Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to Listing and Trading of Shares of PIMCO Short-Term Exchange-Traded Fund and PIMCO Municipal Bond Exchange-Traded Fund Under NYSE Arca Equities Rule 8.600, 38605-38616 [2014-15814]

Download as PDF tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices Required Majority under section 57(f) of the Act. 11. No Non-Interested Director of a Regulated Fund will also be a director, general partner, managing member or principal, or otherwise an ‘‘affiliated person’’ (as defined in the Act) of an Affiliated Fund. 12. The expenses, if any, associated with acquiring, holding or disposing of any securities acquired in a CoInvestment Transaction (including, without limitation, the expenses of the distribution of any such securities registered for sale under the Securities Act) will, to the extent not payable by the Adviser under the investment advisory agreements with the Regulated Funds and the Affiliated Funds, be shared by the Affiliated Funds and the Regulated Funds in proportion to the relative amounts of the securities held or to be acquired or disposed of, as the case may be. 13. Any transaction fee (including break-up or commitment fees but excluding broker’s fees contemplated by section 17(e) or 57(k) of the Act, as applicable), received in connection with a Co-Investment Transaction will be distributed to the participating Regulated Funds and Affiliated Funds on a pro rata basis based on the amounts they invested or committed, as the case may be, in such Co-Investment Transaction. If any transaction fee is to be held by the Adviser pending consummation of the transaction, the fee will be deposited into an account maintained by the Adviser at a bank or banks having the qualifications prescribed in section 26(a)(1) of the Act, and the account will earn a competitive rate of interest that will also be divided pro rata among the participating Regulated Funds and Affiliated Funds based on the amounts they invest in such Co-Investment Transaction. None of the Affiliated Funds, the Adviser, the other Regulated Funds or any affiliated person of the Regulated Funds or Affiliated Funds will receive additional compensation or remuneration of any kind as a result of or in connection with a Co-Investment Transaction (other than (a) in the case of the Regulated Funds and the Affiliated Funds, the pro rata transaction fees described above and fees or other compensation described in condition 2(c)(iii)(C); and (b) in the case of the Adviser, investment advisory fees paid in accordance with the agreements between the Adviser and the Regulated Funds or the Affiliated Funds. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 For the Commission, by the Division of Investment Management, under delegated authority. Jill M. Peterson, Assistant Secretary. [FR Doc. 2014–15817 Filed 7–7–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72509; File No. SR– NYSEArca–2014–58] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to Listing and Trading of Shares of PIMCO ShortTerm Exchange-Traded Fund and PIMCO Municipal Bond ExchangeTraded Fund Under NYSE Arca Equities Rule 8.600 July 1, 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 June 25, 2014, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory 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 the Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the following under NYSE Arca Equities Rule 8.600 (‘‘Managed Fund Shares’’): PIMCO Short-Term Exchange-Traded Fund and PIMCO Municipal Bond ExchangeTraded Fund. 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 PO 00000 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 Frm 00124 Fmt 4703 Sfmt 4703 38605 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 Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade shares (‘‘Shares’’) of the following under NYSE Arca Equities Rule 8.600,4 which governs the listing and trading of Managed Fund Shares: 5 PIMCO ShortTerm Exchange-Traded Fund (‘‘ShortTerm Fund’’) and PIMCO Municipal Bond Exchange-Traded Fund (‘‘Municipal Bond Fund’’), each also referred to as a ‘‘Fund’’ and collectively referred to as the ‘‘Funds.’’ The Shares will be offered by PIMCO ETF Trust (the ‘‘Trust’’), a statutory trust organized under the laws of the State of Delaware and registered with the Commission as an open-end management investment company.6 The investment manager to the Funds will be Pacific Investment Management 4 The Commission has previously approved the listing and trading on the Exchange of other actively managed funds under Rule 8.600. See, e.g., Securities Exchange Act Release Nos. 60981 (November 10, 2009), 74 FR 59594 (November 18, 2009) (SR–NYSEArca–2009–79) (order approving Exchange listing and trading of five fixed income funds of the PIMCO ETF Trust); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR– NYSEArca–2011–95) (order approving listing and trading of PIMCO Total Return Exchange Traded Fund); 66670 (March 28, 2012), 77 FR 20087 (April 3, 2012) (SR–NYSEArca–2012–09) (order approving listing and trading of PIMCO Global Advantage Inflation-Linked Bond Strategy Fund). 5 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 6 The Trust is registered under the 1940 Act. On January 27, 2014, the Trust filed an amendment to its registration statement on Form N–1A under the Securities Act of 1933 (15 U.S.C. 77a) (‘‘1933 Act’’) and the 1940 Act relating to the Funds (File Nos. 333–155395 and 811–22250) (the ‘‘Registration Statement’’). The description of the operation of the Trust and the Funds herein is based, in part, on the Registration Statement. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 28993 (November 10, 2009) (File No. 812–13571) (‘‘Exemptive Order’’). E:\FR\FM\08JYN1.SGM 08JYN1 38606 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Company LLC (‘‘PIMCO’’ or the ‘‘Adviser’’). PIMCO Investments LLC will serve as the distributor for the Funds (‘‘Distributor’’). State Street Bank & Trust Co. will serve as the custodian and transfer agent for the Funds (‘‘Custodian’’ or ‘‘Transfer Agent’’). Commentary .06 to Rule 8.600 provides that, if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a broker-dealer, such investment adviser shall erect a ‘‘fire wall’’ between the investment adviser and the brokerdealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.7 In addition, Commentary .06 further requires that personnel who make decisions on the open-end fund’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the open-end fund’s portfolio. The Adviser is not registered as a broker-dealer, but is affiliated with a broker-dealer, and will implement a ‘‘fire wall’’ with respect to such brokerdealer affiliate regarding access to information concerning the composition and/or changes to a Fund’s portfolio. If PIMCO elects to hire a sub-adviser for the Funds that is registered as a brokerdealer or is affiliated with a brokerdealer, such sub-adviser will implement a fire wall with respect to its relevant personnel or its broker-dealer affiliate regarding access to information concerning the composition and/or changes to a portfolio and will be subject to procedures designed to prevent the use and dissemination of 7 An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Adviser and its related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violations, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 material non-public information regarding such portfolio. In the event (a) the Adviser becomes registered as a broker-dealer or newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated with a broker-dealer, it will implement a fire wall with respect to its relevant personnel or its broker-dealer affiliate regarding access to information concerning the composition and/or changes to a portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. Characteristics of the Funds 8 According to the Registration Statement, in selecting investments for each Fund, PIMCO will develop an outlook for interest rates, currency exchange rates and the economy, analyze credit and call risks, and use other investment selection techniques. The proportion of each Fund’s assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or maturity) will vary based on PIMCO’s outlook for the U.S. economy and the economies of other countries in the world, the financial markets and other factors. With respect to each Fund, in seeking to identify undervalued currencies, PIMCO may consider many factors, including but not limited to, longer-term analysis of relative interest rates, inflation rates, real exchange rates, purchasing power parity, trade account balances and current account balances, as well as other factors that influence exchange rates such as flows, market technical trends and government policies. With respect to fixed income investing, PIMCO will attempt to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO will identify these areas by grouping fixed income investments into sectors such as money markets, governments, corporates, mortgages, asset-backed and international. Sophisticated proprietary software will then assist in evaluating sectors and pricing specific investments. Once investment opportunities are identified, PIMCO will shift assets among sectors depending upon changes in relative valuations, credit spreads and other factors. 8 Many of the investment strategies of the Funds are discretionary, which means that PIMCO can decide from time to time whether to use them or not. PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 Fixed Income Instruments Among other investments described in more detail herein, each Fund may invest in Fixed Income Instruments, which include: • securities issued or guaranteed by the U.S. Government, its agencies or government-sponsored enterprises (‘‘U.S. Government Securities’’); • corporate debt securities of U.S. and non-U.S. issuers, including convertible securities and corporate commercial paper 9; • mortgage-backed and other assetbacked securities 10; • inflation-indexed bonds issued both by governments and corporations 11; • structured notes, including hybrid or ‘‘indexed’’ securities and eventlinked bonds 12; • bank capital and trust preferred securities 13; 9 With respect to each of the Funds, while nonemerging markets corporate debt securities (excluding commercial paper) generally must have $100 million or more par amount outstanding and significant par value traded to be considered as an eligible investment for each of the Funds, at least 80% of issues of such securities held by a Fund must have $100 million or more par amount outstanding at the time of investment. See also note 22, infra, regarding emerging market corporate debt securities. 10 Mortgage-related and other asset-backed securities include collateralized mortgage obligations (‘‘CMO’’s), commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals, stripped mortgage-backed securities and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. A to-beannounced (‘‘TBA’’) transaction is a method of trading mortgage-backed securities. In a TBA transaction, the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount and price. The actual pools delivered generally are determined two days prior to the settlement date. 11 Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) are fixed income securities whose principal value is periodically adjusted according to the rate of inflation (e.g., Treasury Inflation Protected Securities (‘‘TIPS’’)). Municipal inflation-indexed securities are municipal bonds that pay coupons based on a fixed rate plus the Consumer Price Index for All Urban Consumers (‘‘CPI’’). With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is reflected in the semi-annual coupon payment. 12 The Funds may obtain event-linked exposure by investing in ‘‘event-linked bonds’’ or ‘‘eventlinked swaps’’ or by implementing ‘‘event-linked strategies.’’ Event-linked exposure results in gains or losses that typically are contingent, or formulaically related to defined trigger events. Examples of trigger events include hurricanes, earthquakes, weather-related phenomena, or statistics relating to such events. Some event-linked bonds are commonly referred to as ‘‘catastrophe bonds.’’ If a trigger event occurs, a Fund may lose a portion or its entire principal invested in the bond or notional amount on a swap. 13 There are two common types of bank capital: Tier I and Tier II. Bank capital is generally, but not always, of investment grade quality. According to the Registration Statement, Tier I securities often E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices • loan participations and assignments 14; • delayed funding loans and revolving credit facilities; • bank certificates of deposit, fixed time deposits and bankers’ acceptances; • repurchase agreements on Fixed Income Instruments and reverse repurchase agreements on Fixed Income Instruments; • debt securities issued by states or local governments and their agencies, authorities and other governmentsponsored enterprises (‘‘Municipal Bonds’’); • obligations of non-U.S. governments or their subdivisions, agencies and government-sponsored enterprises; and • obligations of international agencies or supranational entities. Use of Derivatives by the Funds tkelley on DSK3SPTVN1PROD with NOTICES A Fund’s investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund’s investment objective and policies. With respect to each Fund, derivative instruments will include forwards; 15 exchange-traded and overthe-counter (‘‘OTC’’) options contracts; exchange-traded futures contracts; exchange-traded and OTC swap agreements; exchange-traded options on futures contracts; and OTC options on swap agreements.16 Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. A Fund may, but is not required to, use derivative instruments for risk management purposes or as part of its investment strategies.17 take the form of trust preferred securities. Tier II securities are commonly thought of as hybrids of debt and preferred stock, are often perpetual (with no maturity date), callable and, under certain conditions, allow for the issuer bank to withhold payment of interest until a later date. However, such deferred interest payments generally earn interest. 14 The Funds may invest in fixed- and floatingrate loans, which investments generally will be in the form of loan participations and assignments of portions of such loans. 15 Forwards are contracts to purchase or sell securities for a fixed price at a future date beyond normal settlement time (forward commitments). 16 In the future, in the event that there are exchange-traded options on swaps, the Fund may invest in these instruments. 17 Each Fund will seek, where possible, to use counterparties whose financial status is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible. PIMCO’s Counterparty Risk Committee evaluates the creditworthiness of counterparties on an ongoing basis. In addition to information provided VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 As described further below, each Fund will typically use derivative instruments as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. A Fund may also use derivative instruments to enhance returns. To limit the potential risk associated with such transactions, a Fund will segregate or ‘‘earmark’’ assets determined to be liquid by PIMCO in accordance with procedures established by the Trust’s Board of Trustees and in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its obligations under derivative instruments. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, each Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that certain transactions of the Fund, including the Fund’s use of derivatives, may give rise to leverage, causing the Fund to be more volatile than if it had not been leveraged.18 Because the markets for certain securities, or the securities themselves, may be unavailable or cost prohibitive as compared to derivative instruments, suitable derivative transactions may be an efficient alternative for a Fund to obtain the desired asset exposure. The Adviser believes that derivatives can be an economically attractive substitute for an underlying physical security that each Fund would otherwise purchase. For example, a Fund could purchase Treasury futures contracts instead of physical Treasuries or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transaction costs or attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields). The Adviser further believes that derivatives can be used as a more liquid means of adjusting portfolio duration as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities (e.g., interest rate swaps may by credit agencies, PIMCO credit analysts evaluate each approved counterparty using various methods of analysis, including company visits, earnings updates, the broker-dealer’s reputation, PIMCO’s past experience with the broker-dealer, market levels for the counterparty’s debt and equity, the counterparty’s liquidity and its share of market participation. 18 To mitigate leveraging risk, the Adviser will segregate or ‘‘earmark’’ liquid assets or otherwise cover the transactions that may give rise to such risk. PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 38607 have lower transaction costs than physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or ‘‘tail risks’’) in each Fund. Each Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps (CDX) can be used to gain exposure to a basket of credit risk by ‘‘selling protection’’ against default or other credit events, or to hedge broad market credit risk by ‘‘buying protection.’’ Single name credit default swaps (CDS) can be used to allow a Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. A Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange for paying a financing cost. A total return swap may be much more efficient than buying underlying securities of an index, potentially lowering transaction costs. The Adviser believes that the use of derivatives will allow each Fund to selectively add diversifying sources of return from selling options. Option purchases and sales can also be used to hedge specific exposures in the portfolio, and can provide access to return streams available to long-term investors such as the persistent difference between implied and realized volatility. Option strategies can generate income or improve execution prices (i.e., covered calls). Short-Term Fund—Principal Investments According to the Registration Statement, the Short-Term Fund will seek maximum current income, consistent with preservation of capital and daily liquidity. The Fund will seek to achieve its investment objective by investing under normal circumstances 19 at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities, and derivatives based on Fixed Income Instruments. The average portfolio duration of the Fund will vary based on PIMCO’s forecast for interest rates and 19 With respect to each Fund, the term ‘‘under normal circumstances’’ includes, but is not limited to, the absence of extreme volatility or trading halts in the fixed income markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or force majeure type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance. E:\FR\FM\08JYN1.SGM 08JYN1 38608 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES will normally not exceed one year. In addition, the dollar weighted average portfolio maturity of the Short-Term Fund, under normal circumstances, is expected not to exceed three years. According to the Registration Statement, the Fund will invest primarily in investment grade debt securities, but may invest up to 10% of its total assets in high yield securities rated B or higher by Moody’s, or equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO to be of comparable quality.20 In furtherance of the Fund’s 65% policy, or with respect to the Fund’s other investments, the Fund may invest in derivative instruments, subject to applicable law and any other restrictions described herein. The Fund may invest up to 20% of its assets in mortgage-related and other asset-backed securities, although this 20% limitation does not apply to securities issued or guaranteed by Federal agencies and/or U.S. government sponsored instrumentalities. According to the Registration Statement, the Fund may invest in securities and instruments that are economically tied to foreign (non-U.S.) countries.21 20 With respect to each Fund, securities rated Ba or lower by Moody’s, or equivalently rated by S&P or Fitch, are sometimes referred to as ‘‘high yield securities’’ or ‘‘junk bonds’’, while securities rated Baa or higher are referred to as ‘‘investment grade.’’ Unrated securities may be less liquid than comparable rated securities and involve the risk that a Fund’s portfolio manager may not accurately evaluate the security’s comparative credit rating. To the extent that a Fund invests in unrated securities, a Fund’s success in achieving its investment objective may depend more heavily on the portfolio manager’s creditworthiness analysis than if that Fund invested exclusively in rated securities. In determining whether a security is of comparable quality, the Adviser will consider, for example, whether the issuer of the security has issued other rated securities; whether the obligations under the security are guaranteed by another entity and the rating of such guarantor (if any); whether and (if applicable) how the security is collateralized; other forms of credit enhancement (if any); the security’s maturity date; liquidity features (if any); relevant cash flow(s); valuation features; other structural analysis; macroeconomic analysis; and sector or industry analysis. 21 PIMCO will generally consider an instrument to be economically tied to a non-U.S. country if the issuer is a foreign government (or any political subdivision, agency, authority or instrumentality of such government), or if the issuer is organized under the laws of a non-U.S. country. With respect to each Fund, in the case of certain money market instruments, such instruments will be considered economically tied to a non-U.S. country if either the issuer or the guarantor of such money market instrument is organized under the laws of a nonU.S. country. With respect to derivative instruments, PIMCO will generally consider such instruments to be economically tied to non-U.S. countries if the underlying assets are foreign currencies (or baskets or indexes of such currencies), or instruments or securities that are VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 The Fund may invest up to 10% of its total assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollardenominated securities of foreign issuers.22 According to the Registration Statement, the Fund will normally limit its foreign currency exposure (from nonU.S. dollar-denominated securities or currencies) to 20% of its total assets. The Fund may invest up to 5% of its total assets in securities and instruments that are economically tied to emerging market countries.23 The Fund may engage in foreign currency transactions on a spot (cash) basis and forward basis and invest in foreign currency futures and exchangetraded and OTC options contracts.24 The Fund may enter into these contracts to hedge against foreign exchange risk, to increase exposure to a foreign currency issued by foreign governments or issuers organized under the laws of a non-U.S. country (or if the underlying assets are certain money market instruments, if either the issuer or the guarantor of such money market instruments is organized under the laws of a non-U.S. country). 22 The Fund may have greater exposure (i.e., up to 20% of its total assets) to foreign currencies through (i) investments in securities denominated in such currencies, and (ii) direct investments in foreign currencies, including currency forwards. 23 PIMCO will generally consider an instrument to be economically tied to an emerging market country if the security’s ‘‘country of exposure’’ is an emerging market country, as determined by the criteria set forth in the Registration Statement. Alternatively, such as when a ‘‘country of exposure’’ is not available or when PIMCO believes the following tests more accurately reflect which country the security is economically tied to, PIMCO may consider an instrument to be economically tied to an emerging market country if the issuer or guarantor is a government of an emerging market country (or any political subdivision, agency, authority or instrumentality of such government), if the issuer or guarantor is organized under the laws of an emerging market country, or if the currency of settlement of the security is a currency of an emerging market country. With respect to derivative instruments, PIMCO will generally consider such instruments to be economically tied to emerging market countries if the underlying assets are currencies of emerging market countries (or baskets or indices of such currencies), or instruments or securities that are issued or guaranteed by governments of emerging market countries or by entities organized under the laws of emerging market countries. While emerging markets corporate debt securities (excluding commercial paper) generally must have $200 million or more par amount outstanding and significant par value traded to be considered as an eligible investment for each of the Funds, at least 80% of issues of such securities held by a Fund must have $200 million or more par amount outstanding at the time of investment. 24 The Fund will limit its investments in currencies to those currencies with a minimum average daily foreign exchange turnover of USD $1 billion as determined by the Bank for International Settlements (‘‘BIS’’) Triennial Central Bank Survey. As of the most recent BIS Triennial Central Bank Survey, at least 52 separate currencies had minimum average daily foreign exchange turnover of USD $1 billion. For a list of eligible currencies, see www.bis.org. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 or to shift exposure to foreign currency fluctuations from one currency to another. Suitable hedging transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in such transactions at any given time or from time to time. The Fund may purchase or sell securities on a whenissued, delayed delivery or forward commitment basis and may engage in short sales.25 The Fund may, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls).26 Short-Term Fund—Other (NonPrincipal) Investments The Short-Term Fund may invest up to 10% of its total assets in preferred stock, convertible securities and other equity-related securities.27 The Fund may invest in variable and floating rate securities that are not Fixed Income Instruments. The Fund may invest in floaters and inverse floaters that are not Fixed Income Instruments and may engage in credit spread trades. As disclosed in the Registration Statement, the Fund may invest in trade 25 Each of the Funds may make short sales of securities to: (i) offset potential declines in long positions in similar securities, (ii) to increase the flexibility of the Fund; (iii) for investment return; and (iv) as part of a risk arbitrage strategy. 26 A dollar roll is similar except that the counterparty is not obligated to return the same securities as those originally sold by the Fund but only securities that are ‘‘substantially identical.’’ 27 Convertible securities are generally preferred stocks and other securities, including fixed income securities and warrants, that are convertible into or exercisable for common stock at a stated price or rate. Equity-related investments may include investments in small-capitalization (‘‘small-cap’’), mid-capitalization (‘‘mid-cap’’) and largecapitalization (‘‘large-cap’’) companies. With respect to each Fund, a small-cap company will be defined as a company with a market capitalization of up to $1.5 billion, a mid-cap company will be defined as a company with a market capitalization of between $1.5 billion and $10 billion and a largecap company will be defined as a company with a market capitalization above $10 billion. Not more than 10% of the net assets of a Fund in the aggregate invested in exchange-traded equity securities shall consist of equity securities, including stocks into which a convertible security is converted, whose principal market is not a member of the Intermarket Surveillance Group (‘‘ISG’’) or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Furthermore, not more than 10% of the net assets of a Fund in the aggregate invested in futures contracts or exchange-traded options contracts shall consist of futures contracts or exchange-traded options contracts whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices claims,28 privately placed and unregistered securities, and exchangetraded and OTC-traded structured products, including credit-linked securities, commodity-linked notes, and structured notes. The Fund may invest in Brady Bonds. The Fund may enter into repurchase agreements on instruments other than Fixed Income Instruments, in addition to repurchase agreements on Fixed Income Instruments mentioned above, in which the Fund purchases a security from a bank or broker-dealer, which agrees to purchase the security at the Fund’s cost plus interest within a specified time. Repurchase agreements maturing in more than seven days and which may not be terminated within seven days at approximately the amount at which the Fund has valued the agreements will be considered illiquid securities. The Fund may enter into reverse repurchase agreements on instruments other than Fixed Income Instruments, in addition to reverse repurchase agreements on Fixed Income Instruments mentioned above, subject to the Fund’s limitations on borrowings.29 The Fund will segregate or ‘‘earmark’’ assets determined to be liquid by PIMCO in accordance with procedures established by the Board to cover its obligations under reverse repurchase agreements. tkelley on DSK3SPTVN1PROD with NOTICES Municipal Bond Fund—Principal Investments According to the Registration Statement, the Municipal Bond Fund will seek high current income exempt from federal income tax, consistent with preservation of capital; capital appreciation is a secondary objective. The Fund will seek to achieve its investment objective by investing under normal circumstances at least 80% of its assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of the issuance, exempt from federal income tax (‘‘Municipal Bonds’’). Municipal Bonds are generally issued by or on behalf of states and local governments and their agencies, authorities and other instrumentalities. Municipal Bonds 28 Trade claims are non-securitized rights of payment arising from obligations that typically arise when vendors and suppliers extend credit to a company by offering payment terms for products and services. If the company files for bankruptcy, payments on these trade claims stop and the claims are subject to compromise along with the other debts of the company. Trade claims may be purchased directly from the creditor or through brokers. 29 With respect to each Fund, a reverse repurchase agreement involves the sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 include municipal lease obligations, municipal general obligation bonds, municipal cash equivalents, and prerefunded and escrowed to maturity bonds. The Fund may invest in industrial development bonds, which are Municipal Bonds issued by a government agency on behalf of a private sector company and, in most cases, are not backed by the credit of the issuing municipality. The Fund may also invest in securities issued by entities whose underlying assets are Municipal Bonds. The Fund may invest more than 25% of its total assets in bonds of issuers in California and New York; may invest 25% of more of its total assets in Municipal Bonds that finance education, health care, housing, transportation, utilities and other similar projects; and may invest 25% or more of its total assets in industrial development bonds. The average portfolio duration of the Fund will normally vary from three to twelve years based on PIMCO’s forecast for interest rates. According to the Registration Statement, the Fund will invest primarily in investment grade debt securities, but may invest up to 10% of its total assets in Municipal Bonds or private activity bonds 30 that are high yield securities rated Ba or higher by Moody’s, or equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO to be of comparable quality.31 The Fund may invest in residual interest bonds (‘‘RIBs’’), which brokers create by depositing a Municipal Bond in a trust. The trust in turn would issue a variable rate security and RIBs. The interest rate for the variable rate security will be determined by the remarketing broker-dealer, while the RIB holder will receive the balance of the income from the underlying municipal bond. In furtherance of the Fund’s 80% policy the Fund may invest in derivative instruments on Municipal Bonds, subject to applicable law and any other restrictions described herein. The Fund may, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls). The Fund may purchase or sell securities on a whenissued, delayed delivery or forward 30 Under the Internal Revenue Code, certain limited obligation bonds are considered ‘‘private activity bonds’’, and interest paid on such bonds is treated as an item of tax preference for purposes of calculating federal alternative minimum tax liability. 31 See supra, note 19 [sic]. PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 38609 commitment basis and may engage in short sales.32 Municipal Bond Fund—Other (NonPrincipal) Investments According to the Registration Statement, the Municipal Bond Fund may invest up to 20% of its net assets in U.S. government securities, money market instruments, ‘‘private activity’’ bonds and/or Fixed Income Instruments (other than Municipal Bonds), including derivative instruments related to such instruments, subject to applicable law and any other restrictions described herein. The Fund may invest up to 10% of its total assets in preferred stock, convertible securities and other equityrelated securities.33 The Fund may invest in variable and floating rate securities. The Fund may invest in floaters and inverse floaters and may engage in credit spread trades. Also, as disclosed in the Registration Statement, the Fund may invest in trade claims, privately placed and unregistered securities, and exchangetraded and OTC-traded structured products, including credit-linked securities, commodity-linked notes, and structured notes. The Fund may invest in Brady Bonds. The Fund may enter into repurchase agreements on instruments other than Fixed Income Instruments, in addition to repurchase agreements on Fixed Income Instruments mentioned above, in which the Fund purchases a security from a bank or broker-dealer, which agrees to purchase the security at the Fund’s cost plus interest within a specified time. Repurchase agreements maturing in more than seven days and which may not be terminated within seven days at approximately the amount at which the Fund has valued the agreements will be considered illiquid securities. The Fund may enter into reverse repurchase agreements on instruments other than Fixed Income Instruments, in addition to reverse repurchase agreements on Fixed Income Instruments mentioned above, subject to the Fund’s limitations on borrowings. Other Investments (Both Funds) The Funds may invest without limit, for temporary or defensive purposes, in U.S. debt securities, including taxable securities and short-term money market securities, if PIMCO deems it appropriate to do so. If PIMCO believes that economic or market conditions are unfavorable to investors, PIMCO may temporarily invest up to 100% of a 32 See 33 See E:\FR\FM\08JYN1.SGM supra, note 24 [sic]. supra, note 26 [sic]. 08JYN1 38610 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices Fund’s assets in certain defensive strategies, including holding a substantial portion of a Fund’s assets in cash, cash equivalents or other highly rated short-term securities, including securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. The Funds may invest in, to the extent permitted by Section 12(d)(1)(A) of the 1940 Act, other affiliated and unaffiliated funds, such as open-end or closed-end management investment companies, including other exchange-traded funds, provided that each of a Fund’s investment in units or shares of investment companies and other open-end collective investment vehicles will not exceed 10% of that Fund’s total assets. Each Fund may invest in securities lending collateral in one or more money market funds to the extent permitted by Rule 12d1–1 under the 1940 Act, including series of PIMCO Funds. tkelley on DSK3SPTVN1PROD with NOTICES Investment Restrictions Each Fund’s investments, including investments in derivative instruments, will be subject to all of the restrictions under the 1940 Act, including restrictions with respect to illiquid assets; that is, the limitation that a Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser, consistent with Commission guidance.34 Each Fund will monitor its respective 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.35 34 In reaching liquidity decisions, the Adviser may consider the following factors: the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). 35 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also, Investment Company Act Release No. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 Each Fund will be diversified within the meaning of the 1940 Act.36 Each Fund intends to qualify annually and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code.37 None of the Funds will concentrate its investments in a particular industry, as that term is used in the 1940 Act, and as interpreted, modified, or otherwise permitted by a regulatory authority having jurisdiction from time to time.38 Each Fund’s investments, including derivatives, will be consistent with that Fund’s investment objective and each Fund’s use of derivatives may be used to enhance leverage. However, each Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of a Fund’s broad-based securities market index (as defined in Form N–1A).39 Net Asset Value and Derivatives Valuation Methodology for Purposes of Determining Net Asset Value The net asset value (‘‘NAV’’) of each Fund’s Shares will be determined by dividing the total value of a Fund’s portfolio investments and other assets, less any liabilities, by the total number of Shares outstanding. Each Fund’s Shares will be valued as of the close of regular trading (normally 4:00 p.m. Eastern time (‘‘E.T.’’) (the ‘‘NYSE Close’’)) on each day NYSE Arca is open (‘‘Business Day’’). Information that becomes known to each of the Funds or its agents after the NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a portfolio asset or the NAV determined earlier that day. For purposes of calculating NAV, portfolio securities and other assets for 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). A fund’s portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the Securities Act). 36 The diversification standard is set forth in Section 5(b)(1) of the 1940 Act (15 U.S.C. 80e). 37 26 U.S.C. 851. 38 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). 39 Each Fund’s broad-based securities market index will be identified in a future amendment to the Registration Statement following a Fund’s first full calendar year of performance. PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 which market quotes are readily available will be valued at market value. Market value will generally be determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Fixed Income Instruments, including those to be purchased under firm commitment agreements/delayed delivery basis, will generally be valued on the basis of quotes obtained from brokers and dealers or independent pricing services. Foreign fixed income securities will generally be valued on the basis of quotes obtained from brokers and dealers or pricing services using data reflecting the earlier closing of the principal markets for those assets. Short-term debt instruments having a remaining maturity of 60 days or less will generally be valued at amortized cost, which approximates market value. As discussed in more detail below, derivatives will generally be valued on the basis of quotes obtained from brokers and dealers or pricing services using data reflecting the earlier closing of the principal markets for those assets. Local closing prices will be used for all instrument valuation purposes. Foreign currency-denominated derivatives will generally be valued as of the respective local region’s market close. With respect to specific derivatives: • Currency spot and forward rates from major market data vendors 40 will generally be determined as of the NYSE Close. • Exchange traded futures will generally be valued at the settlement price of the relevant exchange. • A total return swap on an index will be valued at the publicly available index price. The index price, in turn, is determined by the applicable index calculation agent, which generally values the securities underlying the index at the last reported sale price. • Equity total return swaps will generally be valued using the actual underlying equity at local market closing, while bank loan total return swaps will generally be valued using the evaluated underlying bank loan price minus the strike price of the loan. • Exchange traded non-equity options, (for example, options on bonds, Eurodollar options and U.S. Treasury options), index options, and options on futures will generally be valued at the official settlement price determined by the relevant exchange, if available. 40 Major market data vendors may include, but are not limited to: Thomson Reuters, JPMorgan Chase PricingDirect Inc., Markit Group Limited, Bloomberg, Interactive Data Corporation or other major data vendors. E:\FR\FM\08JYN1.SGM 08JYN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices • OTC and exchange traded equity options will generally be valued on a basis of quotes obtained from a quotation reporting system, established market makers, or pricing services or at the settlement price of the applicable exchange. • OTC FX options will generally be valued by pricing vendors. • All other swaps such as interest rate swaps, inflation swaps, swaptions, credit default swaps, and CDX/CDS will generally be valued by pricing services. Exchange-traded equity securities will be valued at the official closing price or the last trading price on the exchange or market on which the security is primarily traded at the time of valuation. If no sales or closing prices are reported during the day, exchangetraded equity securities will generally be valued at the mean of the last available bid and ask quotation on the exchange or market on which the security is primarily traded, or using other market information obtained from quotation reporting systems, established market makers, or pricing services. Investment company securities that are not exchange-traded will be valued at NAV. Equity securities traded OTC will be valued based on price quotations obtained from a broker-dealer who makes markets in such securities or other equivalent indications of value provided by a third-party pricing service. Options on swaps will be valued at their most recent exchange closing price when available. If no such closing prices are reported, these contracts will be valued by a third party pricing service. RIBs, money market instruments, trade claims, privately placed and unregistered securities, structured products and other types of debt securities will generally be valued on the basis of independent pricing services or quotes obtained from brokers and dealers. If a foreign security’s value has materially changed after the close of the security’s primary exchange or principal market but before the NYSE Close, the security will be valued at fair value based on procedures established and approved by the Board. Foreign securities that do not trade when the NYSE is open will also be valued at fair value. Securities and other assets for which market quotes are not readily available will be valued at fair value as determined in good faith by the Board or persons acting at their direction. The Board has adopted methods for valuing securities and other assets in circumstances where market quotes are not readily available, and has delegated to PIMCO the responsibility for VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 applying the valuation methods. In the event that market quotes are not readily available, and the security or asset cannot be valued pursuant to one of the valuation methods, the value of the security or asset will be determined in good faith by the Valuation Committee of the Board of Trustees, generally based upon recommendations provided by PIMCO. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, broker quotes), including where events occur after the close of the relevant market, but prior to the NYSE Close, that materially affect the values of a Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available. The Board has delegated to PIMCO the responsibility for monitoring significant events that may materially affect the values of a Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be re-evaluated in light of such significant events. When a Fund uses fair value pricing to determine its NAV, securities will not be priced on the basis of quotes from the primary market in which they are traded, but rather may be priced by another method that the Board of Trustees or persons acting at their direction believe reflects fair value. Fair value pricing may require subjective determinations about the value of a security. While the Trust’s policy is intended to result in a calculation of the Fund’s NAV that fairly reflects security values as of the time of pricing, the Trust cannot ensure that fair values determined by the Board or persons acting at its direction would accurately reflect the price that a Fund could obtain for a security if it were to dispose of that security as of the time of pricing (for instance, in a forced or distressed sale). The prices used by a Fund may differ from the value that would be realized if the securities were sold. For a Fund’s 4:00 p.m. E.T. futures holdings, estimated prices from Reuters will be used if any cumulative futures margin impact is greater than $0.005 to the NAV due to futures movement after the fixed income futures market closes (3:00 p.m. E.T.) and up to the NYSE Close (generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the Chicago Mercantile Exchange (‘‘CME’’) or the Intercontinental Exchange (‘‘ICE– PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 38611 US’’) will be priced using the applicable exchange closing price where available. Investments initially valued in currencies other than the U.S. dollar will be converted to the U.S. dollar using exchange rates obtained from pricing services. As a result, the NAV of a Fund’s Shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that the NYSE is closed. As a result, to the extent that a Fund holds foreign (non-U.S.) securities, the NAV of a Fund’s Shares may change when an investor cannot purchase, redeem or exchange shares. Derivatives Valuation Methodology for Purposes of Determining Portfolio Indicative Value On each Business Day, before commencement of trading in Fund Shares on NYSE Arca, each Fund will disclose on its Web site the identities and quantities of the portfolio instruments and other assets held by a Fund that will form the basis for a Fund’s calculation of NAV at the end of the Business Day. In order to provide additional information regarding the intra-day value of Shares of a Fund, one or more major market data vendors will disseminate every 15 seconds through the facilities of the Consolidated Tape Association (‘‘CTA’’) or other widely disseminated means an updated Portfolio Indicative Value (‘‘PIV’’) for each Fund as calculated by an information provider or market data vendor. A third party market data provider will calculate the PIV for each Fund. For the purposes of determining the PIV, the third party market data provider’s valuation of derivatives is expected to be similar to its valuation of all securities. The third party market data provider may use market quotes if available or may fair value securities against proxies (such as swap or yield curves). With respect to specific derivatives: • Foreign currency derivatives may be valued intraday using market quotes, or another proxy as determined to be appropriate by the third party market data provider. • Futures may be valued intraday using the relevant futures exchange data, or another proxy as determined to be appropriate by the third party market data provider. • Interest rate swaps may be mapped to a swap curve and valued intraday E:\FR\FM\08JYN1.SGM 08JYN1 38612 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices based on the swap curve, or another proxy as determined to be appropriate by the third party market data provider. • CDX/CDS may be valued using intraday data from market vendors, or based on underlying asset price, or another proxy as determined to be appropriate by the third party market data provider. • Total return swaps may be valued intraday using the underlying asset price, or another proxy as determined to be appropriate by the third party market data provider. • Exchange listed options may be valued intraday using the relevant exchange data, or another proxy as determined to be appropriate by the third party market data provider. • OTC options may be valued intraday through option valuation models (e.g., Black-Scholes) or using exchange traded options as a proxy, or another proxy as determined to be appropriate by the third party market data provider. • A third party market data provider’s valuation of forwards will be similar to their valuation of the underlying securities, or another proxy as determined to be appropriate by the third party market data provider. The third party market data provider will generally use market quotes if available. Where market quotes are not available, they may fair value securities against proxies (such as swap or yield curves). Each Fund’s disclosure of forward positions will include information that market participants can use to value these positions intraday. tkelley on DSK3SPTVN1PROD with NOTICES Disclosed Portfolio Each Fund’s disclosure of derivative positions in the applicable Disclosed Portfolio will include information that market participants can use to value these positions intraday. On a daily basis, the Funds will disclose on the Funds’ Web site the following information regarding each portfolio holding, as applicable to the type of holding: ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in a Fund’s portfolio. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 Impact on Arbitrage Mechanism For each Fund, the Adviser believes there will be minimal, if any, impact to the arbitrage mechanism as a result of the use of derivatives. Market makers and participants should be able to value derivatives as long as the positions are disclosed with relevant information. The Adviser believes that the price at which Shares of a Fund trade will continue to be disciplined by arbitrage opportunities created by the ability to purchase or redeem creation Shares of a Fund at their NAV, which should ensure that Shares of a Fund will not trade at a material discount or premium in relation to its NAV. The Adviser does not believe there will be any significant impacts to the settlement or operational aspects of a Fund’s arbitrage mechanism due to the use of derivatives. Because derivatives generally are not eligible for in-kind transfer, they will be substituted with a ‘‘cash in lieu’’ amount (as described below) when each Fund processes purchases or redemptions of block-size ‘‘Creation Units’’ (as described below) in-kind. Creations and Redemptions of Shares According to the Registration Statement, Shares of each of the Funds that trade in the secondary market will be ‘‘created’’ at NAV by Authorized Participants only in block-size Creation Units of 50,000 Shares or multiples thereof.41 The size of a Creation Unit is subject to change. Each of the Funds will offer and issue Shares at their NAV per Share generally in exchange for a basket of debt securities held by that Fund (the ‘‘Deposit Securities’’) together with a deposit of a specified cash payment (the ‘‘Cash Component’’), or in lieu of Deposit Securities, a Fund may permit a ‘‘cash-in-lieu’’ amount for any reason at a Fund’s sole discretion. Alternatively, a Fund may issue Creation Units in exchange for a specified all-cash payment (‘‘Cash Deposit’’) (together with Deposit 41 The NAV of the Funds’ Shares generally will be calculated once daily Monday through Friday as of the close of trading on the New York Stock Exchange (‘‘NYSE’’), generally 4:00 p.m. E.T. (the ‘‘NAV Calculation Time’’) on any Business Day. NAV per Share will be calculated by dividing a Fund’s net assets by the number of that Fund’s Shares outstanding. For more information regarding the valuation of Fund investments in calculating a Fund’s NAV, see the Registration Statement. The term ‘‘Authorized Participant’’ refers to a ‘‘Participating Party’’ (a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC; or a Depository Trust Company (‘‘DTC’’) Participant who has executed a Participant Agreement (an agreement with the Distributor and Transfer Agent with respect to creations and redemptions of Creation Units). PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 Securities and Cash Component, the ‘‘Fund Deposit’’). Similarly, Shares can be redeemed only in Creation Units, generally in-kind for a portfolio of debt securities held by the Funds and/or for a specified amount of cash (collectively, ‘‘Redemption Instruments’’). On any given Business Day, purchases and redemptions of Creation Units will be made in whole or in part on a cash basis if an Authorized Participant deposits or receives (as applicable) cash in lieu of some or all of the Fund Deposit or Redemption Instruments, respectively, solely because such instruments are, in the case of the Fund Deposit, not available in sufficient quantity.42 In determining whether a Fund will be selling or redeeming Creation Units on a cash or in-kind basis, the key consideration will be the benefit which would accrue to Fund investors. In many cases, investors may benefit by the use of all cash purchase orders because the Adviser would execute trades rather than market makers, and the Adviser may be able to obtain better execution in bond transactions due to its size, experience and potentially stronger relationships in the fixed income markets. Except when aggregated in Creation Units, Shares will not be redeemable by the Funds. The prices at which creations and redemptions occur will be based on the next calculation of NAV after an order is received. Requirements as to the timing and form of orders will be described in the Authorized Participant agreement. PIMCO will make available on each Business Day via the National Securities Clearing Corporation (‘‘NSCC’’), prior to the opening of business (subject to amendments) on the Exchange (currently 9:30 a.m., E.T.), the identity and the required amount of each Deposit Security and the amount of the Cash Component (or Cash Deposit) to be included in the current ‘‘Fund Deposit’’ 43 (based on information at the end of the previous Business Day). Creations and redemptions must be made by an Authorized Participant. Additional information regarding the Trust, the Funds and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings, disclosure 42 Such purchase or redemption transactions are ‘‘custom orders.’’ On any given Business Day, if the Fund accepts a custom order, the Adviser represents that the Fund will accept custom orders from all other Authorized Participants on the same basis. 43 The Deposit Securities and Cash Component or, alternatively, the Cash Deposit, will constitute the Fund Deposit, which will represent the investment amount for a Creation Unit of each of the Funds. E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices policies, distributions and taxes is included in the Registration Statement. All terms relating to the Funds that are referred to but not defined in this proposed rule change are defined in the Registration Statement. tkelley on DSK3SPTVN1PROD with NOTICES Availability of Information The Trust’s Web site (www.pimcoetfs.com), which will be publicly available prior to the public offering of Shares of the Funds, will include a form of the prospectus for each of the Funds that may be downloaded. The Trust’s Web site will include additional quantitative information updated on a daily basis, including, for each of the Funds, (1) daily trading volume, the prior Business Day’s reported closing price, NAV and mid-point of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’),44 and a calculation of the premium and discount of the Bid/ Ask Price against the NAV, and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. On each Business Day, before commencement of trading in Shares in the Core Trading Session (9:30 a.m. E.T. to 4:00 p.m. E.T.) on the Exchange, each of the Funds will disclose on the Trust’s Web site the Disclosed Portfolio as defined in NYSE Arca Equities Rule 8.600(c)(2) that will form the basis for each of the Fund’s calculation of NAV at the end of the Business Day.45 Each Fund’s disclosure of derivative positions in the applicable Disclosed Portfolio will include information that market participants can use to value these positions intraday. On a daily basis, the Funds will disclose on the Funds’ Web site the following information regarding each portfolio holding, as applicable to the type of holding: ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity 44 The Bid/Ask Price of each of the Funds will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of that Fund’s NAV. The records relating to Bid/Ask Prices will be retained by each of the Funds and their service providers. 45 Under accounting procedures followed by the Funds, trades made on the prior Business Day (‘‘T’’) will be booked and reflected in NAV on the current Business Day (‘‘T+1’’). Accordingly, the Funds will be able to disclose at the beginning of the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in a Fund’s portfolio. The Web site information will be publicly available at no charge. In addition, a basket composition file, which includes the security names and share quantities, if applicable, required to be delivered in exchange for each of the Funds’ Shares, together with estimates and actual cash components, will be publicly disseminated daily prior to the opening of the Exchange via the NSCC. The basket represents one Creation Unit of each of the Funds. The NAV of each of the Funds will normally be determined as of the close of the regular trading session on the Exchange (ordinarily 4:00 p.m. E.T.) on each Business Day. Authorized Participants may refer to the basket composition file for information regarding Fixed Income Instruments, and any other instrument that may comprise a Fund’s basket on a given day. Investors can also obtain the Trust’s SAI, the Funds’ Shareholder Reports, and the Funds’ Forms N–CSR and Forms N–SAR, filed twice a year. The Funds’ SAI and Shareholder Reports will be available free upon request from the Trust, and those documents and the Form N–CSR, Form N–PX and Form N– SAR may be viewed on-screen or downloaded from the Commission’s Web site at www.sec.gov. Intra-day and closing price information regarding exchange-traded equity securities, including common stocks, preferred stocks, securities convertible into stocks, closed-end funds, exchange traded funds and other equity-related securities, will be available from the exchange on which such securities are traded. Intra-day and closing price information regarding exchange traded options (including options on futures) and futures will be available from the exchange on which such instruments are traded. Intra-day and closing price information regarding Fixed Income Instruments also will be available from major market data vendors. Price information relating to forwards, spot currency, OTC options and swaps will be available from major market data vendors. Price information regarding RIBs, money market instruments, private activity bonds, trade claims, privately placed and unregistered securities, and structured products will be available from major market data vendors. Price information regarding other investment company securities will be available from on-line PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 38613 information services and from the Web site for the applicable investment company security. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last sale information for the Shares will be available via the CTA high-speed line. Exchange-traded options quotation and last sale information is available via the Options Price Reporting Authority. Price information relating to equity securities traded OTC will be available from major market data vendors. In addition, the PIV, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session.46 The dissemination of the PIV, together with the Disclosed Portfolio, may allow investors to determine an approximate value of the underlying portfolio of each of the Funds on a daily basis and to provide an estimate of that value throughout the trading day. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of a Fund.47 Trading in Shares of a Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of any of the Funds; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of a Fund may be halted. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s 46 Currently, it is the Exchange’s understanding that several major market data vendors display and/ or make widely available PIVs taken from CTA or other data feeds. 47 See NYSE Arca Equities Rule 7.12. E:\FR\FM\08JYN1.SGM 08JYN1 38614 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading Sessions). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the Funds’ Reporting Authority will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the actual components of each Fund’s portfolio. The Exchange represents that, for initial and/or continued listing, each Fund will be in compliance with Rule 10A–3 48 under the Act, as provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares for each Fund will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares of each Fund that the NAV 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. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by the Financial Industry Regulatory Authority (‘‘FINRA’’) on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.49 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, 48 17 CFR 240.10A–3. 49 FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-traded options, exchange-traded equities, futures and options on futures with other markets or other entities that are members of the ISG, and FINRA may obtain trading information regarding trading in the Shares, exchange-traded options, exchange-traded equities, futures and options on futures from such markets or entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-traded options, exchangetraded equities, futures and options on futures from markets or other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.50 FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Funds reported to FINRA’s Trade Reporting and Compliance Engine (‘‘TRACE’’). FINRA also can access data obtained from the Municipal Securities Rulemaking Board relating to municipal bond trading activity for surveillance purposes in connection with trading in the Shares. Not more than 10% of the net assets of a Fund in the aggregate invested in exchange-traded equity securities shall consist of equity securities, including stocks into which a convertible security is converted, whose principal market is not a member of the ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Furthermore, not more than 10% of the net assets of a Fund in the aggregate invested in futures contracts or exchange-traded options contracts shall consist of futures contracts or exchange-traded options contracts whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. In addition, the Exchange also has a general policy prohibiting the 50 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 a Fund may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 distribution of material, non-public information by its employees. Information Bulletin Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (‘‘ETP’’) Holders in an Information Bulletin (‘‘Bulletin’’) of the special characteristics and risks associated with trading the Shares. Specifically, the Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Unit aggregations (and that Shares are not individually redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated PIV will not be calculated or publicly disseminated; (4) how information regarding the PIV and the Disclosed Portfolio is disseminated; (5) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. In addition, the Bulletin will reference that each of the Funds is subject to various fees and expenses described in the Registration Statement. The Bulletin will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. The Bulletin will also disclose that the NAV for the Shares will be calculated after 4:00 p.m. E.T. each trading day. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 51 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Equities Rule 8.600. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to 51 15 E:\FR\FM\08JYN1.SGM U.S.C. 78f(b)(5). 08JYN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-traded options, exchange-traded equities, futures and options on futures with other markets or other entities that are members of the ISG and FINRA may obtain trading information regarding trading in the Shares, exchange-traded options, exchange-traded equities, futures and options on futures from such markets or entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-traded options, exchangetraded equities, futures and options on futures from markets or other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Funds reported to FINRA’s TRACE. FINRA also can access data obtained from the Municipal Securities Rulemaking Board relating to municipal bond trading activity for surveillance purposes in connection with trading in the Shares. While emerging markets corporate debt securities (excluding commercial paper) generally must have $200 million or more par amount outstanding and significant par value traded to be considered as an eligible investment for each of the Funds, at least 80% of issues of such securities held by a Fund must have $200 million or more par amount outstanding at the time of investment. Furthermore, not more than 10% of the net assets of a Fund in the aggregate invested in exchange-traded equity securities shall consist of equity securities, including stocks into which a convertible security is converted, whose principal market is not a member of the ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Furthermore, not more than 10% of the net assets of a Fund in the aggregate invested in futures contracts or exchange-traded options contracts shall consist of futures contracts or exchange-traded options contracts whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. Each Fund’s investments, including derivatives, will be consistent with that Fund’s investment objective and each Fund’s use of derivatives may be used VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 to enhance leverage. However, each Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of a Fund’s broad-based securities market index (as defined in Form N–1A). Each Fund’s investments will be subject to all of the restrictions under the 1940 Act, including restrictions with respect to investments in illiquid assets, that is, the limitation that a fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser. PIMCO’s Counterparty Risk Committee will evaluate the creditworthiness of swaps counterparties on an ongoing basis. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information is publicly available regarding each of the Funds and the Shares, thereby promoting market transparency. Moreover, the PIV will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Exchange’s Core Trading Session. On each Business Day, before commencement of trading in Shares in the Core Trading Session on the Exchange, each of the Funds will disclose on the Trust’s Web site the Disclosed Portfolio that will form the basis for each Fund’s calculation of NAV at the end of the Business Day. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services, and quotation and last sale information will be available via the CTA high-speed line. Exchange-traded options quotation and last sale information is available via the Options Price Reporting Authority. Price information for the debt securities and other financial instruments held by each of the Funds, including the intra-day closing settlement price for the Fixed Income Instruments, including Municipal Bonds, and derivatives thereon, and other financial instruments held by each of the Funds, will be available through major market data vendors. Each Fund’s investments, including derivatives, will be consistent with that Fund’s investment objective. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 38615 The Trust’s Web site will include a form of the prospectus for each of the Funds and additional data relating to NAV and other applicable quantitative information. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Trading in Shares of any of the Funds will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of any of the Funds may be halted. In addition, as noted above, investors will have ready access to information regarding each of the Funds’ holdings, the PIV, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of additional types of actively-managed exchange-traded products that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. The Adviser is not a brokerdealer but is affiliated with a brokerdealer and has implemented a ‘‘fire wall’’ with respect to such broker-dealer regarding access to information concerning the composition and/or changes to each Fund’s portfolio. In addition, the Funds’ Reporting Authority will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material non-public information regarding the actual components of each Fund’s portfolio. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of additional types of actively-managed E:\FR\FM\08JYN1.SGM 08JYN1 38616 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices exchange-traded products that, under normal circumstances, will invest principally in fixed income securities and that will enhance competition with respect to such products among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: tkelley on DSK3SPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2014–58 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2014–58. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2014–58, and should be submitted on or before July 29, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.52 Jill M. Peterson, Assistant Secretary. [FR Doc. 2014–15814 Filed 7–7–14; 8:45 am] BILLING CODE 8011–01–P 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 Price List to add certain charges for hosting equipment to support Internet connections for member organizations operating on the Floor of the Exchange. 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. SECURITIES AND EXCHANGE COMMISSION A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change [Release No. 34–72510; File No. SR– NYSEMKT–2014–53] 1. Purpose Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Price List To Add Certain Charges for Hosting Equipment To Support Internet Connections for Member Organizations Operating on the Floor of the Exchange Starting January 1, 2015 July 1, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on June 24, 2014, NYSE MKT LLC (‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit PO 00000 52 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 Frm 00135 Fmt 4703 Sfmt 4703 The Exchange proposes to amend the Price List to add certain charges for hosting equipment to support Internet connections for member organizations operating on the Floor of the Exchange. Currently, a member organization that operates on the Floor must arrange for its own access to an Internet service provider (‘‘ISP’’). To provide the service, an ISP must place certain equipment on the Exchange’s premises at 11 Wall Street. Currently there is no separate charge related to the Exchange’s hosting of such equipment. The Exchange does charge fees for installing and removing data jacks and lines, and member organizations are responsible for paying the ISP’s fees. The Exchange believes that these hosting arrangements are not an efficient use of its space or an efficient or robust way to provide Internet service to member organizations operating on the Floor. As such, the Exchange proposes to provide member organizations operating on the Floor with connections to ISPs at no charge via the Exchange’s Secure Financial Transaction Infrastructure (‘‘SFTI’’). For E:\FR\FM\08JYN1.SGM 08JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 130 (Tuesday, July 8, 2014)]
[Notices]
[Pages 38605-38616]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72509; File No. SR-NYSEArca-2014-58]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to Listing and Trading of Shares of 
PIMCO Short-Term Exchange-Traded Fund and PIMCO Municipal Bond 
Exchange-Traded Fund Under NYSE Arca Equities Rule 8.600

July 1, 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 June 25, 2014, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): PIMCO 
Short-Term Exchange-Traded Fund and PIMCO Municipal Bond Exchange-
Traded Fund. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600,\4\ which governs the 
listing and trading of Managed Fund Shares: \5\ PIMCO Short-Term 
Exchange-Traded Fund (``Short-Term Fund'') and PIMCO Municipal Bond 
Exchange-Traded Fund (``Municipal Bond Fund''), each also referred to 
as a ``Fund'' and collectively referred to as the ``Funds.'' The Shares 
will be offered by PIMCO ETF Trust (the ``Trust''), a statutory trust 
organized under the laws of the State of Delaware and registered with 
the Commission as an open-end management investment company.\6\
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    \4\ The Commission has previously approved the listing and 
trading on the Exchange of other actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 60981 
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving Exchange listing and trading of five fixed 
income funds of the PIMCO ETF Trust); 66321 (February 3, 2012), 77 
FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (order approving 
listing and trading of PIMCO Total Return Exchange Traded Fund); 
66670 (March 28, 2012), 77 FR 20087 (April 3, 2012) (SR-NYSEArca-
2012-09) (order approving listing and trading of PIMCO Global 
Advantage Inflation-Linked Bond Strategy Fund).
    \5\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \6\ The Trust is registered under the 1940 Act. On January 27, 
2014, the Trust filed an amendment to its registration statement on 
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) (``1933 
Act'') and the 1940 Act relating to the Funds (File Nos. 333-155395 
and 811-22250) (the ``Registration Statement''). The description of 
the operation of the Trust and the Funds herein is based, in part, 
on the Registration Statement. In addition, the Commission has 
issued an order granting certain exemptive relief to the Trust under 
the 1940 Act. See Investment Company Act Release No. 28993 (November 
10, 2009) (File No. 812-13571) (``Exemptive Order'').
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    The investment manager to the Funds will be Pacific Investment 
Management

[[Page 38606]]

Company LLC (``PIMCO'' or the ``Adviser''). PIMCO Investments LLC will 
serve as the distributor for the Funds (``Distributor''). State Street 
Bank & Trust Co. will serve as the custodian and transfer agent for the 
Funds (``Custodian'' or ``Transfer Agent'').
    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\7\ In addition, 
Commentary .06 further requires that personnel who make decisions on 
the open-end fund's portfolio composition must be subject to procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the open-end fund's portfolio. The Adviser is not 
registered as a broker-dealer, but is affiliated with a broker-dealer, 
and will implement a ``fire wall'' with respect to such broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to a Fund's portfolio. If PIMCO elects to hire a sub-
adviser for the Funds that is registered as a broker-dealer or is 
affiliated with a broker-dealer, such sub-adviser will implement a fire 
wall with respect to its relevant personnel or its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to a portfolio and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding such portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violations, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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    In the event (a) the Adviser becomes registered as a broker-dealer 
or newly affiliated with a broker-dealer, or (b) any new adviser or 
sub-adviser is a registered broker-dealer or becomes affiliated with a 
broker-dealer, it will implement a fire wall with respect to its 
relevant personnel or its broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to a portfolio, 
and will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding such 
portfolio.
Characteristics of the Funds \8\
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    \8\ Many of the investment strategies of the Funds are 
discretionary, which means that PIMCO can decide from time to time 
whether to use them or not.
---------------------------------------------------------------------------

    According to the Registration Statement, in selecting investments 
for each Fund, PIMCO will develop an outlook for interest rates, 
currency exchange rates and the economy, analyze credit and call risks, 
and use other investment selection techniques. The proportion of each 
Fund's assets committed to investment in securities with particular 
characteristics (such as quality, sector, interest rate or maturity) 
will vary based on PIMCO's outlook for the U.S. economy and the 
economies of other countries in the world, the financial markets and 
other factors.
    With respect to each Fund, in seeking to identify undervalued 
currencies, PIMCO may consider many factors, including but not limited 
to, longer-term analysis of relative interest rates, inflation rates, 
real exchange rates, purchasing power parity, trade account balances 
and current account balances, as well as other factors that influence 
exchange rates such as flows, market technical trends and government 
policies. With respect to fixed income investing, PIMCO will attempt to 
identify areas of the bond market that are undervalued relative to the 
rest of the market. PIMCO will identify these areas by grouping fixed 
income investments into sectors such as money markets, governments, 
corporates, mortgages, asset-backed and international. Sophisticated 
proprietary software will then assist in evaluating sectors and pricing 
specific investments. Once investment opportunities are identified, 
PIMCO will shift assets among sectors depending upon changes in 
relative valuations, credit spreads and other factors.
Fixed Income Instruments
    Among other investments described in more detail herein, each Fund 
may invest in Fixed Income Instruments, which include:
     securities issued or guaranteed by the U.S. Government, 
its agencies or government-sponsored enterprises (``U.S. Government 
Securities'');
     corporate debt securities of U.S. and non-U.S. issuers, 
including convertible securities and corporate commercial paper \9\;
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    \9\ With respect to each of the Funds, while non-emerging 
markets corporate debt securities (excluding commercial paper) 
generally must have $100 million or more par amount outstanding and 
significant par value traded to be considered as an eligible 
investment for each of the Funds, at least 80% of issues of such 
securities held by a Fund must have $100 million or more par amount 
outstanding at the time of investment. See also note 22, infra, 
regarding emerging market corporate debt securities.
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     mortgage-backed and other asset-backed securities \10\;
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    \10\ Mortgage-related and other asset-backed securities include 
collateralized mortgage obligations (``CMO''s), commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals, stripped 
mortgage-backed securities and other securities that directly or 
indirectly represent a participation in, or are secured by and 
payable from, mortgage loans on real property. A to-be-announced 
(``TBA'') transaction is a method of trading mortgage-backed 
securities. In a TBA transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
---------------------------------------------------------------------------

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

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

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

    \12\ The Funds may obtain event-linked exposure by investing in 
``event-linked bonds'' or ``event-linked swaps'' or by implementing 
``event-linked strategies.'' Event-linked exposure results in gains 
or losses that typically are contingent, or formulaically related to 
defined trigger events. Examples of trigger events include 
hurricanes, earthquakes, weather-related phenomena, or statistics 
relating to such events. Some event-linked bonds are commonly 
referred to as ``catastrophe bonds.'' If a trigger event occurs, a 
Fund may lose a portion or its entire principal invested in the bond 
or notional amount on a swap.
---------------------------------------------------------------------------

     bank capital and trust preferred securities \13\;
---------------------------------------------------------------------------

    \13\ There are two common types of bank capital: Tier I and Tier 
II. Bank capital is generally, but not always, of investment grade 
quality. According to the Registration Statement, Tier I securities 
often take the form of trust preferred securities. Tier II 
securities are commonly thought of as hybrids of debt and preferred 
stock, are often perpetual (with no maturity date), callable and, 
under certain conditions, allow for the issuer bank to withhold 
payment of interest until a later date. However, such deferred 
interest payments generally earn interest.

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

[[Page 38607]]

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

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

     delayed funding loans and revolving credit facilities;
     bank certificates of deposit, fixed time deposits and 
bankers' acceptances;
     repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments;
     debt securities issued by states or local governments and 
their agencies, authorities and other government-sponsored enterprises 
(``Municipal Bonds'');
     obligations of non-U.S. governments or their subdivisions, 
agencies and government-sponsored enterprises; and
     obligations of international agencies or supranational 
entities.
Use of Derivatives by the Funds
    A Fund's investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. With respect to each Fund, derivative 
instruments will include forwards; \15\ exchange-traded and over-the-
counter (``OTC'') options contracts; exchange-traded futures contracts; 
exchange-traded and OTC swap agreements; exchange-traded options on 
futures contracts; and OTC options on swap agreements.\16\ Generally, 
derivatives are financial contracts whose value depends upon, or is 
derived from, the value of an underlying asset, reference rate or 
index, and may relate to stocks, bonds, interest rates, currencies or 
currency exchange rates, commodities, and related indexes. A Fund may, 
but is not required to, use derivative instruments for risk management 
purposes or as part of its investment strategies.\17\
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    \15\ Forwards are contracts to purchase or sell securities for a 
fixed price at a future date beyond normal settlement time (forward 
commitments).
    \16\ In the future, in the event that there are exchange-traded 
options on swaps, the Fund may invest in these instruments.
    \17\ Each Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. PIMCO's Counterparty Risk Committee evaluates the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, PIMCO credit analysts 
evaluate each approved counterparty using various methods of 
analysis, including company visits, earnings updates, the broker-
dealer's reputation, PIMCO's past experience with the broker-dealer, 
market levels for the counterparty's debt and equity, the 
counterparty's liquidity and its share of market participation.
---------------------------------------------------------------------------

    As described further below, each Fund will typically use derivative 
instruments as a substitute for taking a position in the underlying 
asset and/or as part of a strategy designed to reduce exposure to other 
risks, such as interest rate or currency risk. A Fund may also use 
derivative instruments to enhance returns. To limit the potential risk 
associated with such transactions, a Fund will segregate or ``earmark'' 
assets determined to be liquid by PIMCO in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with the 
1940 Act (or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments. These procedures have been adopted consistent with Section 
18 of the 1940 Act and related Commission guidance. In addition, each 
Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk that 
certain transactions of the Fund, including the Fund's use of 
derivatives, may give rise to leverage, causing the Fund to be more 
volatile than if it had not been leveraged.\18\ Because the markets for 
certain securities, or the securities themselves, may be unavailable or 
cost prohibitive as compared to derivative instruments, suitable 
derivative transactions may be an efficient alternative for a Fund to 
obtain the desired asset exposure.
---------------------------------------------------------------------------

    \18\ To mitigate leveraging risk, the Adviser will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
---------------------------------------------------------------------------

    The Adviser believes that derivatives can be an economically 
attractive substitute for an underlying physical security that each 
Fund would otherwise purchase. For example, a Fund could purchase 
Treasury futures contracts instead of physical Treasuries or could sell 
credit default protection on a corporate bond instead of buying a 
physical bond. Economic benefits include potentially lower transaction 
costs or attractive relative valuation of a derivative versus a 
physical bond (e.g., differences in yields).
    The Adviser further believes that derivatives can be used as a more 
liquid means of adjusting portfolio duration as well as targeting 
specific areas of yield curve exposure, with potentially lower 
transaction costs than the underlying securities (e.g., interest rate 
swaps may have lower transaction costs than physical bonds). Similarly, 
money market futures can be used to gain exposure to short-term 
interest rates in order to express views on anticipated changes in 
central bank policy rates. In addition, derivatives can be used to 
protect client assets through selectively hedging downside (or ``tail 
risks'') in each Fund.
    Each Fund also can use derivatives to increase or decrease credit 
exposure. Index credit default swaps (CDX) can be used to gain exposure 
to a basket of credit risk by ``selling protection'' against default or 
other credit events, or to hedge broad market credit risk by ``buying 
protection.'' Single name credit default swaps (CDS) can be used to 
allow a Fund to increase or decrease exposure to specific issuers, 
saving investor capital through lower trading costs. A Fund can use 
total return swap contracts to obtain the total return of a reference 
asset or index in exchange for paying a financing cost. A total return 
swap may be much more efficient than buying underlying securities of an 
index, potentially lowering transaction costs.
    The Adviser believes that the use of derivatives will allow each 
Fund to selectively add diversifying sources of return from selling 
options. Option purchases and sales can also be used to hedge specific 
exposures in the portfolio, and can provide access to return streams 
available to long-term investors such as the persistent difference 
between implied and realized volatility. Option strategies can generate 
income or improve execution prices (i.e., covered calls).
Short-Term Fund--Principal Investments
    According to the Registration Statement, the Short-Term Fund will 
seek maximum current income, consistent with preservation of capital 
and daily liquidity. The Fund will seek to achieve its investment 
objective by investing under normal circumstances \19\ at least 65% of 
its total assets in a diversified portfolio of Fixed Income Instruments 
of varying maturities, and derivatives based on Fixed Income 
Instruments. The average portfolio duration of the Fund will vary based 
on PIMCO's forecast for interest rates and

[[Page 38608]]

will normally not exceed one year. In addition, the dollar weighted 
average portfolio maturity of the Short-Term Fund, under normal 
circumstances, is expected not to exceed three years.
---------------------------------------------------------------------------

    \19\ With respect to each Fund, the term ``under normal 
circumstances'' includes, but is not limited to, the absence of 
extreme volatility or trading halts in the fixed income markets or 
the financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund will invest 
primarily in investment grade debt securities, but may invest up to 10% 
of its total assets in high yield securities rated B or higher by 
Moody's, or equivalently rated by S&P or Fitch, or, if unrated, 
determined by PIMCO to be of comparable quality.\20\
---------------------------------------------------------------------------

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

    In furtherance of the Fund's 65% policy, or with respect to the 
Fund's other investments, the Fund may invest in derivative 
instruments, subject to applicable law and any other restrictions 
described herein.
    The Fund may invest up to 20% of its assets in mortgage-related and 
other asset-backed securities, although this 20% limitation does not 
apply to securities issued or guaranteed by Federal agencies and/or 
U.S. government sponsored instrumentalities.
    According to the Registration Statement, the Fund may invest in 
securities and instruments that are economically tied to foreign (non-
U.S.) countries.\21\
---------------------------------------------------------------------------

    \21\ PIMCO will generally consider an instrument to be 
economically tied to a non-U.S. country if the issuer is a foreign 
government (or any political subdivision, agency, authority or 
instrumentality of such government), or if the issuer is organized 
under the laws of a non-U.S. country. With respect to each Fund, in 
the case of certain money market instruments, such instruments will 
be considered economically tied to a non-U.S. country if either the 
issuer or the guarantor of such money market instrument is organized 
under the laws of a non-U.S. country. With respect to derivative 
instruments, PIMCO will generally consider such instruments to be 
economically tied to non-U.S. countries if the underlying assets are 
foreign currencies (or baskets or indexes of such currencies), or 
instruments or securities that are issued by foreign governments or 
issuers organized under the laws of a non-U.S. country (or if the 
underlying assets are certain money market instruments, if either 
the issuer or the guarantor of such money market instruments is 
organized under the laws of a non-U.S. country).
---------------------------------------------------------------------------

    The Fund may invest up to 10% of its total assets in securities 
denominated in foreign currencies, and may invest beyond this limit in 
U.S. dollar-denominated securities of foreign issuers.\22\ According to 
the Registration Statement, the Fund will normally limit its foreign 
currency exposure (from non-U.S. dollar-denominated securities or 
currencies) to 20% of its total assets. The Fund may invest up to 5% of 
its total assets in securities and instruments that are economically 
tied to emerging market countries.\23\
---------------------------------------------------------------------------

    \22\ The Fund may have greater exposure (i.e., up to 20% of its 
total assets) to foreign currencies through (i) investments in 
securities denominated in such currencies, and (ii) direct 
investments in foreign currencies, including currency forwards.
    \23\ PIMCO will generally consider an instrument to be 
economically tied to an emerging market country if the security's 
``country of exposure'' is an emerging market country, as determined 
by the criteria set forth in the Registration Statement. 
Alternatively, such as when a ``country of exposure'' is not 
available or when PIMCO believes the following tests more accurately 
reflect which country the security is economically tied to, PIMCO 
may consider an instrument to be economically tied to an emerging 
market country if the issuer or guarantor is a government of an 
emerging market country (or any political subdivision, agency, 
authority or instrumentality of such government), if the issuer or 
guarantor is organized under the laws of an emerging market country, 
or if the currency of settlement of the security is a currency of an 
emerging market country. With respect to derivative instruments, 
PIMCO will generally consider such instruments to be economically 
tied to emerging market countries if the underlying assets are 
currencies of emerging market countries (or baskets or indices of 
such currencies), or instruments or securities that are issued or 
guaranteed by governments of emerging market countries or by 
entities organized under the laws of emerging market countries. 
While emerging markets corporate debt securities (excluding 
commercial paper) generally must have $200 million or more par 
amount outstanding and significant par value traded to be considered 
as an eligible investment for each of the Funds, at least 80% of 
issues of such securities held by a Fund must have $200 million or 
more par amount outstanding at the time of investment.
---------------------------------------------------------------------------

    The Fund may engage in foreign currency transactions on a spot 
(cash) basis and forward basis and invest in foreign currency futures 
and exchange-traded and OTC options contracts.\24\ The Fund may enter 
into these contracts to hedge against foreign exchange risk, to 
increase exposure to a foreign currency or to shift exposure to foreign 
currency fluctuations from one currency to another. Suitable hedging 
transactions may not be available in all circumstances and there can be 
no assurance that the Fund will engage in such transactions at any 
given time or from time to time. The Fund may purchase or sell 
securities on a when-issued, delayed delivery or forward commitment 
basis and may engage in short sales.\25\
---------------------------------------------------------------------------

    \24\ The Fund will limit its investments in currencies to those 
currencies with a minimum average daily foreign exchange turnover of 
USD $1 billion as determined by the Bank for International 
Settlements (``BIS'') Triennial Central Bank Survey. As of the most 
recent BIS Triennial Central Bank Survey, at least 52 separate 
currencies had minimum average daily foreign exchange turnover of 
USD $1 billion. For a list of eligible currencies, see www.bis.org.
    \25\ Each of the Funds may make short sales of securities to: 
(i) offset potential declines in long positions in similar 
securities, (ii) to increase the flexibility of the Fund; (iii) for 
investment return; and (iv) as part of a risk arbitrage strategy.
---------------------------------------------------------------------------

    The Fund may, without limitation, seek to obtain market exposure to 
the securities in which it primarily invests by entering into a series 
of purchase and sale contracts or by using other investment techniques 
(such as buy backs or dollar rolls).\26\
---------------------------------------------------------------------------

    \26\ A dollar roll is similar except that the counterparty is 
not obligated to return the same securities as those originally sold 
by the Fund but only securities that are ``substantially 
identical.''
---------------------------------------------------------------------------

Short-Term Fund--Other (Non-Principal) Investments
    The Short-Term Fund may invest up to 10% of its total assets in 
preferred stock, convertible securities and other equity-related 
securities.\27\
---------------------------------------------------------------------------

    \27\ Convertible securities are generally preferred stocks and 
other securities, including fixed income securities and warrants, 
that are convertible into or exercisable for common stock at a 
stated price or rate. Equity-related investments may include 
investments in small-capitalization (``small-cap''), mid-
capitalization (``mid-cap'') and large-capitalization (``large-
cap'') companies. With respect to each Fund, a small-cap company 
will be defined as a company with a market capitalization of up to 
$1.5 billion, a mid-cap company will be defined as a company with a 
market capitalization of between $1.5 billion and $10 billion and a 
large-cap company will be defined as a company with a market 
capitalization above $10 billion. Not more than 10% of the net 
assets of a Fund in the aggregate invested in exchange-traded equity 
securities shall consist of equity securities, including stocks into 
which a convertible security is converted, whose principal market is 
not a member of the Intermarket Surveillance Group (``ISG'') or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. Furthermore, not more than 10% of 
the net assets of a Fund in the aggregate invested in futures 
contracts or exchange-traded options contracts shall consist of 
futures contracts or exchange-traded options contracts whose 
principal market is not a member of ISG or is a market with which 
the Exchange does not have a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    The Fund may invest in variable and floating rate securities that 
are not Fixed Income Instruments. The Fund may invest in floaters and 
inverse floaters that are not Fixed Income Instruments and may engage 
in credit spread trades.
    As disclosed in the Registration Statement, the Fund may invest in 
trade

[[Page 38609]]

claims,\28\ privately placed and unregistered securities, and exchange-
traded and OTC-traded structured products, including credit-linked 
securities, commodity-linked notes, and structured notes. The Fund may 
invest in Brady Bonds.
---------------------------------------------------------------------------

    \28\ Trade claims are non-securitized rights of payment arising 
from obligations that typically arise when vendors and suppliers 
extend credit to a company by offering payment terms for products 
and services. If the company files for bankruptcy, payments on these 
trade claims stop and the claims are subject to compromise along 
with the other debts of the company. Trade claims may be purchased 
directly from the creditor or through brokers.
---------------------------------------------------------------------------

    The Fund may enter into repurchase agreements on instruments other 
than Fixed Income Instruments, in addition to repurchase agreements on 
Fixed Income Instruments mentioned above, in which the Fund purchases a 
security from a bank or broker-dealer, which agrees to purchase the 
security at the Fund's cost plus interest within a specified time. 
Repurchase agreements maturing in more than seven days and which may 
not be terminated within seven days at approximately the amount at 
which the Fund has valued the agreements will be considered illiquid 
securities. The Fund may enter into reverse repurchase agreements on 
instruments other than Fixed Income Instruments, in addition to reverse 
repurchase agreements on Fixed Income Instruments mentioned above, 
subject to the Fund's limitations on borrowings.\29\ The Fund will 
segregate or ``earmark'' assets determined to be liquid by PIMCO in 
accordance with procedures established by the Board to cover its 
obligations under reverse repurchase agreements.
---------------------------------------------------------------------------

    \29\ With respect to each Fund, a reverse repurchase agreement 
involves the sale of a security by the Fund and its agreement to 
repurchase the instrument at a specified time and price.
---------------------------------------------------------------------------

Municipal Bond Fund--Principal Investments
    According to the Registration Statement, the Municipal Bond Fund 
will seek high current income exempt from federal income tax, 
consistent with preservation of capital; capital appreciation is a 
secondary objective. The Fund will seek to achieve its investment 
objective by investing under normal circumstances at least 80% of its 
assets in debt securities whose interest is, in the opinion of bond 
counsel for the issuer at the time of the issuance, exempt from federal 
income tax (``Municipal Bonds''). Municipal Bonds are generally issued 
by or on behalf of states and local governments and their agencies, 
authorities and other instrumentalities. Municipal Bonds include 
municipal lease obligations, municipal general obligation bonds, 
municipal cash equivalents, and pre-refunded and escrowed to maturity 
bonds. The Fund may invest in industrial development bonds, which are 
Municipal Bonds issued by a government agency on behalf of a private 
sector company and, in most cases, are not backed by the credit of the 
issuing municipality. The Fund may also invest in securities issued by 
entities whose underlying assets are Municipal Bonds.
    The Fund may invest more than 25% of its total assets in bonds of 
issuers in California and New York; may invest 25% of more of its total 
assets in Municipal Bonds that finance education, health care, housing, 
transportation, utilities and other similar projects; and may invest 
25% or more of its total assets in industrial development bonds. The 
average portfolio duration of the Fund will normally vary from three to 
twelve years based on PIMCO's forecast for interest rates.
    According to the Registration Statement, the Fund will invest 
primarily in investment grade debt securities, but may invest up to 10% 
of its total assets in Municipal Bonds or private activity bonds \30\ 
that are high yield securities rated Ba or higher by Moody's, or 
equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO 
to be of comparable quality.\31\
---------------------------------------------------------------------------

    \30\ Under the Internal Revenue Code, certain limited obligation 
bonds are considered ``private activity bonds'', and interest paid 
on such bonds is treated as an item of tax preference for purposes 
of calculating federal alternative minimum tax liability.
    \31\ See supra, note 19 [sic].
---------------------------------------------------------------------------

    The Fund may invest in residual interest bonds (``RIBs''), which 
brokers create by depositing a Municipal Bond in a trust. The trust in 
turn would issue a variable rate security and RIBs. The interest rate 
for the variable rate security will be determined by the remarketing 
broker-dealer, while the RIB holder will receive the balance of the 
income from the underlying municipal bond.
    In furtherance of the Fund's 80% policy the Fund may invest in 
derivative instruments on Municipal Bonds, subject to applicable law 
and any other restrictions described herein.
    The Fund may, without limitation, seek to obtain market exposure to 
the securities in which it primarily invests by entering into a series 
of purchase and sale contracts or by using other investment techniques 
(such as buy backs or dollar rolls). The Fund may purchase or sell 
securities on a when-issued, delayed delivery or forward commitment 
basis and may engage in short sales.\32\
---------------------------------------------------------------------------

    \32\ See supra, note 24 [sic].
---------------------------------------------------------------------------

Municipal Bond Fund--Other (Non-Principal) Investments
    According to the Registration Statement, the Municipal Bond Fund 
may invest up to 20% of its net assets in U.S. government securities, 
money market instruments, ``private activity'' bonds and/or Fixed 
Income Instruments (other than Municipal Bonds), including derivative 
instruments related to such instruments, subject to applicable law and 
any other restrictions described herein.
    The Fund may invest up to 10% of its total assets in preferred 
stock, convertible securities and other equity-related securities.\33\
---------------------------------------------------------------------------

    \33\ See supra, note 26 [sic].
---------------------------------------------------------------------------

    The Fund may invest in variable and floating rate securities. The 
Fund may invest in floaters and inverse floaters and may engage in 
credit spread trades.
    Also, as disclosed in the Registration Statement, the Fund may 
invest in trade claims, privately placed and unregistered securities, 
and exchange-traded and OTC-traded structured products, including 
credit-linked securities, commodity-linked notes, and structured notes. 
The Fund may invest in Brady Bonds.
    The Fund may enter into repurchase agreements on instruments other 
than Fixed Income Instruments, in addition to repurchase agreements on 
Fixed Income Instruments mentioned above, in which the Fund purchases a 
security from a bank or broker-dealer, which agrees to purchase the 
security at the Fund's cost plus interest within a specified time. 
Repurchase agreements maturing in more than seven days and which may 
not be terminated within seven days at approximately the amount at 
which the Fund has valued the agreements will be considered illiquid 
securities. The Fund may enter into reverse repurchase agreements on 
instruments other than Fixed Income Instruments, in addition to reverse 
repurchase agreements on Fixed Income Instruments mentioned above, 
subject to the Fund's limitations on borrowings.
Other Investments (Both Funds)
    The Funds may invest without limit, for temporary or defensive 
purposes, in U.S. debt securities, including taxable securities and 
short-term money market securities, if PIMCO deems it appropriate to do 
so. If PIMCO believes that economic or market conditions are 
unfavorable to investors, PIMCO may temporarily invest up to 100% of a

[[Page 38610]]

Fund's assets in certain defensive strategies, including holding a 
substantial portion of a Fund's assets in cash, cash equivalents or 
other highly rated short-term securities, including securities issued 
or guaranteed by the U.S. government, its agencies or 
instrumentalities. The Funds may invest in, to the extent permitted by 
Section 12(d)(1)(A) of the 1940 Act, other affiliated and unaffiliated 
funds, such as open-end or closed-end management investment companies, 
including other exchange-traded funds, provided that each of a Fund's 
investment in units or shares of investment companies and other open-
end collective investment vehicles will not exceed 10% of that Fund's 
total assets. Each Fund may invest in securities lending collateral in 
one or more money market funds to the extent permitted by Rule 12d1-1 
under the 1940 Act, including series of PIMCO Funds.
Investment Restrictions
    Each Fund's investments, including investments in derivative 
instruments, will be subject to all of the restrictions under the 1940 
Act, including restrictions with respect to illiquid assets; that is, 
the limitation that a Fund may hold up to an aggregate amount of 15% of 
its net assets in illiquid assets (calculated at the time of 
investment), including Rule 144A securities deemed illiquid by the 
Adviser, consistent with Commission guidance.\34\ Each Fund will 
monitor its respective 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.\35\
---------------------------------------------------------------------------

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

    Each Fund will be diversified within the meaning of the 1940 
Act.\36\
---------------------------------------------------------------------------

    \36\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80e).
---------------------------------------------------------------------------

    Each Fund intends to qualify annually and elect to be treated as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code.\37\ None of the Funds will concentrate its investments in a 
particular industry, as that term is used in the 1940 Act, and as 
interpreted, modified, or otherwise permitted by a regulatory authority 
having jurisdiction from time to time.\38\
---------------------------------------------------------------------------

    \37\ 26 U.S.C. 851.
    \38\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
---------------------------------------------------------------------------

    Each Fund's investments, including derivatives, will be consistent 
with that Fund's investment objective and each Fund's use of 
derivatives may be used to enhance leverage. However, each Fund's 
investments will not be used to seek performance that is the multiple 
or inverse multiple (i.e., 2Xs and 3Xs) of a Fund's broad-based 
securities market index (as defined in Form N-1A).\39\
---------------------------------------------------------------------------

    \39\ Each Fund's broad-based securities market index will be 
identified in a future amendment to the Registration Statement 
following a Fund's first full calendar year of performance.
---------------------------------------------------------------------------

Net Asset Value and Derivatives Valuation Methodology for Purposes of 
Determining Net Asset Value
    The net asset value (``NAV'') of each Fund's Shares will be 
determined by dividing the total value of a Fund's portfolio 
investments and other assets, less any liabilities, by the total number 
of Shares outstanding.
    Each Fund's Shares will be valued as of the close of regular 
trading (normally 4:00 p.m. Eastern time (``E.T.'') (the ``NYSE 
Close'')) on each day NYSE Arca is open (``Business Day''). Information 
that becomes known to each of the Funds or its agents after the NAV has 
been calculated on a particular day will not generally be used to 
retroactively adjust the price of a portfolio asset or the NAV 
determined earlier that day.
    For purposes of calculating NAV, portfolio securities and other 
assets for which market quotes are readily available will be valued at 
market value. Market value will generally be determined on the basis of 
last reported sales prices, or if no sales are reported, based on 
quotes obtained from a quotation reporting system, established market 
makers, or pricing services.
    Fixed Income Instruments, including those to be purchased under 
firm commitment agreements/delayed delivery basis, will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
independent pricing services. Foreign fixed income securities will 
generally be valued on the basis of quotes obtained from brokers and 
dealers or pricing services using data reflecting the earlier closing 
of the principal markets for those assets. Short-term debt instruments 
having a remaining maturity of 60 days or less will generally be valued 
at amortized cost, which approximates market value.
    As discussed in more detail below, derivatives will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
pricing services using data reflecting the earlier closing of the 
principal markets for those assets. Local closing prices will be used 
for all instrument valuation purposes. Foreign currency-denominated 
derivatives will generally be valued as of the respective local 
region's market close.
    With respect to specific derivatives:
     Currency spot and forward rates from major market data 
vendors \40\ will generally be determined as of the NYSE Close.
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    \40\ Major market data vendors may include, but are not limited 
to: Thomson Reuters, JPMorgan Chase PricingDirect Inc., Markit Group 
Limited, Bloomberg, Interactive Data Corporation or other major data 
vendors.
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     Exchange traded futures will generally be valued at the 
settlement price of the relevant exchange.
     A total return swap on an index will be valued at the 
publicly available index price. The index price, in turn, is determined 
by the applicable index calculation agent, which generally values the 
securities underlying the index at the last reported sale price.
     Equity total return swaps will generally be valued using 
the actual underlying equity at local market closing, while bank loan 
total return swaps will generally be valued using the evaluated 
underlying bank loan price minus the strike price of the loan.
     Exchange traded non-equity options, (for example, options 
on bonds, Eurodollar options and U.S. Treasury options), index options, 
and options on futures will generally be valued at the official 
settlement price determined by the relevant exchange, if available.

[[Page 38611]]

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

[[Page 38612]]

based on the swap curve, or another proxy as determined to be 
appropriate by the third party market data provider.
     CDX/CDS may be valued using intraday data from market 
vendors, or based on underlying asset price, or another proxy as 
determined to be appropriate by the third party market data provider.
     Total return swaps may be valued intraday using the 
underlying asset price, or another proxy as determined to be 
appropriate by the third party market data provider.
     Exchange listed options may be valued intraday using the 
relevant exchange data, or another proxy as determined to be 
appropriate by the third party market data provider.
     OTC options may be valued intraday through option 
valuation models (e.g., Black-Scholes) or using exchange traded options 
as a proxy, or another proxy as determined to be appropriate by the 
third party market data provider.
     A third party market data provider's valuation of forwards 
will be similar to their valuation of the underlying securities, or 
another proxy as determined to be appropriate by the third party market 
data provider. The third party market data provider will generally use 
market quotes if available. Where market quotes are not available, they 
may fair value securities against proxies (such as swap or yield 
curves). Each Fund's disclosure of forward positions will include 
information that market participants can use to value these positions 
intraday.
Disclosed Portfolio
    Each Fund's disclosure of derivative positions in the applicable 
Disclosed Portfolio will include information that market participants 
can use to value these positions intraday. On a daily basis, the Funds 
will disclose on the Funds' Web site the following information 
regarding each portfolio holding, as applicable to the type of holding: 
ticker symbol, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding, such as the type of 
swap); the identity of the security, commodity, index or other asset or 
instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity date, 
if any; coupon rate, if any; effective date, if any; market value of 
the holding; and the percentage weighting of the holding in a Fund's 
portfolio.
Impact on Arbitrage Mechanism
    For each Fund, the Adviser believes there will be minimal, if any, 
impact to the arbitrage mechanism as a result of the use of 
derivatives. Market makers and participants should be able to value 
derivatives as long as the positions are disclosed with relevant 
information. The Adviser believes that the price at which Shares of a 
Fund trade will continue to be disciplined by arbitrage opportunities 
created by the ability to purchase or redeem creation Shares of a Fund 
at their NAV, which should ensure that Shares of a Fund will not trade 
at a material discount or premium in relation to its NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of a Fund's arbitrage 
mechanism due to the use of derivatives. Because derivatives generally 
are not eligible for in-kind transfer, they will be substituted with a 
``cash in lieu'' amount (as described below) when each Fund processes 
purchases or redemptions of block-size ``Creation Units'' (as described 
below) in-kind.
Creations and Redemptions of Shares
    According to the Registration Statement, Shares of each of the 
Funds that trade in the secondary market will be ``created'' at NAV by 
Authorized Participants only in block-size Creation Units of 50,000 
Shares or multiples thereof.\41\ The size of a Creation Unit is subject 
to change. Each of the Funds will offer and issue Shares at their NAV 
per Share generally in exchange for a basket of debt securities held by 
that Fund (the ``Deposit Securities'') together with a deposit of a 
specified cash payment (the ``Cash Component''), or in lieu of Deposit 
Securities, a Fund may permit a ``cash-in-lieu'' amount for any reason 
at a Fund's sole discretion. Alternatively, a Fund may issue Creation 
Units in exchange for a specified all-cash payment (``Cash Deposit'') 
(together with Deposit Securities and Cash Component, the ``Fund 
Deposit''). Similarly, Shares can be redeemed only in Creation Units, 
generally in-kind for a portfolio of debt securities held by the Funds 
and/or for a specified amount of cash (collectively, ``Redemption 
Instruments'').
---------------------------------------------------------------------------

    \41\ The NAV of the Funds' Shares generally will be calculated 
once daily Monday through Friday as of the close of trading on the 
New York Stock Exchange (``NYSE''), generally 4:00 p.m. E.T. (the 
``NAV Calculation Time'') on any Business Day. NAV per Share will be 
calculated by dividing a Fund's net assets by the number of that 
Fund's Shares outstanding. For more information regarding the 
valuation of Fund investments in calculating a Fund's NAV, see the 
Registration Statement.
    The term ``Authorized Participant'' refers to a ``Participating 
Party'' (a broker-dealer or other participant in the clearing 
process through the Continuous Net Settlement System of the NSCC; or 
a Depository Trust Company (``DTC'') Participant who has executed a 
Participant Agreement (an agreement with the Distributor and 
Transfer Agent with respect to creations and redemptions of Creation 
Units).
---------------------------------------------------------------------------

    On any given Business Day, purchases and redemptions of Creation 
Units will be made in whole or in part on a cash basis if an Authorized 
Participant deposits or receives (as applicable) cash in lieu of some 
or all of the Fund Deposit or Redemption Instruments, respectively, 
solely because such instruments are, in the case of the Fund Deposit, 
not available in sufficient quantity.\42\ In determining whether a Fund 
will be selling or redeeming Creation Units on a cash or in-kind basis, 
the key consideration will be the benefit which would accrue to Fund 
investors. In many cases, investors may benefit by the use of all cash 
purchase orders because the Adviser would execute trades rather than 
market makers, and the Adviser may be able to obtain better execution 
in bond transactions due to its size, experience and potentially 
stronger relationships in the fixed income markets.
---------------------------------------------------------------------------

    \42\ Such purchase or redemption transactions are ``custom 
orders.'' On any given Business Day, if the Fund accepts a custom 
order, the Adviser represents that the Fund will accept custom 
orders from all other Authorized Participants on the same basis.
---------------------------------------------------------------------------

    Except when aggregated in Creation Units, Shares will not be 
redeemable by the Funds. The prices at which creations and redemptions 
occur will be based on the next calculation of NAV after an order is 
received. Requirements as to the timing and form of orders will be 
described in the Authorized Participant agreement. PIMCO will make 
available on each Business Day via the National Securities Clearing 
Corporation (``NSCC''), prior to the opening of business (subject to 
amendments) on the Exchange (currently 9:30 a.m., E.T.), the identity 
and the required amount of each Deposit Security and the amount of the 
Cash Component (or Cash Deposit) to be included in the current ``Fund 
Deposit'' \43\ (based on information at the end of the previous 
Business Day). Creations and redemptions must be made by an Authorized 
Participant.
---------------------------------------------------------------------------

    \43\ The Deposit Securities and Cash Component or, 
alternatively, the Cash Deposit, will constitute the Fund Deposit, 
which will represent the investment amount for a Creation Unit of 
each of the Funds.
---------------------------------------------------------------------------

    Additional information regarding the Trust, the Funds and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, disclosure

[[Page 38613]]

policies, distributions and taxes is included in the Registration 
Statement. All terms relating to the Funds that are referred to but not 
defined in this proposed rule change are defined in the Registration 
Statement.
Availability of Information
    The Trust's Web site (www.pimcoetfs.com), which will be publicly 
available prior to the public offering of Shares of the Funds, will 
include a form of the prospectus for each of the Funds that may be 
downloaded. The Trust's Web site will include additional quantitative 
information updated on a daily basis, including, for each of the Funds, 
(1) daily trading volume, the prior Business Day's reported closing 
price, NAV and mid-point of the bid/ask spread at the time of 
calculation of such NAV (the ``Bid/Ask Price''),\44\ and a calculation 
of the premium and discount of the Bid/Ask Price against the NAV, and 
(2) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily Bid/Ask Price against the NAV, 
within appropriate ranges, for each of the four previous calendar 
quarters. On each Business Day, before commencement of trading in 
Shares in the Core Trading Session (9:30 a.m. E.T. to 4:00 p.m. E.T.) 
on the Exchange, each of the Funds will disclose on the Trust's Web 
site the Disclosed Portfolio as defined in NYSE Arca Equities Rule 
8.600(c)(2) that will form the basis for each of the Fund's calculation 
of NAV at the end of the Business Day.\45\
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    \44\ The Bid/Ask Price of each of the Funds will be determined 
using the mid-point of the highest bid and the lowest offer on the 
Exchange as of the time of calculation of that Fund's NAV. The 
records relating to Bid/Ask Prices will be retained by each of the 
Funds and their service providers.
    \45\ Under accounting procedures followed by the Funds, trades 
made on the prior Business Day (``T'') will be booked and reflected 
in NAV on the current Business Day (``T+1''). Accordingly, the Funds 
will be able to disclose at the beginning of the Business Day the 
portfolio that will form the basis for the NAV calculation at the 
end of the Business Day.
---------------------------------------------------------------------------

    Each Fund's disclosure of derivative positions in the applicable 
Disclosed Portfolio will include information that market participants 
can use to value these positions intraday. On a daily basis, the Funds 
will disclose on the Funds' Web site the following information 
regarding each portfolio holding, as applicable to the type of holding: 
ticker symbol, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding, such as the type of 
swap); the identity of the security, commodity, index or other asset or 
instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity date, 
if any; coupon rate, if any; effective date, if any; market value of 
the holding; and the percentage weighting of the holding in a Fund's 
portfolio. The Web site information will be publicly available at no 
charge.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for each of the Funds' Shares, together with estimates and 
actual cash components, will be publicly disseminated daily prior to 
the opening of the Exchange via the NSCC. The basket represents one 
Creation Unit of each of the Funds. The NAV of each of the Funds will 
normally be determined as of the close of the regular trading session 
on the Exchange (ordinarily 4:00 p.m. E.T.) on each Business Day. 
Authorized Participants may refer to the basket composition file for 
information regarding Fixed Income Instruments, and any other 
instrument that may comprise a Fund's basket on a given day.
    Investors can also obtain the Trust's SAI, the Funds' Shareholder 
Reports, and the Funds' Forms N-CSR and Forms N-SAR, filed twice a 
year. The Funds' SAI and Shareholder Reports will be available free 
upon request from the Trust, and those documents and the Form N-CSR, 
Form N-PX and Form N-SAR may be viewed on-screen or downloaded from the 
Commission's Web site at www.sec.gov. Intra-day and closing price 
information regarding exchange-traded equity securities, including 
common stocks, preferred stocks, securities convertible into stocks, 
closed-end funds, exchange traded funds and other equity-related 
securities, will be available from the exchange on which such 
securities are traded. Intra-day and closing price information 
regarding exchange traded options (including options on futures) and 
futures will be available from the exchange on which such instruments 
are traded. Intra-day and closing price information regarding Fixed 
Income Instruments also will be available from major market data 
vendors. Price information relating to forwards, spot currency, OTC 
options and swaps will be available from major market data vendors. 
Price information regarding RIBs, money market instruments, private 
activity bonds, trade claims, privately placed and unregistered 
securities, and structured products will be available from major market 
data vendors. Price information regarding other investment company 
securities will be available from on-line information services and from 
the Web site for the applicable investment company security. 
Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
Shares will be available via the CTA high-speed line. Exchange-traded 
options quotation and last sale information is available via the 
Options Price Reporting Authority. Price information relating to equity 
securities traded OTC will be available from major market data vendors. 
In addition, the PIV, as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated by one or more major market 
data vendors at least every 15 seconds during the Core Trading 
Session.\46\ The dissemination of the PIV, together with the Disclosed 
Portfolio, may allow investors to determine an approximate value of the 
underlying portfolio of each of the Funds on a daily basis and to 
provide an estimate of that value throughout the trading day.
---------------------------------------------------------------------------

    \46\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available PIVs 
taken from CTA or other data feeds.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of a Fund.\47\ Trading in Shares of a Fund will 
be halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent to 
which trading is not occurring in the securities and/or the financial 
instruments comprising the Disclosed Portfolio of any of the Funds; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of a Fund may be 
halted.
---------------------------------------------------------------------------

    \47\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's

[[Page 38614]]

existing rules governing the trading of equity securities. Shares will 
trade on the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Funds' Reporting Authority will 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the actual components of each Fund's portfolio. The Exchange 
represents that, for initial and/or continued listing, each Fund will 
be in compliance with Rule 10A-3 \48\ under the Act, as provided by 
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares for each Fund 
will be outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares of 
each Fund that the NAV 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.
---------------------------------------------------------------------------

    \48\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\49\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and federal securities laws applicable to trading on 
the Exchange.
---------------------------------------------------------------------------

    \49\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-traded options, exchange-
traded equities, futures and options on futures with other markets or 
other entities that are members of the ISG, and FINRA may obtain 
trading information regarding trading in the Shares, exchange-traded 
options, exchange-traded equities, futures and options on futures from 
such markets or entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-traded options, 
exchange-traded equities, futures and options on futures from markets 
or other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.\50\ FINRA, 
on behalf of the Exchange, is able to access, as needed, trade 
information for certain fixed income securities held by the Funds 
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE''). 
FINRA also can access data obtained from the Municipal Securities 
Rulemaking Board relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares.
---------------------------------------------------------------------------

    \50\ 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 a Fund may trade on markets that are members 
of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
---------------------------------------------------------------------------

    Not more than 10% of the net assets of a Fund in the aggregate 
invested in exchange-traded equity securities shall consist of equity 
securities, including stocks into which a convertible security is 
converted, whose principal market is not a member of the ISG or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. Furthermore, not more than 10% of the 
net assets of a Fund in the aggregate invested in futures contracts or 
exchange-traded options contracts shall consist of futures contracts or 
exchange-traded options contracts whose principal market is not a 
member of ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Unit aggregations (and that Shares are not individually 
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty 
of due diligence on its ETP Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (3) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated PIV will not be calculated or publicly 
disseminated; (4) how information regarding the PIV and the Disclosed 
Portfolio is disseminated; (5) the requirement that ETP Holders deliver 
a prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (6) trading 
information.
    In addition, the Bulletin will reference that each of the Funds is 
subject to various fees and expenses described in the Registration 
Statement. The Bulletin will discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act. The Bulletin will also disclose that the NAV for the Shares will 
be calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \51\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to

[[Page 38615]]

deter and detect violations of Exchange rules and federal securities 
laws applicable to trading on the Exchange. FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares, 
exchange-traded options, exchange-traded equities, futures and options 
on futures with other markets or other entities that are members of the 
ISG and FINRA may obtain trading information regarding trading in the 
Shares, exchange-traded options, exchange-traded equities, futures and 
options on futures from such markets or entities. In addition, the 
Exchange may obtain information regarding trading in the Shares, 
exchange-traded options, exchange-traded equities, futures and options 
on futures from markets or other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. FINRA, on behalf of the Exchange, is able to access, 
as needed, trade information for certain fixed income securities held 
by the Funds reported to FINRA's TRACE. FINRA also can access data 
obtained from the Municipal Securities Rulemaking Board relating to 
municipal bond trading activity for surveillance purposes in connection 
with trading in the Shares. While emerging markets corporate debt 
securities (excluding commercial paper) generally must have $200 
million or more par amount outstanding and significant par value traded 
to be considered as an eligible investment for each of the Funds, at 
least 80% of issues of such securities held by a Fund must have $200 
million or more par amount outstanding at the time of investment. 
Furthermore, not more than 10% of the net assets of a Fund in the 
aggregate invested in exchange-traded equity securities shall consist 
of equity securities, including stocks into which a convertible 
security is converted, whose principal market is not a member of the 
ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement. Furthermore, not more 
than 10% of the net assets of a Fund in the aggregate invested in 
futures contracts or exchange-traded options contracts shall consist of 
futures contracts or exchange-traded options contracts whose principal 
market is not a member of ISG or is a market with which the Exchange 
does not have a comprehensive surveillance sharing agreement.
    Each Fund's investments, including derivatives, will be consistent 
with that Fund's investment objective and each Fund's use of 
derivatives may be used to enhance leverage. However, each Fund's 
investments will not be used to seek performance that is the multiple 
or inverse multiple (i.e., 2Xs and 3Xs) of a Fund's broad-based 
securities market index (as defined in Form N-1A). Each Fund's 
investments will be subject to all of the restrictions under the 1940 
Act, including restrictions with respect to investments in illiquid 
assets, that is, the limitation that a fund may hold up to an aggregate 
amount of 15% of its net assets in illiquid assets (calculated at the 
time of investment), including Rule 144A securities deemed illiquid by 
the Adviser. PIMCO's Counterparty Risk Committee will evaluate the 
creditworthiness of swaps counterparties on an ongoing basis.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding each of the Funds and the 
Shares, thereby promoting market transparency. Moreover, the PIV will 
be widely disseminated by one or more major market data vendors at 
least every 15 seconds during the Exchange's Core Trading Session. On 
each Business Day, before commencement of trading in Shares in the Core 
Trading Session on the Exchange, each of the Funds will disclose on the 
Trust's Web site the Disclosed Portfolio that will form the basis for 
each Fund's calculation of NAV at the end of the Business Day. 
Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services, and 
quotation and last sale information will be available via the CTA high-
speed line. Exchange-traded options quotation and last sale information 
is available via the Options Price Reporting Authority. Price 
information for the debt securities and other financial instruments 
held by each of the Funds, including the intra-day closing settlement 
price for the Fixed Income Instruments, including Municipal Bonds, and 
derivatives thereon, and other financial instruments held by each of 
the Funds, will be available through major market data vendors. Each 
Fund's investments, including derivatives, will be consistent with that 
Fund's investment objective. The Trust's Web site will include a form 
of the prospectus for each of the Funds and additional data relating to 
NAV and other applicable quantitative information. Moreover, prior to 
the commencement of trading, the Exchange will inform its ETP Holders 
in an Information Bulletin of the special characteristics and risks 
associated with trading the Shares. Trading in Shares of any of the 
Funds will be halted if the circuit breaker parameters in NYSE Arca 
Equities Rule 7.12 have been reached or because of market conditions or 
for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable, and trading in the Shares will be subject to NYSE 
Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of any of the Funds may be halted. In addition, as noted 
above, investors will have ready access to information regarding each 
of the Funds' holdings, the PIV, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
additional types of actively-managed exchange-traded products that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. The Adviser is not a broker-dealer but 
is affiliated with a broker-dealer and has implemented a ``fire wall'' 
with respect to such broker-dealer regarding access to information 
concerning the composition and/or changes to each Fund's portfolio. In 
addition, the Funds' Reporting Authority will implement and maintain, 
or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the actual 
components of each Fund's portfolio.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of 
additional types of actively-managed

[[Page 38616]]

exchange-traded products that, under normal circumstances, will invest 
principally in fixed income securities and that will enhance 
competition with respect to such products among market participants, to 
the benefit of investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2014-58. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2014-58, and should 
be submitted on or before July 29, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15814 Filed 7-7-14; 8:45 am]
BILLING CODE 8011-01-P

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