus the strike price of the loan.
     Exchange-traded non-equity options, (for example, options 
on bonds, Eurodollar options and U.S. Treasury options), index options, 
and options on futures will generally be valued at the official 
settlement price determined by the relevant exchange, if available.
     OTC and exchange traded equity options will generally be 
valued on a basis of quotes obtained from a quotation reporting system, 
established market makers, or pricing services.
     OTC FX options will generally be valued by pricing 
vendors.
     All other swaps such as interest rate swaps, inflation 
swaps, swaptions, credit default swaps, CDX/CDS will generally be 
valued by pricing services.
    Exchange-traded equity securities will be valued at the official 
closing price or the last trading price on the exchange or market on 
which the security is primarily traded at the time of valuation. If no 
sales or closing prices are reported during the day, equity securities 
are generally valued at the mean of the last available bid and ask 
quotation on the exchange or market on which the security is primarily 
traded, or using other market information obtained from quotation 
reporting systems, established market makers, or pricing services. 
Investment company securities that are not exchange-traded will be 
valued at NAV.
    If a foreign security's value has materially changed after the 
close of the security's primary exchange or principal market but before 
the NYSE Close, the security will be valued at fair value based on 
procedures established and approved by the Board. Foreign securities 
that do not trade when the NYSE is open are also valued at fair value.
    Securities and other assets for which market quotes are not readily 
available will be valued at fair value as determined in good faith by 
the Board or persons acting at their direction. The Board has adopted 
methods for valuing securities and other assets in circumstances where 
market quotes are not readily available, and has delegated to PIMCO the 
responsibility for applying the valuation methods. In the event that 
market quotes are not readily available, and the security or asset 
cannot be valued pursuant to one of the valuation methods, the value of 
the security or asset will be determined in good faith by the Valuation 
Committee of the Board, generally based upon recommendations provided 
by PIMCO.
    Market quotes are considered not readily available in circumstances 
where there is an absence of current or reliable market-based data 
(e.g., trade information, bid/ask information, broker quotes), 
including where events occur after the close of the relevant market, 
but prior to the NYSE Close, that materially affect the values of the 
Fund's securities or assets. In addition, market quotes are considered 
not readily available when, due to extraordinary circumstances, the 
exchanges or markets on which the securities trade do not open for 
trading for the entire day and no other market prices are available. 
The Board has delegated to PIMCO the responsibility for monitoring 
significant events that may materially affect the values of the Fund's 
securities or assets and for determining whether the value of the 
applicable securities or assets should be re-evaluated in light of such 
significant events.
    When the Fund uses fair value pricing to determine its NAV, 
securities will not be priced on the basis of quotes from the primary 
market in which they are traded, but rather may be priced by another 
method that the Board or persons acting at their direction believe 
reflects fair value. Fair value pricing may require subjective 
determinations about the value of a security. While the Trust's policy 
is intended to result in a calculation of the Fund's NAV that fairly 
reflects security values as of the time of pricing, the Trust cannot 
ensure that fair values determined by the Board or persons acting at 
their direction would accurately reflect the price that the Fund could 
obtain for a security if it were to dispose of that security as of the 
time of pricing (for instance, in a forced or distressed sale). The 
prices used by the Fund may differ from the value that would be 
realized if the securities were sold.
    For the Fund's 4:00 p.m. E.T. futures holdings, estimated prices 
from Reuters will be used if any cumulative futures margin impact is 
greater than $0.005 to the NAV due to futures movement after the fixed 
income futures market closes (3:00 p.m. E.T.) and up to the NYSE Close 
(generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the 
Chicago Mercantile Exchange (``CME'') or the Intercontinental Exchange 
(``ICE-US'') will use the applicable exchange closing price where 
available.
    Investments initially valued in currencies other than the U.S. 
dollar will be converted to the U.S. dollar using exchange rates 
obtained from pricing services. As a result, the NAV of the Fund's 
Shares may be affected by changes in the value of currencies in 
relation to the U.S. dollar. The value of securities traded in markets 
outside the United States or denominated in currencies other than the 
U.S. dollar may be affected significantly on a day that the NYSE is 
closed. As a result, to the extent that the Fund holds foreign (non-
U.S.) securities, the NAV of the Fund's Shares may change when an 
investor cannot purchase, redeem or exchange Shares.
Derivatives Valuation Methodology for Purposes of Determining Portfolio 
Indicative Value
    On each Business Day, before commencement of trading in Fund Shares 
on NYSE Arca, the Fund will disclose on its Web site the identities and 
quantities of the portfolio instruments and other assets held by the 
Fund that will form the basis for the Fund's calculation of NAV at the 
end of the Business Day.
    In order to provide additional information regarding the intra-day 
value of Shares of the Fund, the NYSE Arca or a market data vendor will 
disseminate every 15 seconds through the facilities of the Consolidated 
Tape Association (``CTA'') or other widely disseminated means an 
updated Portfolio Indicative Value (``PIV'') for the Fund as calculated 
by an information provider or market data vendor.
    A third party market data provider will calculate the PIV for the 
Fund. For

[[Page 29237]]

the purposes of determining the PIV, the third party market data 
provider's valuation of derivatives is expected to be similar to its 
valuation of all securities. The third party market data provider may 
use market quotes if available or may fair value securities against 
proxies (such as swap or yield curves).
    With respect to specific derivatives:
     Foreign currency derivatives may be valued intraday using 
market quotes, or another proxy as determined to be appropriate by the 
third party market data provider.
     Futures may be valued intraday using the relevant futures 
exchange data, or another proxy as determined to be appropriate by the 
third party market data provider.
     Interest rate swaps may be mapped to a swap curve and 
valued intraday based on the swap curve, or another proxy as determined 
to be appropriate by the third party market data provider.
     CDX/CDS may be valued using intraday data from market 
vendors, or based on underlying asset price, or another proxy as 
determined to be appropriate by the third party market data provider.
     Total return swaps may be valued intraday using the 
underlying asset price, or another proxy as determined to be 
appropriate by the third party market data provider.
     Exchange listed options may be valued intraday using the 
relevant exchange data, or another proxy as determined to be 
appropriate by the third party market data provider.
     OTC options may be valued intraday through option 
valuation models (e.g., Black-Scholes) or using exchange traded options 
as a proxy, or another proxy as determined to be appropriate by the 
third party market data provider.
    A third party market data provider's valuation of forwards will be 
similar to its valuation of the underlying securities, or another proxy 
as determined to be appropriate by the third party market data 
provider. The third party market data provider will generally use 
market quotes if available. Where market quotes are not available, it 
may fair value securities against proxies (such as swap or yield 
curves). The Fund's disclosure of forward positions will include 
information that market participants can use to value these positions 
intraday.
Disclosed Portfolio
    The Fund's disclosure of derivative positions will include 
information that market participants can use to value these positions 
intraday. The Fund's disclosure of derivative positions in the 
Disclosed Portfolio will include information that market participants 
can use to value these positions intraday. On a daily basis, the Fund 
will disclose on the Fund's Web site the following information 
regarding each portfolio holding, as applicable to the type of holding: 
Ticker symbol, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding, such as the type of 
swap); the identity of the security, commodity, index or other asset or 
instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity date, 
if any; coupon rate, if any; effective date, if any; market value of 
the holding; and the percentage weighting of the holding in the Fund's 
portfolio.
Impact on Arbitrage Mechanism
    The Adviser believes there will be minimal, if any, impact to the 
arbitrage mechanism for the Fund as a result of the use of derivatives. 
Market makers and participants should be able to value derivatives as 
long as the positions are disclosed with relevant information. The 
Adviser believes that the price at which Shares trade will continue to 
be disciplined by arbitrage opportunities created by the ability to 
purchase or redeem creation Shares at their NAV, which should ensure 
that Shares will not trade at a material discount or premium in 
relation to their NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of the Fund's arbitrage 
mechanism due to the use of derivatives. Because derivatives generally 
are not eligible for in-kind transfer, they will typically be 
substituted with a ``cash in lieu'' amount when the Fund processes 
purchases or redemptions of block-size Creation Units (as described 
below) in-kind.
Creations and Redemptions of Shares
    According to the Registration Statement, Shares of the Fund that 
trade in the secondary market will be ``created'' at NAV by Authorized 
Participants only in block-size creation units (``Creation Units'') of 
100,000 Shares or multiples thereof.\33\ The Fund will offer and issue 
Shares at their NAV per Share generally in exchange for a basket of 
debt securities held by the Fund (the ``Deposit Securities'') together 
with a deposit of a specified cash payment (the ``Cash Component''), or 
in lieu of Deposit Securities, a [sic] Fund may permit a ``cash-in-
lieu'' amount for any reason at the Fund's sole discretion. 
Alternatively, the Fund may issue Creation Units in exchange for a 
specified all-cash payment (``Cash Deposit''). Similarly, Shares can be 
redeemed only in Creation Units, generally in-kind for a portfolio of 
debt securities held by the Fund and/or for a specified amount of cash.
---------------------------------------------------------------------------

    \33\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of trading on the 
New York Stock Exchange (``NYSE''), generally 4:00 p.m. E.T. (the 
``NAV Calculation Time'') on any business day. NAV per Share is 
calculated by dividing the Fund's net assets by the number of the 
Fund's Shares outstanding. For more information regarding the 
valuation of Fund investments in calculating the Fund's NAV, see the 
Registration Statement.
    An ``Authorized Participant'' refers to a Participating Party (a 
broker-dealer or other participant in the clearing process through 
the Continuous Net Settlement System of the National Securities 
Clearing Corporation (``NSCC''); or a Depository Trust Company 
(``DTC'') Participant who has executed a Participant Agreement (an 
agreement with the Distributor and Transfer Agent with respect to 
creations and redemptions of Creation Unit aggregations).
---------------------------------------------------------------------------

    Except when aggregated in Creation Units, Shares will not be 
redeemable by the Fund. The prices at which creations and redemptions 
occur will be based on the next calculation of NAV after an order is 
received. Requirements as to the timing and form of orders are 
described in the Authorized Participant agreement. PIMCO will make 
available on each Business Day via the NSCC, prior to the opening of 
business (subject to amendments) on the Exchange (currently 9:30 a.m., 
E.T.), the identity and the required amount of each Deposit Security 
and the amount of the Cash Component (or Cash Deposit) to be included 
in the current ``Fund Deposit'' \34\ (based on information at the end 
of the previous Business Day). Creations and redemptions must be made 
by an Authorized Participant.
---------------------------------------------------------------------------

    \34\ The Deposit Securities and Cash Component or, 
alternatively, the Cash Deposit, will constitute the Fund Deposit 
which will represents the investment amount for a Creation Unit of 
the Fund.
---------------------------------------------------------------------------

    Additional information regarding the Trust, the Fund and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, disclosure policies, 
distributions and taxes is included in the Registration Statement. All 
terms relating to the Fund that are referred to but not defined in this 
proposed rule change are defined in the Registration Statement.
Availability of Information
    The Trust's Web site (www.pimcoetfs.com), which will be publicly 
available prior to the public offering of Shares, will include a form

[[Page 29238]]

of the prospectus for the Fund that may be downloaded. The Trust's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the 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 ``Bid/Ask 
Price''),\35\ 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 (9:30 a.m. E.T. to 
4:00 p.m. E.T.) on the Exchange, the Fund will disclose on the Trust's 
Web site the Disclosed Portfolio as defined in NYSE Arca Equities Rule 
8.600(c)(2) that will form the basis for the Fund's calculation of NAV 
at the end of the Business Day.\36\
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    \35\ The Bid/Ask Price of the Fund will be determined using the 
mid-point of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \36\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    As noted above, on a daily basis, the Fund will disclose on the 
Fund's Web site the following information regarding each portfolio 
holding, as applicable to the type of holding: Ticker symbol, CUSIP 
number or other identifier, if any; a description of the holding 
(including the type of holding, such as the type of swap); the identity 
of the security, commodity, index or other asset or instrument 
underlying the holding, if any; for options, the option strike price; 
quantity held (as measured by, for example, par value, notional value 
or number of shares, contracts or units); maturity date, if any; coupon 
rate, if any; effective date, if any; market value of the holding; and 
the percentage weighting of the holding in the Fund's portfolio. The 
Web site information will be publicly available at no charge.
    Price information for the debt securities and other financial 
instruments held by the Fund will be available through major market 
data vendors.\37\
---------------------------------------------------------------------------

    \37\ Supplementally, major market data vendors may include, but 
are not limited to: Thomson Reuters, JPMorgan Chase PricingDirect 
Inc., Markit Group Limited, Bloomberg, Interactive Data Corporation 
or other major data vendors.
---------------------------------------------------------------------------

    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for the Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket represents one Creation Unit of 
Shares of the Fund. The NAV of the Fund will normally be determined as 
of the close of the regular trading session on the Exchange (ordinarily 
4:00 p.m. E.T.) on each Business Day. Authorized participants may refer 
to the basket composition file for information regarding Fixed Income 
Instruments, and any other instrument that may comprise the Fund's 
basket on a given day.
    Investors can also obtain the Trust's SAI, the Fund's Shareholder 
Reports, and the Fund's Forms N-CSR and Forms N-SAR, filed twice a 
year. The Trust's SAI and Shareholder Reports will be available free 
upon request from the Trust, and those documents and the Form N-CSR, 
Form N-PX and Form N-SAR may be viewed on-screen or downloaded from the 
Commission's Web site at www.sec.gov. Intra-day and closing price 
information regarding equity securities traded on an exchange, 
including common stocks, preferred stocks, securities convertible into 
stocks, closed-end funds, exchange traded funds and other equity-
related securities, will be available from the exchange on which such 
securities are traded. Intra-day and closing price information 
regarding Fixed Income Instruments also will be available from major 
market data vendors. Price information relating to forwards will be 
available from major market data vendors. Information regarding market 
price and trading volume of the Shares will be continually available on 
a real-time basis throughout the day on brokers' computer screens and 
other electronic services. Information regarding the previous day's 
closing price and trading volume information for the Shares will be 
published daily in the financial section of newspapers. Quotation and 
last sale information for the Shares will be available via the CTA 
high-speed line. In addition, the PIV, as defined in NYSE Arca Equities 
Rule 8.600(c)(3), will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Core Trading 
Session.\38\ The dissemination of the PIV, together with the Disclosed 
Portfolio, may allow investors to determine an approximate value of the 
underlying portfolio of the Fund on a daily basis and to provide an 
estimate of that value throughout the trading day.
---------------------------------------------------------------------------

    \38\ Currently, the Exchange understands that several major 
market data vendors display and/or make widely available PIVs taken 
from the CTA or other data feeds.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\39\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 have been reached. Trading also may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \39\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. 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.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\40\ The Exchange

[[Page 29239]]

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
---------------------------------------------------------------------------

    \40\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-traded equities, exchange-
traded options, futures contracts and options on futures contracts with 
other markets that are members of the ISG and FINRA, on behalf of the 
Exchange, may obtain trading information regarding trading in the 
Shares, exchange-traded equities, exchange-traded options, futures 
contracts and options on futures contracts from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, exchange-traded equities, exchange-traded 
options, futures contracts and options on futures contracts from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.\41\ FINRA, on behalf of the Exchange, is able to access, as 
needed, trade information for certain fixed income securities held by 
the Funds [sic] reported to FINRA's Trade Reporting and Compliance 
Engine (``TRACE'').
---------------------------------------------------------------------------

    \41\ For a list of the current members of ISG, see https://www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    Not more than 10% of the net assets of a [sic] Fund in the 
aggregate shall consist of equity securities, including stocks into 
which a convertible security is converted, whose principal market is 
not a member of the ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement.
    Furthermore, not more than 10% of the net assets of the Fund in the 
aggregate shall consist of futures contracts or exchange-traded options 
contracts whose principal market is not a member of ISG or is a market 
with which the Exchange does not have a comprehensive surveillance 
sharing agreement.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Unit aggregations (and that Shares are not individually 
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty 
of due diligence on its ETP Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (3) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated PIV will not be calculated or publicly 
disseminated; (4) how information regarding the PIV is disseminated; 
(5) the requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information. In 
addition, the Bulletin will reference that the Fund is subject to 
various fees and expenses described in the Registration Statement. The 
Bulletin will discuss any exemptive, no-action, and interpretive relief 
granted by the Commission from any rules under the Act. The Bulletin 
will also disclose that the NAV for the Shares will be calculated after 
4:00 p.m. E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \42\ 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.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in 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. FINRA, 
on behalf of the Exchange, will communicate as needed regarding trading 
in the Shares, exchange-traded equities, exchange-traded options, 
futures contracts and options on futures contracts with other markets 
that are members of the ISG and FINRA, on behalf of the Exchange, may 
obtain trading information regarding trading in the Shares, exchange-
traded equities, exchange-traded options, futures contracts and options 
on futures contracts from such markets and other entities. In addition, 
the Exchange may obtain information regarding trading in the Shares, 
exchange-traded equities, exchange-traded options, futures contracts 
and options on futures contracts from markets and other entities that 
are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Not more than 10% of the 
net assets of a [sic] Fund in the aggregate shall consist of equity 
securities, including stocks into which a convertible security is 
converted, whose principal market is not a member of the ISG or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. Furthermore, not more than 10% of the 
net assets of the Fund in the aggregate shall consist of futures 
contracts or exchange-traded options contracts whose principal market 
is not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement. FINRA, on behalf 
of the Exchange, is able to access, as needed, trade information for 
certain fixed income securities held by the Funds [sic] reported to 
FINRA's TRACE.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and the Fund's use of derivatives 
may be used to enhance leverage. However, the Fund's investments will 
not be used to seek performance that is the multiple or inverse 
multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities 
market index (as defined in Form N-1A). The Fund will not invest more 
than 50% of its total assets in high yield securities rated below 
investment grade but rated at least Caa by Moody's, S&P or Fitch, or if 
unrated, determined by PIMCO to be of comparable quality (except such 
limitation shall not apply

[[Page 29240]]

to the Fund's investments in mortgage- and asset-backed securities. The 
Fund will not invest more than 20% of its total assets in securities 
and instruments economically tied to emerging market countries. The 
Fund will normally limit its foreign currency exposure (from non-U.S. 
dollar-denominated securities or currencies) to 10% of its total 
assets. The Fund will limit its investments in currencies to those 
currencies with a minimum average daily foreign exchange turnover of 
USD $1 billion as determined by the BIS Triennial Central Bank Survey. 
The Fund will not invest more than 15% of its net assets in illiquid 
assets. The Fund will not invest more than 10% of its total assets in 
preferred stock, convertible securities and other equity-related 
securities. PIMCO's Counterparty Risk Committee will evaluate the 
creditworthiness of swaps counterparties on an ongoing basis.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Moreover, the PIV will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Exchange's Core Trading Session. On each business 
day, before commencement of trading in Shares in the Core Trading 
Session on the Exchange, the Fund will disclose on the Trust's Web site 
the Disclosed Portfolio that will form the basis for the Fund's 
calculation of NAV at the end of the business day. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services, and quotation 
and last sale information will be available via the CTA high-speed 
line. The Trust's Web site will include a form of the prospectus for 
the Fund and additional data relating to NAV and other applicable 
quantitative information. Moreover, prior to the commencement of 
trading, the Exchange will inform its ETP Holders in an Information 
Bulletin of the special characteristics and risks associated with 
trading the Shares. Trading in Shares of the Fund will be halted if the 
circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been 
reached or because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the Shares inadvisable, and 
trading in the Shares will be subject to NYSE Arca Equities Rule 
8.600(d)(2)(D), which sets forth circumstances under which Shares of 
the Fund may be halted. In addition, as noted above, investors will 
have ready access to information regarding the Fund's holdings, the 
PIV, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares 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. The Adviser is not a broker-dealer but 
is affiliated with a broker-dealer and has implemented a ``fire wall'' 
with respect to such broker-dealer regarding access to information 
concerning the composition and/or changes to the Fund's portfolio. In 
addition, the Fund's Reporting Authority will implement and maintain, 
or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the actual 
components of the Fund's portfolio.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded product that, under 
normal circumstances, will invest principally in fixed income 
securities and that will enhance competition with respect to such 
products 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-2014-56 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-2014-56. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the

[[Page 29241]]

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-2014-56 and should 
be submitted on or before June 11, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11724 Filed 5-20-14; 8:45 am]
BILLING CODE 8011-01-P

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