Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of Shares of Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month ETF Under NYSEArca Equities Rule 8.600, 33619-33625 [2014-13564]
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Federal Register / Vol. 79, No. 112 / Wednesday, June 11, 2014 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72336; File No. SR–
NYSEArca–2014–42]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change Relating to the
Listing and Trading of Shares of
Schwab Active Short Duration Income
ETF; Schwab TargetDuration 2-Month
ETF; Schwab TargetDuration 9-Month
ETF; and Schwab TargetDuration 12Month ETF Under NYSEArca Equities
Rule 8.600
June 5, 2014.
I. Introduction
On April 14, 2014, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’ or
‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares (‘‘Shares’’) of the
Schwab Active Short Duration Income
ETF; Schwab TargetDuration 2-Month
ETF; Schwab TargetDuration 9-Month
ETF; and Schwab TargetDuration 12Month ETF (individually, ‘‘Fund,’’ and
collectively, ‘‘Funds’’) under NYSE Arca
Equities Rule 8.600. The proposed rule
change was published for comment in
the Federal Register on May 1, 2014.3
The Commission received no comments
on the proposed rule change. This order
grants approval of the proposed rule
change.
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade Shares of the Funds pursuant to
NYSE Arca Equities Rule 8.600, which
governs the listing and trading of
Managed Fund Shares on the Exchange.
Each Fund is a series of the Schwab
Strategic Trust (‘‘Trust’’), a statutory
trust organized under the laws of the
State of Delaware and registered with
the Commission as an open-end
management investment company.4 The
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 72028
(Apr. 25, 2014), 79 FR 24789 (‘‘Notice’’).
4 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). According to
the Exchange, on November 21, 2012, the Trust
filed with the Commission a registration statement
on Form N–1A under the Securities Act of 1933
(‘‘Securities Act’’) and the 1940 Act relating to the
Schwab Active Short Duration Income ETF (File
Nos. 333–160595 and 811–22311) (‘‘Short Duration
Registration Statement’’). On August 1, 2013, the
Trust filed with the Commission a registration
statement on Form N–1A under the Securities Act
ehiers on DSK2VPTVN1PROD with NOTICES
2 17
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Funds will be advised by Charles
Schwab Investment Management, Inc.
(‘‘CSIM’’ or ‘‘Adviser’’). The Exchange
states that the Adviser is not a brokerdealer but is affiliated with a brokerdealer, Charles Schwab & Co., Inc. The
Adviser has implemented and will
maintain a fire wall with respect to its
broker-dealer affiliate regarding access
to information concerning the
composition of or changes to each
respective Fund’s portfolio.5
The Exchange has made the following
representations and statements in
describing the Funds and their
respective investment strategies,
including other portfolio holdings and
investment restrictions.
Schwab Active Short Duration Income
ETF 6
Principal Investments
According to the Short Duration
Registration Statement, the investment
objective of the Fund is to seek a high
level of current income consistent with
preservation of capital and daily
liquidity.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,7 to
and the 1940 Act for the Schwab TargetDuration 2Month ETF; Schwab TargetDuration 9-Month ETF;
and Schwab TargetDuration 12-Month ETF (File
Nos. 333–160595 and 811–22311) (‘‘TargetDuration
Registration Statement’’ and, together with the
Short Duration Registration Statement, collectively,
‘‘Registration Statements’’). In addition, the
Exchange states that the Adviser (defined herein)
has obtained certain exemptive relief under the
1940 Act. See Investment Company Act Release No.
30606 (July 23, 2013) (File No. 812–14009). The
Exchange states that each Fund will be offered in
reliance upon the Exemptive Order issued to the
Adviser.
5 See NYSE Arca Equities Rule 8.600,
Commentary .06. In the event (a) the Adviser
becomes a registered broker-dealer or newly
affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer
or becomes affiliated with a broker-dealer, the
adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or its brokerdealer affiliate regarding access to information
concerning the composition of or changes to the
portfolios, and it will be subject to procedures
designed to prevent the use and dissemination of
material, non-public information regarding the
portfolios.
6 The Adviser represents that the name of this
Fund will be changed to the Schwab TargetDuration
6-Month ETF prior to commencement of listing and
trading of Shares of the Fund on the Exchange. This
change will be reflected in an amendment to the
Short Duration Registration Statement.
7 With respect to each of the Funds, the term
‘‘under normal circumstances’’ includes, but is not
limited to, the absence of extreme volatility or
trading halts in the fixed-income markets or the
financial markets generally; events or circumstances
causing a disruption in market liquidity or orderly
markets; operational issues causing dissemination
of inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
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33619
invest at least 90% of its net assets 8 in
a portfolio of investment-grade shortterm fixed-income securities issued by
U.S. and foreign issuers and in other
short-term investments, as described
below. The short-term fixed-income
securities in which the Fund may invest
include corporate and commercial debt
instruments; 9 privately-issued
securities; 10 mortgage-backed and assetbacked securities; 11 variable- and
floating-rate fixed-income securities;
repurchase agreements; 12 money market
instruments, including, but not limited
to certificates of deposit, commercial
paper, promissory notes, and assetbacked commercial paper; obligations
issued by the U.S. government or its
agencies and instrumentalities,
8 Each Fund’s 90% investment policy may be
satisfied by the investments outlined in a Fund’s
‘‘Principal Investments’’ section. Certain ‘‘NonPrincipal Investments’’ of each Fund, as discussed
below, may also be considered within a Fund’s 90%
investment policy to the extent they are investmentgrade short-term fixed-income securities. See note
55, infra.
9 The Adviser expects that, under normal market
circumstances, each Fund will generally seek to
invest in corporate bond issuances in developed
countries that have at least $100,000,000 par
amount outstanding and at least $200,000,000 par
amount outstanding with respect to corporate bond
issuances in emerging market countries.
10 Privately-issued securities are generally issued
under Rule 144A of the Securities Act.
11 Each Fund’s investments in each of the
following security types will be limited to 10% of
a Fund’s net assets: (1) Non-agency residentialmortgage-backed securities; (2) non-agency
commercial-mortgage-backed securities; and (3)
non-agency asset-backed securities. Each Fund’s
aggregate investments in the following security
types will be limited to 20% of a Fund’s net assets:
(1) Non-agency residential-mortgage-backed
securities; (2) non-agency commercial-mortgagebacked securities; and (3) non-agency asset-backed
securities. As noted for each Fund, at least 90% of
a Fund’s net assets will be, under normal
circumstances, invested in U.S. dollar-denominated
fixed-income securities. All fixed-income securities,
including mortgage-backed and asset-backed
securities, purchased by a Fund will be rated A¥
or higher. Neither high-yield asset-backed securities
nor high-yield mortgage-backed securities are
included in a Fund’s principal investment
strategies. The liquidity of a security, especially in
the case of asset-backed and mortgage-backed debt
securities, is a factor in each Fund’s security
selection process. Asset-backed securities backed by
a specific industry receivable are classified into
distinct industries based on the underlying credit
and liquidity structures. Asset-backed commercial
paper programs backed by multiple industry
receivables are classified within a multi-industry
category. Each Fund will limit investments in each
identified industry individually and in the multiindustry category to less than 25% of its net assets.
12 Repurchase agreements are instruments under
which a buyer acquires ownership of certain
securities (usually U.S. government securities) from
a seller who agrees to repurchase the securities at
a mutually agreed-upon time and price, thereby
determining the yield during the buyer’s holding
period. The period to maturity for repurchase
agreements is generally short (from overnight to one
week), although it may be longer. In addition, the
securities collateralizing a repurchase agreement
may have longer maturity periods.
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Federal Register / Vol. 79, No. 112 / Wednesday, June 11, 2014 / Notices
ehiers on DSK2VPTVN1PROD with NOTICES
including but not limited to, obligations
that are not guaranteed by the U.S.
Treasury, such as those issued by
Fannie Mae and Freddie Mac; and bank
notes and similar demand deposits. To
gain exposure to short-term fixedincome securities, the Fund may invest
in other short-term investments
including (1) money market funds
(including funds that are managed by
the Adviser or one of its affiliates), (2)
other investment companies,13
including exchange-traded funds
(‘‘ETFs’’),14 that invest in securities
similar to those in which the Fund may
invest directly, and (3) cash and cash
equivalents. All of these investments
will be denominated in U.S. dollars,
including those that are issued by
foreign issuers.
All fixed-income securities purchased
by the Fund will be rated A¥ or higher
by Standard & Poor’s Corporation
(‘‘S&P’’); will have an equivalent rating
by another Nationally Recognized
Statistical Rating Organization
(‘‘NRSRO’’), such as Fitch Inc. (‘‘Fitch’’)
or Moody’s Investor Services, Inc.
(‘‘Moody’s’’); or, if unrated, will be of
equivalent quality, as determined by the
Adviser.15
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than six months.16 The
Adviser may adjust the Fund’s duration
within the stated limit based on current
or anticipated changes in interest rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
13 Each Fund may invest in other investment
companies to the extent permitted by Section
12(d)(1) of the 1940 Act and rules thereunder or by
any applicable exemption under the 1940 Act with
respect to such investments.
14 For purposes of this proposed rule change,
ETFs include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE
Arca Equities Rule 8.100); and Managed Fund
Shares (as described in NYSE Arca Equities Rule
8.600). The ETFs all will be listed and traded in the
U.S. on registered exchanges. While each Fund may
invest in inverse ETFs, a Fund will not invest in
leveraged (e.g., 2X or 3X) or leveraged inverse ETFs.
15 In determining whether a security is of
‘‘equivalent quality,’’ the Adviser may consider
various factors, including but not limited to:
Whether the issuer of the security has issued other
rated securities; whether the obligations under the
security are guaranteed by another entity and the
rating of the guarantor (if any); whether and (if
applicable) how the security is collateralized; other
forms of credit enhancement (if any); the security’s
maturity date; liquidity features (if any); relevant
cash flow(s); valuation features; and other structural
analysis.
16 Duration measures the price sensitivity of a
security to interest rate changes. The longer the
duration, the more sensitive the portfolio will be to
a change in interest rates.
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15:19 Jun 10, 2014
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of less than twelve months (1 year). For
most security types, the security’s final
maturity date (the date on which the
final principal payment of the security
is scheduled to be paid) will be used to
determine the Fund’s portfolio
maturity.17 The Fund will not purchase
any security with a maturity—or, for
securitized investments, a weighted
average life—of more than twenty-four
months (2 years) from the date of
acquisition. The Adviser may adjust the
Fund’s maturity within the stated limit
based on current and anticipated
changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed-income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary.02.18
Schwab TargetDuration 2-Month ETF
Principal Investments
According to the TargetDuration
Registration Statement, the investment
objective of the Fund is to seek current
17 For securitized investments such as assetbacked and mortgage-backed securities, the
security’s weighted average life (the weighted
average time to receipt of all principal payments)
will be used to determine a Fund’s portfolio
maturity, while for securities with embedded
demand features, such as puts or calls, either the
security’s demand date or the final maturity date,
depending on interest rates, yields, and other
market conditions, will be used.
18 See NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02 governing fixed-income based
Investment Company Units. Under normal
circumstances, each Fund’s portfolio will meet the
following criteria: (i) Components that in the
aggregate account for at least 65% of the weight of
the index or portfolio must each have a minimum
original principal amount outstanding of $100
million or more (in contrast to the requirement in
NYSE Arca Equities Rule 5.2(j)(3), Commentary
.02(a)(3) that 75% of the weight of the index or
portfolio meet such requirement); (ii) no component
fixed-income security (excluding Treasury
Securities, government-sponsored entity and other
exempted securities) will represent more than 30%
of the weight of the portfolio, and the five highestweighted component fixed-income securities
(excluding Treasury Securities, governmentsponsored entity and other exempted securities)
will not in the aggregate account for more than 65%
of the weight of the portfolio); and (iii) the portfolio
(excluding Treasury Securities, governmentsponsored-entity securities and other exempted
securities) will include securities from a minimum
of 13 non-affiliated issuers. Each Fund will not be
required to meet the requirements of NYSE Arca
Equities Rule 5.2(j)(3), Commentary .02(a)(3) (which
relates to convertible security index components
and removal of such components from an index or
portfolio once the convertible security converts to
the underlying security), and Commentary .02(a)(6)
(which relates to reporting, numerical, or other
enumerated requirements applicable to issuers of
index component securities).
PO 00000
Frm 00129
Fmt 4703
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income consistent with preservation of
capital and daily liquidity.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,19
to invest at least 90% of its net assets 20
in a portfolio of investment-grade shortterm fixed-income securities issued by
U.S. and foreign issuers and in other
short-term investments. The fixedincome securities in which the Fund
may invest include corporate and
commercial debt instruments; 21
privately-issued securities; 22 mortgagebacked and asset-backed securities; 23
variable- and floating-rate fixed-income
securities; repurchase agreements; 24
money market instruments, including,
but not limited to certificates of deposit,
commercial paper, promissory notes,
and asset-backed commercial paper;
obligations issued by the U.S.
government or its agencies and
instrumentalities, including but not
limited to, obligations that are not
guaranteed by the U.S. Treasury, such as
those issued by Fannie Mae and Freddie
Mac; and bank notes and similar
demand deposits. To gain exposure to
short-term fixed-income securities, the
Fund may invest in other short-term
investments including (1) money market
funds (including funds that are managed
by the Adviser or one of its affiliates),
(2) other investment companies,25
including ETFs,26 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed-income securities purchased
by the Fund will be rated A¥ or higher
by S&P; hold an equivalent rating by
another NRSRO such as Fitch or
Moody’s; or, if unrated, be determined
by the Adviser to be of equivalent
quality.27
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than two months.28 The
Adviser may adjust the Fund’s duration
within the stated limit based on current
and anticipated changes in interest
rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
19 See
note 7, supra.
note 8, supra.
21 See note 9, supra.
22 See note 10, supra.
23 See note 11, supra.
24 See note 12, supra.
25 See note 13, supra.
26 See note 14, supra.
27 See note 15, supra.
28 See note 16, supra.
20 See
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of all the securities held in the portfolio)
of less than four months. For most
security types, the security’s final
maturity date (the date on which the
final principal payment of the security
is scheduled to be paid) will be used to
determine the Fund’s portfolio
maturity.29 The Fund will not purchase
any security with a maturity—or, for
securitized investments, a weighted
average life—of more than eighteen
months (1.5 years) from the date of
acquisition. The Adviser may adjust the
Fund’s maturity within the stated limit
based on current and anticipated
changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed-income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.30
Schwab TargetDuration 9-Month ETF
ehiers on DSK2VPTVN1PROD with NOTICES
Principal Investments
According to the TargetDuration
Registration Statement, the investment
objective of the Fund is to seek a high
level of current income consistent with
preservation of capital.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,31
to invest at least 90% of its net assets 32
in a portfolio of investment-grade shortterm fixed-income securities issued by
U.S. and foreign issuers and in other
short-term investments. The fixedincome securities in which the Fund
may invest include corporate and
commercial debt instruments; 33
privately-issued securities; 34 mortgagebacked and asset-backed securities; 35
variable- and floating-rate fixed-income
securities; repurchase agreements,36
money market instruments, including,
but not limited to certificates of deposit,
commercial paper, promissory notes,
and asset-backed commercial paper;
obligations issued by the U.S.
government or its agencies and
instrumentalities, including but not
limited to, obligations that are not
guaranteed by the U.S. Treasury, such as
those issued by Fannie Mae and Freddie
Mac; and bank notes and similar
demand deposits. To gain exposure to
29 See
note 17, supra.
note 18, supra.
31 See note 7, supra.
32 See note 8, supra.
33 See note 9, supra.
34 See note 10, supra.
35 See note 11, supra.
36 See note 12, supra.
short-term fixed-income securities, the
Fund may invest in other short-term
investments including (1) money market
funds (including funds that are managed
by the Adviser or one of its affiliates),
(2) other investment companies,37
including ETFs,38 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed-income securities purchased
by the Fund will be rated A¥ or higher
by S&P; hold an equivalent rating by
another NRSRO such as Fitch or
Moody’s; or, if unrated, be determined
by the Adviser to be of equivalent
quality.39
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than nine months.40 The
Adviser may adjust the Fund’s duration
within the stated limit based on current
and anticipated changes in interest
rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
(which is the weighted average maturity
of all the securities held in the portfolio)
of less than eighteen months (1.5 years).
For most security types, the security’s
final maturity date (the date on which
the final principal payment of the
security is scheduled to be paid) will be
used to determine the Fund’s portfolio
maturity.41 The Fund will not purchase
any security with a maturity—or, for
securitized investments, a weighted
average life—of more than thirty months
(2.5 years) from the date of acquisition.
The Adviser may adjust the Fund’s
maturity within the stated limit based
on current and anticipated changes in
interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed-income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.42
Schwab TargetDuration 12-Month ETF
Principal Investments
According to the TargetDuration
Registration Statement, the investment
30 See
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15:19 Jun 10, 2014
37 See
note 13, supra.
note 14, supra.
39 See note 15, supra.
40 See note 16, supra.
41 See note 17, supra.
42 See note 18, supra.
38 See
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PO 00000
Frm 00130
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33621
objective of the Fund is to seek
maximum current income consistent
with preservation of capital.
To pursue its goal, it is the Fund’s
policy, under normal circumstances,43
to invest at least 90% of its net assets 44
in a portfolio of investment-grade shortterm fixed-income securities issued by
U.S. and foreign issuers and in other
short-term investments. The fixedincome securities in which the Fund
may invest include corporate and
commercial debt instruments; 45
privately-issued securities,46 mortgagebacked and asset-backed securities; 47
variable- and floating-rate fixed-income
securities; repurchase agreements; 48
money market instruments, including,
but not limited to certificates of deposit,
commercial paper, promissory notes,
and asset-backed commercial paper;
obligations issued by the U.S.
government or its agencies and
instrumentalities, including but not
limited to, obligations that are not
guaranteed by the U.S. Treasury, such as
those issued by Fannie Mae and Freddie
Mac; and bank notes and similar
demand deposits. To gain exposure to
short-term fixed-income securities, the
Fund may invest in other short-term
investments including (1) money market
funds (including funds that are managed
by the Adviser or one of its affiliates),
(2) other investment companies,49
including ETFs,50 that invest in
securities similar to those in which the
Fund may invest directly, and (3) cash
and cash equivalents. All of these
investments will be denominated in
U.S. dollars, including those that are
issued by foreign issuers.
All fixed-income securities purchased
by the Fund will be rated A¥ or higher
by S&P; hold an equivalent rating by
another NRSRO such as Fitch or
Moody’s; or, if unrated, be determined
by the Adviser to be of equivalent
quality.51
Under normal circumstances, the
Fund will generally maintain a portfolio
duration of less than twelve months (1
year).52 The Adviser may adjust the
Fund’s duration within the stated limit
based on current and anticipated
changes in interest rates.
Additionally, under normal
circumstances, the Fund generally
expects to maintain a portfolio maturity
43 See
note 7, supra.
note 8, supra.
45 See note 9, supra.
46 See note 10, supra.
47 See note 11, supra.
48 See note 12, supra.
49 See note 13, supra.
50 See note 14, supra.
51 See note 15, supra.
52 See note 16, supra.
44 See
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(which is the weighted average maturity
of all the securities held in the portfolio)
of less than twenty-four months (2
years). For most security types, the
security’s final maturity date (the date
on which the final principal payment of
the security is scheduled to be paid)
will be used to determine the Fund’s
portfolio maturity.53 The Fund will not
purchase any security with a maturity—
or, for securitized investments, a
weighted average life—of more than
thirty-six months (3 years) from the date
of acquisition. The Adviser may adjust
the Fund’s maturity within the stated
limit based on current and anticipated
changes in interest rates.
The Fund is an actively-managed
fund that does not seek to track the
performance of a specific index. The
Exchange notes, however, that the
Fund’s portfolio, under normal
circumstances, will meet certain criteria
similar to those applicable to indexbased, fixed-income exchange-traded
funds contained in NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02.54
Non-Principal Investments 55
As part of each Fund’s non-principal
investment strategies, a Fund may
invest in other securities such as Build
America Bonds; 56 capital and trust
preferred securities; 57 fixed-income
securities with put features; sinking
funds; 58 and zero-coupon, step-coupon,
53 See
note 17, supra.
note 18, supra.
55 Certain investments have been identified as
‘‘Non-Principal Investments’’ within the
Registration Statements given the limited extent to
which these investments are expected to constitute
each Fund’s portfolio. These non-principal
investments, however, may be considered within a
Fund’s 90% investment policy to the extent they
are investment-grade short-term fixed-income
securities.
56 Build America Bonds offer an alternative form
of financing to state and local governments whose
primary means for accessing the capital markets has
historically been through the issuance of tax-free
municipal bonds. Issuance of Build America Bonds
ceased on December 31, 2010. Outstanding Build
America Bonds will continue to be eligible for the
federal interest-rate subsidy, which continues for
the life of the bonds.
57 Capital securities are certain subordinated
securities and generally rank senior to common
stock and preferred stock in an issuer’s capital
structure, but have a lower security claim than the
issuer’s corporate bonds. Trust preferred securities
have characteristics similar to other capital
securities. They are issued by a special purpose
trust subsidiary backed by subordinated debt of the
corporate parent.
58 Sinking funds are generally established by
bond issuers to set aside a certain amount of money
to cover timely repayment of bondholders’
principal raised through a bond issuance. By
creating a sinking fund, the issuer is able to spread
repayment of principal to numerous bondholders
while reducing reliance on its then-current cash
flows. A sinking fund also may allow the issuer to
annually repurchase certain of its outstanding
bonds from the open market or repurchase certain
ehiers on DSK2VPTVN1PROD with NOTICES
54 See
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15:19 Jun 10, 2014
Jkt 232001
and pay-in-kind securities.59 Also as
part of each Fund’s non-principal
investment strategies, a Fund may
borrow money in accordance with the
1940 Act as outlined in a Fund’s
Registration Statement.
A Fund may not hold more than 15%
of its net assets in illiquid assets,
including Rule 144A securities 60 except
for Rule 144A securities deemed liquid
by the Adviser, based on criteria for
liquidity established by the Board,
consistent with Commission guidance.61
Each Fund will monitor its portfolio
liquidity on an ongoing basis to
determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of a Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
Furthermore, a Fund may not
concentrate investments in a particular
industry or group of industries, as
concentration is defined under the 1940
Act, the rules or regulations thereunder,
or any exemption therefrom, as such
statute, rules, or regulations may be
of its bonds at a call price named in a bond’s
sinking fund provision. This call provision allows
bonds to be prepaid or called prior to a bond’s
maturity.
59 Zero-coupon, step-coupon, and pay-in-kind
securities are fixed-income securities that do not
make regular cash interest payments throughout the
period prior to maturity. Zero-coupon and stepcoupon securities are sold at a deep discount to
their face value. A zero-coupon security pays no
interest to its holders during its life. Step-coupon
securities are debt securities that, instead of having
a fixed coupon for the life of the security, have
coupon or interest payments that may increase or
decrease to pre-determined rates at future dates.
Pay-in-kind securities pay interest through the
issuance of additional securities. To continue to
qualify as a ‘‘regulated investment company’’ or
‘‘RIC’’ under the Internal Revenue Code of 1986, as
amended, and to avoid excise tax, each Fund may
be required to distribute a portion of such discount
value and income and may be required to dispose
of other portfolio securities, which may occur in
periods of adverse market prices, in order to
generate cash to meet these distribution
requirements.
60 Rule 144A securities are securities that, while
privately placed, are eligible for purchase and resale
pursuant to Rule 144A of the Securities Act.
61 In reaching liquidity decisions, the Adviser
may consider the following factors: The frequency
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
the number of other potential purchasers; dealer
undertakings to make a market in the security; and
the nature of the security and the nature of the
marketplace in which it trades (e.g., the time
needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
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amended or interpreted from time to
time.
Each Fund will not invest in options,
futures, swaps, or other derivatives or in
non-U.S. equity securities. A Fund’s
investments will be consistent with its
investment objective and will not be
used to enhance leverage.
Additional information regarding the
Trust, the Funds, and the Shares of each
Fund, including investment strategies,
risks, creation and redemption
procedures, fees, portfolio holdings,
disclosure policies, distributions, and
taxes, among other things, is included in
the Notice and Registration Statements,
as applicable.62
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6 of the Act 63 and the rules and
regulations thereunder applicable to a
national securities exchange.64 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,65 which
requires, among other things, that the
Exchange’s rules be 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 a national market system, and, in
general, to protect investors and the
public interest. The Commission notes
that the Funds and the Shares must
comply with the requirements of NYSE
Arca Equities Rule 8.600 for the Shares
to be listed and traded on the Exchange.
The Commission finds that the
proposal to list and trade the Shares on
the Exchange is consistent with Section
11A(a)(1)(C)(iii) of the Act,66 which sets
forth Congress’s finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last-sale information for the Shares
will be available via the Consolidated
Tape Association (‘‘CTA’’) high-speed
line. In addition, the Portfolio Indicative
Value, as defined in NYSE Arca Equities
62 See Notice and Registration Statements, supra
notes 3 and 4, respectively.
63 15 U.S.C. 78f.
64 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
65 15 U.S.C. 78f(b)(5).
66 15 U.S.C. 78k–1(a)(1)(C)(iii).
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Rule 8.600(c)(3), of the Shares of each
Fund will be widely disseminated by
one or more major market data vendors
at least every 15 seconds during the
Core Trading Session.67 On each day
that the Exchange is open for business
(normally from 9:30 a.m. until 4:00 p.m.
Eastern Time) (‘‘Business Day’’), before
commencement of the Core Trading
Session, the Adviser will disclose on
each Fund’s Web site the Disclosed
Portfolio, as defined in NYSE Arca
Equities Rule 8.600(c)(2), that will form
the basis for each Fund’s calculation of
net asset value (‘‘NAV’’) at the end of
the Business Day.68 Each Fund will
calculate its NAV at the close of the
regular trading session of each Business
Day using the values of the respective
Fund’s portfolio securities.69 A basket
67 According to the Exchange, several major
market-data vendors widely disseminate PIVs taken
from CTA or other data feeds. The Exchange further
notes that the PIV’s approximate value generally
will be determined by using current market
quotations or price quotations obtained from
broker-dealers that may trade in the portfolio
securities held by a Fund. The PIV will be based
upon the current value for the components of a
Fund’s Disclosed Portfolio, as defined in NYSE
Arca Equities Rule 8.600(c)(2).
68 On a daily basis, the Adviser will disclose for
each portfolio security and financial instrument of
each Fund the following information: Ticker
symbol (if applicable); name of security and
financial instrument; number of shares, if
applicable, and dollar value of securities and
financial instruments held in the portfolio; and
percentage weighting of the security and financial
instrument in the portfolio. The Web site
information will be publicly available at no charge.
69 The Exchange represents that, when valuing
fixed-income securities with remaining maturities
of more than 60 days, each Fund will use the value
of the security provided by independent pricing
services. The pricing services may value fixedincome securities at an evaluated price by
employing methodologies that use actual market
transactions, broker-supplied valuations, or other
methodologies designed to identify the market
value for such securities. When valuing fixedincome securities with remaining maturities of 60
days or less, each Fund may use the security’s
amortized cost, which approximates the security’s
market value. Corporate and commercial debt
instruments; privately-issued securities; mortgagebacked and asset-backed securities; variable- and
floating-rate fixed-income securities; repurchase
agreements; money market instruments; obligations
issued by the U.S. government or its agencies and
instrumentalities; bank notes and similar demand
deposits; Build America Bonds; fixed-income
securities with put features; sinking funds; over-thecounter capital and trust-preferred securities; and
step-coupons will be valued based on price
quotations or other equivalent indications of value
provided by a third-party pricing service. Any such
third-party pricing service may use a variety of
methodologies to value some or all of a Fund’s debt
securities to determine the market price. For
example, the prices of securities with
characteristics similar to those held by each Fund
may be used to assist with the pricing process. In
addition, the pricing service may use proprietary
pricing models. A Fund’s debt securities may be
valued at the mean between the last available bid
and ask prices for such securities or, if such prices
are not available, at prices for securities of
comparable maturity, quality, and type. Short-term
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composition file disclosing each Fund’s
securities, which will include the
security names and share quantities
required to be delivered in exchange for
Fund Shares, together with estimates
and actual cash components, will be
publicly disseminated daily prior to the
opening of the New York Stock
Exchange via the National Securities
Clearing Corporation. 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 or will be available via
the respective newspapers’ Web sites
and other such sources. Intra-day and
closing price information regarding
corporate and commercial debt
instruments; privately-issued securities;
mortgage-backed and asset-backed
securities; variable- and floating-rate
fixed-income securities; repurchase
agreements; money market instruments;
obligations issued by the U.S.
government or its agencies and
instrumentalities; bank notes and
similar demand deposits; Build America
Bonds; fixed-income securities with put
features; sinking funds; capital and
trust-preferred securities; and stepcoupons will be available from major
market data vendors. Price information
for ETFs and exchange-traded capital
and trust-preferred securities will be
available from the applicable exchange
or major market-data vendors. Price
information for other investment
company securities (including money
market funds) will be available from
major market-data vendors. The Funds’
Web site will include a form of the
prospectus for each Fund, which may be
downloaded, and additional data
relating to NAV and other applicable
quantitative information.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
securities for which market quotations are not
readily available will be valued at amortized cost,
which approximates market value. ETFs and
exchange-traded capital and trust preferred
securities will be valued at market value, which
will generally be determined using the last reported
official closing or last trading price on the exchange
or market on which the security is primarily traded
at the time of valuation. Investment company
securities, including money market funds, (other
than ETFs) will be valued at NAV.
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33623
Commission notes that the Exchange
will obtain a representation from the
issuer of the Shares of each Fund that
the NAV per Share will be calculated
daily and that the NAV and the
Disclosed Portfolio will be made
available to all market participants at
the same time.70 The Exchange may halt
trading in the Shares if trading is not
occurring in the securities or the
financial instruments constituting the
Disclosed Portfolio of a Fund, or if other
unusual conditions or circumstances
detrimental to the maintenance of a fair
and orderly market are present.71 In
addition, trading in the Shares will be
subject to NYSE Arca Equities Rule
8.600(d)(2)(D), which sets forth
circumstances under which Shares of
each Fund may be halted. Further, the
Commission notes that the Reporting
Authority that provides the Disclosed
Portfolio of each Fund must implement
and maintain, or be subject to,
procedures designed to prevent the use
and dissemination of material, nonpublic information regarding the actual
components of the portfolio.72 The
Commission further notes that the
Financial Industry Regulatory Authority
(‘‘FINRA’’), on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares, ETFs, exchangetraded capital and trust-preferred
securities, and other exchange-listed
assets, as applicable, with other markets
and other entities that are members of
the Intermarket Surveillance Group
(‘‘ISG’’), and FINRA, on behalf of the
Exchange,73 may obtain trading
information regarding trading in the
Shares, ETFs, exchange-traded capital
and trust-preferred securities, and other
exchange-listed assets, as applicable,
from such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares, ETFs, exchange-traded capital
and trust-preferred securities, and other
exchange-listed assets, as applicable,
from markets and other entities that are
70 See
NYSE Arca Equities Rule 8.600(d)(1)(B).
NYSE Arca Equities Rule 8.600(d)(2)(C)
(providing additional considerations for the
suspension of trading in or removal from listing of
Managed Fund Shares on the Exchange). 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 each Fund.
Trading in Shares of either 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.
72 See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
73 The Exchange states that, while 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.
71 See
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members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.74
FINRA, on behalf of the Exchange, is
able to access, as needed, trade
information reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’) for certain fixed-income
securities held by the Funds.
The Exchange states that it has a
general policy prohibiting the
distribution of material, non-public
information by its employees. The
Exchange also states that CSIM is not a
broker-dealer but is affiliated with a
broker-dealer, Charles Schwab & Co.,
Inc., and that CSIM has implemented
and will maintain a fire wall with
respect to its broker-dealer affiliate
regarding access to information
concerning the composition of or
changes to the portfolios.75
The Exchange represents that the
Shares are deemed to be equity
securities, thus rendering trading in the
Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. In support of this
proposal, the Exchange has made
representations, including:
(1) The Shares of each Fund will
conform to the initial and continued
listing criteria under NYSE Arca
Equities Rule 8.600.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange represents that
trading in the Shares will be subject to
74 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio for each
Fund may trade on markets that are members of ISG
or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
75 See supra note 5. An investment adviser to an
open-end fund is required to be registered under the
Investment Advisers Act of 1940 (‘‘Advisers Act’’).
As a result, the Adviser and its related personnel
are subject to the provisions of Rule 204A–1 under
the Advisers Act relating to codes of ethics. This
Rule requires investment advisers to adopt a code
of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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the existing trading surveillances,
administered by FINRA on behalf of the
Exchange, that are designed to detect
violations of Exchange rules and
applicable federal securities laws and
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.
(4) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit (‘‘ETP’’) Holders
in an Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Specifically, the
Information Bulletin will discuss the
following: (a) The procedures for
purchases and redemptions of Shares in
Creation Units (and that Shares are not
individually redeemable); (b) 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; (c) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated Portfolio Indicative
Value will not be calculated or publicly
disseminated; (d) how information
regarding the Portfolio Indicative Value
is disseminated; (e) 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 (f)
trading information.
(5) For initial and continued listing,
each Fund will be in compliance with
Rule 10A–3 under the Exchange Act,76
as provided by NYSE Arca Equities Rule
5.3.
(6) The Adviser expects that, under
normal market circumstances, each
Fund will generally seek to invest in
corporate bond issuances in developed
countries that have at least $100,000,000
par amount outstanding and at least
$200,000,000 par amount outstanding
with respect to corporate bond
issuances in emerging market countries.
(7) Each Fund’s investments in each
of the following security types will be
limited to 10% of a Fund’s net assets:
(a) Non-agency residential-mortgagebacked securities; (b) non-agency
commercial-mortgage-backed securities;
and (c) non-agency asset-backed
securities. Each Fund’s aggregate
investments in the following security
types will be limited to 20% of a Fund’s
net assets: (a) Non-agency residentialmortgage-backed securities; (b) nonagency commercial-mortgage-backed
securities; and (c) non-agency assetbacked securities.
(8) At least 90% of a Fund’s net assets
will be, under normal circumstances,
invested in U.S. dollar-denominated
fixed-income securities. All fixedincome securities, including mortgagebacked and asset-backed securities,
purchased by a Fund will be rated A¥
or higher. Neither high-yield assetbacked securities nor high-yield
mortgage-backed securities are included
in a Fund’s principal investment
strategies.
(9) Each Fund’s portfolio, under
normal circumstances, will meet certain
criteria similar to those applicable to
index-based, fixed-income exchangetraded funds contained in NYSE Arca
Equities Rule 5.2(j)(3),
Commentary.02.77
(10) A Fund may not hold more than
15% of its net assets in illiquid assets,
including Rule 144A securities, except
for Rule 144A securities deemed liquid
by the Adviser, based on criteria for
liquidity established by the Board,
consistent with Commission guidance.
(11) A minimum of 100,000 Shares of
each Fund will be outstanding at the
commencement of trading on the
Exchange.
(12) With respect to each of the
Funds, the Fund’s investments will be
consistent with the Fund’s investment
objective and will not be used to
enhance leverage. While each Fund may
invest in inverse ETFs, a Fund will not
invest in leveraged (e.g., 2X or 3X) or
leveraged inverse ETFs.
(13) Each Fund will not invest in
options, futures, swaps, or other
derivatives, or in non-U.S. equity
securities.
This approval order is based on all of
the Exchange’s representations and
description of the Funds, including
those set forth above and in the Notice.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 78 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,79 that the
proposed rule change (SR–NYSEArca–
2014–42) be, and it hereby is, approved.
77 See
note 18, supra.
U.S.C. 78f(b)(5).
79 15 U.S.C. 78s(b)(2).
78 15
76 17
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Federal Register / Vol. 79, No. 112 / Wednesday, June 11, 2014 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.80
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13564 Filed 6–10–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72332 ; File No. SR–
FINRA–2014–020]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on Proposed Rule Change To Adopt
FINRA Rule 2081, Prohibited
Conditions Relating to Expungement
of Customer Dispute Information
June 5, 2014.
On April 14, 2014, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt FINRA
Rule 2081 to prohibit member firms and
associated persons from conditioning or
seeking to condition settlement of a
dispute with a customer on, or to
otherwise compensate the customer for,
the customer’s agreement to consent to,
or not to oppose, the firm’s or associated
person’s request to expunge the
customer dispute information which
was the subject of the settlement from
the Central Registration Depository
(CRD®). The proposal was published for
comment in the Federal Register on
April 23, 2014.3 The Commission
received 15 comments on the proposal.4
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71959
(April 17, 2014), 79 FR 22734 (SR–FINRA–2014–
020).
4 See Letter from Steven B. Caruso, Maddox
Hargett Caruso, P.C., dated April 21, 2014; Letter
from Nicole G. Iannarone, Assistant Clinical
Professor, Tim Guilmette, Student Intern, and
Nataliya Obikhod, Student Intern, Georgia State
University College of Law, dated May 1, 2014;
Letter from Ryan K. Bakhtiari, Aidikoff, Uhl and
Bakhtiari, dated May 5, 2014; Letter from Richard
P. Ryder, dated May 5, 2014; Letter from Barry D.
Estell, dated May 7, 2014; Letter from Leonard
Steiner, Steiner & Libo, PC, dated May 7, 2014;
Letter from Philip M. Aidikoff, Aidikoff, Uhl and
Bakhtiari, dated May 1, 2014; Letter from George H.
Friedman, George H. Friedman Consulting, LLC,
dated May 13, 2014; Letter from Jason Doss,
President, Public Investors Arbitration Bar
Association, dated May 13, 2014; Letter from David
T. Bellaire, Executive Vice President and General
Counsel, Financial Services Institute, dated May 14,
2014; Letter from Andrea Seidt, Ohio Securities
Section 19(b)(2) of the Act 5 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is June 7, 2014. The Commission is
extending this 45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change
and the comment letters received.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the Act,6
designates July 22, 2014 as the date by
which the Commission should either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–FINRA–2014–020).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13562 Filed 6–10–14; 8:45 am]
BILLING CODE 8011–01–P
80 17
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1 15
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Commissioner and North American Securities
Administrators Association (‘‘NASAA’’) President,
NASAA, dated May 14, 2014; Letter from Jill Gross,
Director, Elissa Germaine, Supervising Attorney,
and Michelle Robinson, Student Intern, John Jay
Legal Services, Inc., Pace University School of Law,
dated May 14, 2014; Letter from Kevin M. Carroll,
Managing Director and Associate General Counsel,
Securities Industry and Financial Markets
Association Small Firms Committee, dated May 14,
2014; Letter from Ronald M. Amato, Amato Law
Firm, LLC, dated May 15, 2014; and Letter from
Harry A. Jacobwitz, Database Manager, Securities
Arbitration Commentator, Inc., dated May 16, 2014.
5 15 U.S.C. 78s(b)(2).
6 15 U.S.C. 78s(b)(2).
7 17 CFR 200.30–3(a)(31).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72327; File No. SR–NYSE–
2014–27]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending the
NYSE BBO Market Data Product
Offering
June 5, 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 23,
2014, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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 amend the
NYSE BBO market data product
offering. 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 amend the
NYSE BBO market data product
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
E:\FR\FM\11JNN1.SGM
11JNN1
]]>Agencies
[Federal Register Volume 79, Number 112 (Wednesday, June 11, 2014)]
[Notices]
[Pages 33619-33625]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13564]
[[Page 33619]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72336; File No. SR-NYSEArca-2014-42]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change Relating to the Listing and Trading of
Shares of Schwab Active Short Duration Income ETF; Schwab
TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and
Schwab TargetDuration 12-Month ETF Under NYSEArca Equities Rule 8.600
June 5, 2014.
I. Introduction
On April 14, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month
ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-
Month ETF (individually, ``Fund,'' and collectively, ``Funds'') under
NYSE Arca Equities Rule 8.600. The proposed rule change was published
for comment in the Federal Register on May 1, 2014.\3\ The Commission
received no comments on the proposed rule change. This order grants
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72028 (Apr. 25,
2014), 79 FR 24789 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Funds
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing
and trading of Managed Fund Shares on the Exchange. Each Fund is a
series of the Schwab Strategic Trust (``Trust''), a statutory trust
organized under the laws of the State of Delaware and registered with
the Commission as an open-end management investment company.\4\ The
Funds will be advised by Charles Schwab Investment Management, Inc.
(``CSIM'' or ``Adviser''). The Exchange states that the Adviser is not
a broker-dealer but is affiliated with a broker-dealer, Charles Schwab
& Co., Inc. The Adviser has implemented and will maintain a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition of or changes to each respective
Fund's portfolio.\5\
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\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). According to the Exchange, on November 21,
2012, the Trust filed with the Commission a registration statement
on Form N-1A under the Securities Act of 1933 (``Securities Act'')
and the 1940 Act relating to the Schwab Active Short Duration Income
ETF (File Nos. 333-160595 and 811-22311) (``Short Duration
Registration Statement''). On August 1, 2013, the Trust filed with
the Commission a registration statement on Form N-1A under the
Securities Act and the 1940 Act for the Schwab TargetDuration 2-
Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab
TargetDuration 12-Month ETF (File Nos. 333-160595 and 811-22311)
(``TargetDuration Registration Statement'' and, together with the
Short Duration Registration Statement, collectively, ``Registration
Statements''). In addition, the Exchange states that the Adviser
(defined herein) has obtained certain exemptive relief under the
1940 Act. See Investment Company Act Release No. 30606 (July 23,
2013) (File No. 812-14009). The Exchange states that each Fund will
be offered in reliance upon the Exemptive Order issued to the
Adviser.
\5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the
event (a) the Adviser becomes a registered broker-dealer or newly
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, the adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or its broker-dealer
affiliate regarding access to information concerning the composition
of or changes to the portfolios, and it will be subject to
procedures designed to prevent the use and dissemination of
material, non-public information regarding the portfolios.
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The Exchange has made the following representations and statements
in describing the Funds and their respective investment strategies,
including other portfolio holdings and investment restrictions.
Schwab Active Short Duration Income ETF \6\
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\6\ The Adviser represents that the name of this Fund will be
changed to the Schwab TargetDuration 6-Month ETF prior to
commencement of listing and trading of Shares of the Fund on the
Exchange. This change will be reflected in an amendment to the Short
Duration Registration Statement.
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Principal Investments
According to the Short Duration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\7\ to invest at least 90% of its net assets \8\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments, as
described below. The short-term fixed-income securities in which the
Fund may invest include corporate and commercial debt instruments; \9\
privately-issued securities; \10\ mortgage-backed and asset-backed
securities; \11\ variable- and floating-rate fixed-income securities;
repurchase agreements; \12\ money market instruments, including, but
not limited to certificates of deposit, commercial paper, promissory
notes, and asset-backed commercial paper; obligations issued by the
U.S. government or its agencies and instrumentalities,
[[Page 33620]]
including but not limited to, obligations that are not guaranteed by
the U.S. Treasury, such as those issued by Fannie Mae and Freddie Mac;
and bank notes and similar demand deposits. To gain exposure to short-
term fixed-income securities, the Fund may invest in other short-term
investments including (1) money market funds (including funds that are
managed by the Adviser or one of its affiliates), (2) other investment
companies,\13\ including exchange-traded funds (``ETFs''),\14\ that
invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
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\7\ With respect to each of the Funds, the term ``under normal
circumstances'' includes, but is not limited to, the absence of
extreme volatility or trading halts in the fixed-income markets or
the financial markets generally; events or circumstances causing a
disruption in market liquidity or orderly markets; operational
issues causing dissemination of inaccurate market information; or
force majeure type events such as systems failure, natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or
labor disruption, or any similar intervening circumstance.
\8\ Each Fund's 90% investment policy may be satisfied by the
investments outlined in a Fund's ``Principal Investments'' section.
Certain ``Non-Principal Investments'' of each Fund, as discussed
below, may also be considered within a Fund's 90% investment policy
to the extent they are investment-grade short-term fixed-income
securities. See note 55, infra.
\9\ The Adviser expects that, under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances
in developed countries that have at least $100,000,000 par amount
outstanding and at least $200,000,000 par amount outstanding with
respect to corporate bond issuances in emerging market countries.
\10\ Privately-issued securities are generally issued under Rule
144A of the Securities Act.
\11\ Each Fund's investments in each of the following security
types will be limited to 10% of a Fund's net assets: (1) Non-agency
residential-mortgage-backed securities; (2) non-agency commercial-
mortgage-backed securities; and (3) non-agency asset-backed
securities. Each Fund's aggregate investments in the following
security types will be limited to 20% of a Fund's net assets: (1)
Non-agency residential-mortgage-backed securities; (2) non-agency
commercial-mortgage-backed securities; and (3) non-agency asset-
backed securities. As noted for each Fund, at least 90% of a Fund's
net assets will be, under normal circumstances, invested in U.S.
dollar-denominated fixed-income securities. All fixed-income
securities, including mortgage-backed and asset-backed securities,
purchased by a Fund will be rated A- or higher. Neither high-yield
asset-backed securities nor high-yield mortgage-backed securities
are included in a Fund's principal investment strategies. The
liquidity of a security, especially in the case of asset-backed and
mortgage-backed debt securities, is a factor in each Fund's security
selection process. Asset-backed securities backed by a specific
industry receivable are classified into distinct industries based on
the underlying credit and liquidity structures. Asset-backed
commercial paper programs backed by multiple industry receivables
are classified within a multi-industry category. Each Fund will
limit investments in each identified industry individually and in
the multi-industry category to less than 25% of its net assets.
\12\ Repurchase agreements are instruments under which a buyer
acquires ownership of certain securities (usually U.S. government
securities) from a seller who agrees to repurchase the securities at
a mutually agreed-upon time and price, thereby determining the yield
during the buyer's holding period. The period to maturity for
repurchase agreements is generally short (from overnight to one
week), although it may be longer. In addition, the securities
collateralizing a repurchase agreement may have longer maturity
periods.
\13\ Each Fund may invest in other investment companies to the
extent permitted by Section 12(d)(1) of the 1940 Act and rules
thereunder or by any applicable exemption under the 1940 Act with
respect to such investments.
\14\ For purposes of this proposed rule change, ETFs include
Investment Company Units (as described in NYSE Arca Equities Rule
5.2(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); and Managed Fund Shares (as described in NYSE
Arca Equities Rule 8.600). The ETFs all will be listed and traded in
the U.S. on registered exchanges. While each Fund may invest in
inverse ETFs, a Fund will not invest in leveraged (e.g., 2X or 3X)
or leveraged inverse ETFs.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by Standard & Poor's Corporation (``S&P''); will have an
equivalent rating by another Nationally Recognized Statistical Rating
Organization (``NRSRO''), such as Fitch Inc. (``Fitch'') or Moody's
Investor Services, Inc. (``Moody's''); or, if unrated, will be of
equivalent quality, as determined by the Adviser.\15\
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\15\ In determining whether a security is of ``equivalent
quality,'' the Adviser may consider various factors, including but
not limited to: Whether the issuer of the security has issued other
rated securities; whether the obligations under the security are
guaranteed by another entity and the rating of the guarantor (if
any); whether and (if applicable) how the security is
collateralized; other forms of credit enhancement (if any); the
security's maturity date; liquidity features (if any); relevant cash
flow(s); valuation features; and other structural analysis.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than six months.\16\ The Adviser may adjust
the Fund's duration within the stated limit based on current or
anticipated changes in interest rates.
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\16\ Duration measures the price sensitivity of a security to
interest rate changes. The longer the duration, the more sensitive
the portfolio will be to a change in interest rates.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
twelve months (1 year). For most security types, the security's final
maturity date (the date on which the final principal payment of the
security is scheduled to be paid) will be used to determine the Fund's
portfolio maturity.\17\ The Fund will not purchase any security with a
maturity--or, for securitized investments, a weighted average life--of
more than twenty-four months (2 years) from the date of acquisition.
The Adviser may adjust the Fund's maturity within the stated limit
based on current and anticipated changes in interest rates.
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\17\ For securitized investments such as asset-backed and
mortgage-backed securities, the security's weighted average life
(the weighted average time to receipt of all principal payments)
will be used to determine a Fund's portfolio maturity, while for
securities with embedded demand features, such as puts or calls,
either the security's demand date or the final maturity date,
depending on interest rates, yields, and other market conditions,
will be used.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed-income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary.02.\18\
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\18\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02
governing fixed-income based Investment Company Units. Under normal
circumstances, each Fund's portfolio will meet the following
criteria: (i) Components that in the aggregate account for at least
65% of the weight of the index or portfolio must each have a minimum
original principal amount outstanding of $100 million or more (in
contrast to the requirement in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02(a)(3) that 75% of the weight of the index or
portfolio meet such requirement); (ii) no component fixed-income
security (excluding Treasury Securities, government-sponsored entity
and other exempted securities) will represent more than 30% of the
weight of the portfolio, and the five highest-weighted component
fixed-income securities (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will not in the
aggregate account for more than 65% of the weight of the portfolio);
and (iii) the portfolio (excluding Treasury Securities, government-
sponsored-entity securities and other exempted securities) will
include securities from a minimum of 13 non-affiliated issuers. Each
Fund will not be required to meet the requirements of NYSE Arca
Equities Rule 5.2(j)(3), Commentary .02(a)(3) (which relates to
convertible security index components and removal of such components
from an index or portfolio once the convertible security converts to
the underlying security), and Commentary .02(a)(6) (which relates to
reporting, numerical, or other enumerated requirements applicable to
issuers of index component securities).
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Schwab TargetDuration 2-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek current income consistent
with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\19\ to invest at least 90% of its net assets \20\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \21\ privately-issued securities; \22\
mortgage-backed and asset-backed securities; \23\ variable- and
floating-rate fixed-income securities; repurchase agreements; \24\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes, and asset-backed
commercial paper; obligations issued by the U.S. government or its
agencies and instrumentalities, including but not limited to,
obligations that are not guaranteed by the U.S. Treasury, such as those
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand
deposits. To gain exposure to short-term fixed-income securities, the
Fund may invest in other short-term investments including (1) money
market funds (including funds that are managed by the Adviser or one of
its affiliates), (2) other investment companies,\25\ including
ETFs,\26\ that invest in securities similar to those in which the Fund
may invest directly, and (3) cash and cash equivalents. All of these
investments will be denominated in U.S. dollars, including those that
are issued by foreign issuers.
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\19\ See note 7, supra.
\20\ See note 8, supra.
\21\ See note 9, supra.
\22\ See note 10, supra.
\23\ See note 11, supra.
\24\ See note 12, supra.
\25\ See note 13, supra.
\26\ See note 14, supra.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\27\
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\27\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than two months.\28\ The Adviser may adjust
the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
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\28\ See note 16, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity
[[Page 33621]]
of all the securities held in the portfolio) of less than four months.
For most security types, the security's final maturity date (the date
on which the final principal payment of the security is scheduled to be
paid) will be used to determine the Fund's portfolio maturity.\29\ The
Fund will not purchase any security with a maturity--or, for
securitized investments, a weighted average life--of more than eighteen
months (1.5 years) from the date of acquisition. The Adviser may adjust
the Fund's maturity within the stated limit based on current and
anticipated changes in interest rates.
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\29\ See note 17, supra.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed-income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\30\
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\30\ See note 18, supra.
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Schwab TargetDuration 9-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\31\ to invest at least 90% of its net assets \32\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \33\ privately-issued securities; \34\
mortgage-backed and asset-backed securities; \35\ variable- and
floating-rate fixed-income securities; repurchase agreements,\36\ money
market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes, and asset-backed
commercial paper; obligations issued by the U.S. government or its
agencies and instrumentalities, including but not limited to,
obligations that are not guaranteed by the U.S. Treasury, such as those
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand
deposits. To gain exposure to short-term fixed-income securities, the
Fund may invest in other short-term investments including (1) money
market funds (including funds that are managed by the Adviser or one of
its affiliates), (2) other investment companies,\37\ including
ETFs,\38\ that invest in securities similar to those in which the Fund
may invest directly, and (3) cash and cash equivalents. All of these
investments will be denominated in U.S. dollars, including those that
are issued by foreign issuers.
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\31\ See note 7, supra.
\32\ See note 8, supra.
\33\ See note 9, supra.
\34\ See note 10, supra.
\35\ See note 11, supra.
\36\ See note 12, supra.
\37\ See note 13, supra.
\38\ See note 14, supra.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\39\
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\39\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than nine months.\40\ The Adviser may adjust
the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
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\40\ See note 16, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
eighteen months (1.5 years). For most security types, the security's
final maturity date (the date on which the final principal payment of
the security is scheduled to be paid) will be used to determine the
Fund's portfolio maturity.\41\ The Fund will not purchase any security
with a maturity--or, for securitized investments, a weighted average
life--of more than thirty months (2.5 years) from the date of
acquisition. The Adviser may adjust the Fund's maturity within the
stated limit based on current and anticipated changes in interest
rates.
---------------------------------------------------------------------------
\41\ See note 17, supra.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed-income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\42\
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\42\ See note 18, supra.
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Schwab TargetDuration 12-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek maximum current income
consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\43\ to invest at least 90% of its net assets \44\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \45\ privately-issued securities,\46\
mortgage-backed and asset-backed securities; \47\ variable- and
floating-rate fixed-income securities; repurchase agreements; \48\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes, and asset-backed
commercial paper; obligations issued by the U.S. government or its
agencies and instrumentalities, including but not limited to,
obligations that are not guaranteed by the U.S. Treasury, such as those
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand
deposits. To gain exposure to short-term fixed-income securities, the
Fund may invest in other short-term investments including (1) money
market funds (including funds that are managed by the Adviser or one of
its affiliates), (2) other investment companies,\49\ including
ETFs,\50\ that invest in securities similar to those in which the Fund
may invest directly, and (3) cash and cash equivalents. All of these
investments will be denominated in U.S. dollars, including those that
are issued by foreign issuers.
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\43\ See note 7, supra.
\44\ See note 8, supra.
\45\ See note 9, supra.
\46\ See note 10, supra.
\47\ See note 11, supra.
\48\ See note 12, supra.
\49\ See note 13, supra.
\50\ See note 14, supra.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\51\
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\51\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than twelve months (1 year).\52\ The Adviser
may adjust the Fund's duration within the stated limit based on current
and anticipated changes in interest rates.
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\52\ See note 16, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity
[[Page 33622]]
(which is the weighted average maturity of all the securities held in
the portfolio) of less than twenty-four months (2 years). For most
security types, the security's final maturity date (the date on which
the final principal payment of the security is scheduled to be paid)
will be used to determine the Fund's portfolio maturity.\53\ The Fund
will not purchase any security with a maturity--or, for securitized
investments, a weighted average life--of more than thirty-six months (3
years) from the date of acquisition. The Adviser may adjust the Fund's
maturity within the stated limit based on current and anticipated
changes in interest rates.
---------------------------------------------------------------------------
\53\ See note 17, supra.
---------------------------------------------------------------------------
The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed-income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\54\
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\54\ See note 18, supra.
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Non-Principal Investments \55\
---------------------------------------------------------------------------
\55\ Certain investments have been identified as ``Non-Principal
Investments'' within the Registration Statements given the limited
extent to which these investments are expected to constitute each
Fund's portfolio. These non-principal investments, however, may be
considered within a Fund's 90% investment policy to the extent they
are investment-grade short-term fixed-income securities.
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As part of each Fund's non-principal investment strategies, a Fund
may invest in other securities such as Build America Bonds; \56\
capital and trust preferred securities; \57\ fixed-income securities
with put features; sinking funds; \58\ and zero-coupon, step-coupon,
and pay-in-kind securities.\59\ Also as part of each Fund's non-
principal investment strategies, a Fund may borrow money in accordance
with the 1940 Act as outlined in a Fund's Registration Statement.
---------------------------------------------------------------------------
\56\ Build America Bonds offer an alternative form of financing
to state and local governments whose primary means for accessing the
capital markets has historically been through the issuance of tax-
free municipal bonds. Issuance of Build America Bonds ceased on
December 31, 2010. Outstanding Build America Bonds will continue to
be eligible for the federal interest-rate subsidy, which continues
for the life of the bonds.
\57\ Capital securities are certain subordinated securities and
generally rank senior to common stock and preferred stock in an
issuer's capital structure, but have a lower security claim than the
issuer's corporate bonds. Trust preferred securities have
characteristics similar to other capital securities. They are issued
by a special purpose trust subsidiary backed by subordinated debt of
the corporate parent.
\58\ Sinking funds are generally established by bond issuers to
set aside a certain amount of money to cover timely repayment of
bondholders' principal raised through a bond issuance. By creating a
sinking fund, the issuer is able to spread repayment of principal to
numerous bondholders while reducing reliance on its then-current
cash flows. A sinking fund also may allow the issuer to annually
repurchase certain of its outstanding bonds from the open market or
repurchase certain of its bonds at a call price named in a bond's
sinking fund provision. This call provision allows bonds to be
prepaid or called prior to a bond's maturity.
\59\ Zero-coupon, step-coupon, and pay-in-kind securities are
fixed-income securities that do not make regular cash interest
payments throughout the period prior to maturity. Zero-coupon and
step-coupon securities are sold at a deep discount to their face
value. A zero-coupon security pays no interest to its holders during
its life. Step-coupon securities are debt securities that, instead
of having a fixed coupon for the life of the security, have coupon
or interest payments that may increase or decrease to pre-determined
rates at future dates. Pay-in-kind securities pay interest through
the issuance of additional securities. To continue to qualify as a
``regulated investment company'' or ``RIC'' under the Internal
Revenue Code of 1986, as amended, and to avoid excise tax, each Fund
may be required to distribute a portion of such discount value and
income and may be required to dispose of other portfolio securities,
which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
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A Fund may not hold more than 15% of its net assets in illiquid
assets, including Rule 144A securities \60\ except for Rule 144A
securities deemed liquid by the Adviser, based on criteria for
liquidity established by the Board, consistent with Commission
guidance.\61\ Each Fund will monitor its portfolio liquidity on an
ongoing basis to determine whether, in light of current circumstances,
an adequate level of liquidity is being maintained and will consider
taking appropriate steps in order to maintain adequate liquidity if,
through a change in values, net assets, or other circumstances, more
than 15% of a Fund's net assets are held in illiquid assets. Illiquid
assets include securities subject to contractual or other restrictions
on resale and other instruments that lack readily available markets as
determined in accordance with Commission staff guidance.
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\60\ Rule 144A securities are securities that, while privately
placed, are eligible for purchase and resale pursuant to Rule 144A
of the Securities Act.
\61\ In reaching liquidity decisions, the Adviser may consider
the following factors: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
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Furthermore, a Fund may not concentrate investments in a particular
industry or group of industries, as concentration is defined under the
1940 Act, the rules or regulations thereunder, or any exemption
therefrom, as such statute, rules, or regulations may be amended or
interpreted from time to time.
Each Fund will not invest in options, futures, swaps, or other
derivatives or in non-U.S. equity securities. A Fund's investments will
be consistent with its investment objective and will not be used to
enhance leverage.
Additional information regarding the Trust, the Funds, and the
Shares of each Fund, including investment strategies, risks, creation
and redemption procedures, fees, portfolio holdings, disclosure
policies, distributions, and taxes, among other things, is included in
the Notice and Registration Statements, as applicable.\62\
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\62\ See Notice and Registration Statements, supra notes 3 and
4, respectively.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \63\
and the rules and regulations thereunder applicable to a national
securities exchange.\64\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\65\
which requires, among other things, that the Exchange's rules be
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 a national
market system, and, in general, to protect investors and the public
interest. The Commission notes that the Funds and the Shares must
comply with the requirements of NYSE Arca Equities Rule 8.600 for the
Shares to be listed and traded on the Exchange.
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\63\ 15 U.S.C. 78f.
\64\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\65\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\66\ which sets forth Congress's finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated
Tape Association (``CTA'') high-speed line. In addition, the Portfolio
Indicative Value, as defined in NYSE Arca Equities
[[Page 33623]]
Rule 8.600(c)(3), of the Shares of each Fund will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Core Trading Session.\67\ On each day that the
Exchange is open for business (normally from 9:30 a.m. until 4:00 p.m.
Eastern Time) (``Business Day''), before commencement of the Core
Trading Session, the Adviser will disclose on each Fund's Web site the
Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2),
that will form the basis for each Fund's calculation of net asset value
(``NAV'') at the end of the Business Day.\68\ Each Fund will calculate
its NAV at the close of the regular trading session of each Business
Day using the values of the respective Fund's portfolio securities.\69\
A basket composition file disclosing each Fund's securities, which will
include the security names and share quantities required to be
delivered in exchange for Fund Shares, together with estimates and
actual cash components, will be publicly disseminated daily prior to
the opening of the New York Stock Exchange via the National Securities
Clearing Corporation. 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 or will be available via the
respective newspapers' Web sites and other such sources. Intra-day and
closing price information regarding corporate and commercial debt
instruments; privately-issued securities; mortgage-backed and asset-
backed securities; variable- and floating-rate fixed-income securities;
repurchase agreements; money market instruments; obligations issued by
the U.S. government or its agencies and instrumentalities; bank notes
and similar demand deposits; Build America Bonds; fixed-income
securities with put features; sinking funds; capital and trust-
preferred securities; and step-coupons will be available from major
market data vendors. Price information for ETFs and exchange-traded
capital and trust-preferred securities will be available from the
applicable exchange or major market-data vendors. Price information for
other investment company securities (including money market funds) will
be available from major market-data vendors. The Funds' Web site will
include a form of the prospectus for each Fund, which may be
downloaded, and additional data relating to NAV and other applicable
quantitative information.
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\66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\67\ According to the Exchange, several major market-data
vendors widely disseminate PIVs taken from CTA or other data feeds.
The Exchange further notes that the PIV's approximate value
generally will be determined by using current market quotations or
price quotations obtained from broker-dealers that may trade in the
portfolio securities held by a Fund. The PIV will be based upon the
current value for the components of a Fund's Disclosed Portfolio, as
defined in NYSE Arca Equities Rule 8.600(c)(2).
\68\ On a daily basis, the Adviser will disclose for each
portfolio security and financial instrument of each Fund the
following information: Ticker symbol (if applicable); name of
security and financial instrument; number of shares, if applicable,
and dollar value of securities and financial instruments held in the
portfolio; and percentage weighting of the security and financial
instrument in the portfolio. The Web site information will be
publicly available at no charge.
\69\ The Exchange represents that, when valuing fixed-income
securities with remaining maturities of more than 60 days, each Fund
will use the value of the security provided by independent pricing
services. The pricing services may value fixed-income securities at
an evaluated price by employing methodologies that use actual market
transactions, broker-supplied valuations, or other methodologies
designed to identify the market value for such securities. When
valuing fixed-income securities with remaining maturities of 60 days
or less, each Fund may use the security's amortized cost, which
approximates the security's market value. Corporate and commercial
debt instruments; privately-issued securities; mortgage-backed and
asset-backed securities; variable- and floating-rate fixed-income
securities; repurchase agreements; money market instruments;
obligations issued by the U.S. government or its agencies and
instrumentalities; bank notes and similar demand deposits; Build
America Bonds; fixed-income securities with put features; sinking
funds; over-the-counter capital and trust-preferred securities; and
step-coupons will be valued based on price quotations or other
equivalent indications of value provided by a third-party pricing
service. Any such third-party pricing service may use a variety of
methodologies to value some or all of a Fund's debt securities to
determine the market price. For example, the prices of securities
with characteristics similar to those held by each Fund may be used
to assist with the pricing process. In addition, the pricing service
may use proprietary pricing models. A Fund's debt securities may be
valued at the mean between the last available bid and ask prices for
such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality, and type. Short-term
securities for which market quotations are not readily available
will be valued at amortized cost, which approximates market value.
ETFs and exchange-traded capital and trust preferred securities will
be valued at market value, which will generally be determined using
the last reported official closing or last trading price on the
exchange or market on which the security is primarily traded at the
time of valuation. Investment company securities, including money
market funds, (other than ETFs) will be valued at NAV.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares of each Fund that the NAV
per Share will be calculated daily and that the NAV and the Disclosed
Portfolio will be made available to all market participants at the same
time.\70\ The Exchange may halt trading in the Shares if trading is not
occurring in the securities or the financial instruments constituting
the Disclosed Portfolio of a Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\71\ In addition, trading in the Shares will be
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of each Fund may be halted. Further,
the Commission notes that the Reporting Authority that provides the
Disclosed Portfolio of each Fund must 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
portfolio.\72\ The Commission further notes that the Financial Industry
Regulatory Authority (``FINRA''), on behalf of the Exchange, will
communicate as needed regarding trading in the Shares, ETFs, exchange-
traded capital and trust-preferred securities, and other exchange-
listed assets, as applicable, with other markets and other entities
that are members of the Intermarket Surveillance Group (``ISG''), and
FINRA, on behalf of the Exchange,\73\ may obtain trading information
regarding trading in the Shares, ETFs, exchange-traded capital and
trust-preferred securities, and other exchange-listed assets, as
applicable, from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares, ETFs,
exchange-traded capital and trust-preferred securities, and other
exchange-listed assets, as applicable, from markets and other entities
that are
[[Page 33624]]
members of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement.\74\ FINRA, on behalf of the Exchange,
is able to access, as needed, trade information reported to FINRA's
Trade Reporting and Compliance Engine (``TRACE'') for certain fixed-
income securities held by the Funds.
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\70\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\71\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing
additional considerations for the suspension of trading in or
removal from listing of Managed Fund Shares on the Exchange). 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 each Fund. Trading in Shares of either 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.
\72\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\73\ The Exchange states that, while 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.
\74\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for each Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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The Exchange states that it has a general policy prohibiting the
distribution of material, non-public information by its employees. The
Exchange also states that CSIM is not a broker-dealer but is affiliated
with a broker-dealer, Charles Schwab & Co., Inc., and that CSIM has
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition of or changes to the portfolios.\75\
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\75\ See supra note 5. An investment adviser to an open-end fund
is required to be registered under the Investment Advisers Act of
1940 (``Advisers Act''). As a result, the Adviser and its related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares of each Fund will conform to the initial and
continued listing criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange represents that trading in the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, that are designed to detect violations of
Exchange rules and applicable federal securities laws and 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.
(4) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin
of the special characteristics and risks associated with trading the
Shares. Specifically, the Information Bulletin will discuss the
following: (a) The procedures for purchases and redemptions of Shares
in Creation Units (and that Shares are not individually redeemable);
(b) 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; (c) the risks involved in
trading the Shares during the Opening and Late Trading Sessions when an
updated Portfolio Indicative Value will not be calculated or publicly
disseminated; (d) how information regarding the Portfolio Indicative
Value is disseminated; (e) 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 (f) trading
information.
(5) For initial and continued listing, each Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\76\ as provided by
NYSE Arca Equities Rule 5.3.
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\76\ 17 CFR 240.10A-3.
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(6) The Adviser expects that, under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances in
developed countries that have at least $100,000,000 par amount
outstanding and at least $200,000,000 par amount outstanding with
respect to corporate bond issuances in emerging market countries.
(7) Each Fund's investments in each of the following security types
will be limited to 10% of a Fund's net assets: (a) Non-agency
residential-mortgage-backed securities; (b) non-agency commercial-
mortgage-backed securities; and (c) non-agency asset-backed securities.
Each Fund's aggregate investments in the following security types will
be limited to 20% of a Fund's net assets: (a) Non-agency residential-
mortgage-backed securities; (b) non-agency commercial-mortgage-backed
securities; and (c) non-agency asset-backed securities.
(8) At least 90% of a Fund's net assets will be, under normal
circumstances, invested in U.S. dollar-denominated fixed-income
securities. All fixed-income securities, including mortgage-backed and
asset-backed securities, purchased by a Fund will be rated A- or
higher. Neither high-yield asset-backed securities nor high-yield
mortgage-backed securities are included in a Fund's principal
investment strategies.
(9) Each Fund's portfolio, under normal circumstances, will meet
certain criteria similar to those applicable to index-based, fixed-
income exchange-traded funds contained in NYSE Arca Equities Rule
5.2(j)(3), Commentary.02.\77\
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\77\ See note 18, supra.
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(10) A Fund may not hold more than 15% of its net assets in
illiquid assets, including Rule 144A securities, except for Rule 144A
securities deemed liquid by the Adviser, based on criteria for
liquidity established by the Board, consistent with Commission
guidance.
(11) A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange.
(12) With respect to each of the Funds, the Fund's investments will
be consistent with the Fund's investment objective and will not be used
to enhance leverage. While each Fund may invest in inverse ETFs, a Fund
will not invest in leveraged (e.g., 2X or 3X) or leveraged inverse
ETFs.
(13) Each Fund will not invest in options, futures, swaps, or other
derivatives, or in non-U.S. equity securities.
This approval order is based on all of the Exchange's representations
and description of the Funds, including those set forth above and in
the Notice.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \78\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\78\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\79\ that the proposed rule change (SR-NYSEArca-2014-42) be, and it
hereby is, approved.
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\79\ 15 U.S.C. 78s(b)(2).
[[Page 33625]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
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\80\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13564 Filed 6-10-14; 8:45 am]
BILLING CODE 8011-01-P
