Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Proposing To List and Trade Shares of Treesdale Rising Rates ETF Under NYSE Arca Equities Rule 8.600, 44878-44889 [2014-18114]

Download as PDF tkelley on DSK3SPTVN1PROD with NOTICES 44878 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices the Program. This press release must disclose: a. The date that the security is leaving the Program and that leaving the Program may have a negative impact on the price and liquidity of the security which could adversely impact a purchaser’s subsequent sale of the security; and b. A hyperlink to the Web page described in condition (5) below; 4. In place of the press releases required by conditions (2) and (3) above, an issuer of a participating ETP that is not registered under the 1940 Act, or sponsor on behalf of the issuer, may provide prompt notice to the public through the use of such other written Regulation FD compliant methods (other than Web site disclosure only) that is designed to provide broad public dissemination as provided in 17 CFR 243.101(e), provided, however, that such other methods must contain all the information required to be disclosed by conditions (2) and (3) above; 5. The issuer of the participating ETP, or sponsor on behalf of the issuer, must provide prompt, prominent and continuous disclosure on its Web site in the location generally used to communicate information to investors about a particular security participating in the Program, and for a security that has a separate Web site, the security’s Web site of: a. The security participating in the Program and ticker, date of entry into the Program, and the amount of the CLP Fee; b. Risk factors investors should consider when making an investment decision, including that participation in the Program may have potential impacts on the price and liquidity of the security; and c. Termination date of the pilot, anticipated date (if any) of the security leaving the Program for any reason, date of actual exit (if applicable), and that the security leaving the Program could adversely impact a purchaser’s subsequent sale of the security; and 6. The Web site disclosure in condition (5) above must be promptly updated if a material change occurs with respect to any information contained in the disclosure. This exemptive relief expires when the pilot terminates, and is subject to modification or revocation at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. This exemptive relief is limited solely to the payment of the CLP Fee as set forth in New IP .03 for a security that is an ETP participating in VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 the Program,32 and does not extend to any other activities, any other security of the trust related to the participating ETP, or any other issuers.33 In addition, persons relying on this exemption are directed to the anti-fraud and antimanipulation provisions of the Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b–5 thereunder. Responsibility for compliance with these and any other applicable provisions of the federal securities laws must rest with the persons relying on this exemption. This order does not represent Commission views with respect to any other question that the proposed activities may raise, including, but not limited to the adequacy of the disclosure required by federal securities laws and rules, and the applicability of other federal or state laws and rules to, the proposed activities. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–18128 Filed 7–31–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72679; File No. SR– NYSEArca–2014–71] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Proposing To List and Trade Shares of Treesdale Rising Rates ETF Under NYSE Arca Equities Rule 8.600 July 28, 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 July 14, 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 32 All ETPs that are allowed to participate in the Program have a pool of underlying assets. See New Rule 7.25(b)(2). Should the Program be modified to include other ETPs, such as exchange-traded notes, that do not have a pool of underlying assets, the Commission would consider this a material change and outside the scope of this exemptive relief. 33 Other activities, such as ETP redemptions, are not covered by this exemptive relief. 34 17 CFR 200.30–3(a)(6). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to proposes to list and trade the following under NYSE Arca Equities Rule 8.600 (‘‘Managed Fund Shares’’): Treesdale Rising Rates ETF. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade shares (‘‘Shares’’) of the following under NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares:4 Treesdale Rising Rates ETF (‘‘Fund’’).5 The Shares 4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 The Commission has approved listing and trading on the Exchange of a number of actively managed funds under Rule 8.600. See, e.g., Securities Exchange Act Release Nos. 69591 (May 16, 2013), 78 FR 30372 (May 22, 2013) (SR– NYSEArca–2013–33) (order approving Exchange listing and trading of International Bear ETF); 69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR– NYSEArca–2013–01) (order approving Exchange listing and trading of Newfleet Multi-Sector Income ETF); and 67277 (June 27, 2012), 77 FR 39554 (July 3, 2012) (SR–NYSEArca–2012–39) (order approving E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES will be offered by AdvisorShares Trust (the ‘‘Trust’’), a statutory trust organized under the laws of the State of Delaware and registered with the Securities and Exchange Commission (the ‘‘Commission’’) as an open-end management investment company.6 The investment adviser to the Fund is AdvisorShares Investments, LLC (the ‘‘Adviser’’). The sub-adviser to the Fund is Treesdale Partners, LLC (‘‘SubAdviser’’), which will provide day-today portfolio management of the Fund. Foreside Fund Services, LLC (the ‘‘Distributor’’) is the principal underwriter and distributor of the Fund’s Shares. The Bank of New York Mellon (the ‘‘Administrator’’) serves as the administrator, custodian, transfer agent and fund accounting agent for the Fund. 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. 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.7 Commentary .06 to Rule Exchange listing and trading of the Global Alpha & Beta ETF). 6 The Trust is registered under the 1940 Act. On September 4, 2013, the Trust filed with the Commission an amendment to its registration statement on Form N–1A under the Securities Act of 1933 (15 U.S.C. 77a) and under the 1940 Act relating to the Fund (File Nos. 333–157876 and 811–22110) (‘‘Registration Statement’’). The description of the operation of the Trust and the Fund herein is based, in part, on the Registration Statement. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 29291 (May 28, 2010) (File No. 812–13677) (‘‘Exemptive Order’’). 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 Sub-Adviser and their 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 VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the establishment of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects the applicable open-end fund’s portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Adviser nor the SubAdviser is a broker-dealer or is affiliated with a broker-dealer. In the event (a) the Adviser or Sub-Adviser becomes, or becomes newly affiliated with, a brokerdealer, or (b) any new adviser or subadviser is, or becomes affiliated with, a broker-dealer, it will implement a fire wall with respect to its relevant personnel or broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. 44879 According to the Registration Statement, the Fund will seek to generate current income while providing protection for investors against loss of principal in a rising interest rate environment. According to the Registration Statement, the Fund will be actively managed and thus will not seek to replicate the performance of a specified passive index of securities. Instead, it will use an active investment strategy to seek to meet its investment objectives. The Sub-Adviser, subject to the oversight of the Adviser and the Board of Trustees, will have discretion on a daily basis to manage the Fund’s portfolio in accordance with the Fund’s investment objectives and investment policies. According to the Registration Statement, the Fund will seek to achieve its investment objectives by investing, under normal circumstances,8 at least 80% of its net assets in positions in agency interest-only collateralized mortgage obligations (‘‘CMOs’’), interest-only swaps (‘‘IOS’’) that reference interest only cash flows from agency mortgage-backed securities (‘‘MBS’’) pools with certain coupons and specified origination periods (‘‘Agency MBS IOS’’), interest rate swaps, U.S. Treasury obligations, including U.S. Treasury zero-coupon bonds, and U.S. Treasury futures.9 Under normal circumstances, the SubAdviser will seek to generate enhanced returns in an environment of rising interest rates by investing in agency interest-only CMOs and Agency MBS IOS to maintain a negative portfolio duration with a generally positive current yield. Under normal circumstances, the Fund will utilize the U.S. Treasury obligations, U.S. Treasury futures and interest rate swaps, which are liquid interest rate products, to manage duration risks. Aside from Treasury futures, which will be exchange traded,10 all the Fund’s principal investments will be U.S. dollar-denominated and traded over the counter (‘‘OTC’’). According to the Adviser, the mortgage-backed securities market, which includes interest-only CMOs, is the largest sector of the U.S. fixed income markets. It is diverse, with both highly liquid instruments as well as less liquid products. The primary focus of the Fund will be on the Agency MBS IOS sector, where liquidity is provided by multiple market makers that actively make two-sided markets. Additionally, Markit publishes daily closing prices based on dealer marks. Pricing in this market is transparent and provided by major market makers. The Agency MBS IOS are analogous to interest-only CMOs in swap form with differences in the composition of underlying MBS collateral. IOS are total rate of return swaps. According to the Registration Statement, the Agency MBS IOS and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. 8 The term ‘‘under normal circumstances’’ includes, but is not limited to, the absence of adverse market, economic, political or other conditions, including extreme volatility or trading halts in the equity 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. 9 According to the Registration Statement, CMOs are debt obligations of a legal entity that are collateralized by mortgages and divided into classes. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. The Fund will only use futures contracts that have U.S. Treasury securities and interest rate swaps as their underlying reference assets. 10 The futures in which the Fund may invest will trade on markets that are members of the Intermarket Surveillance Group (‘‘ISG’’) or that have entered into a comprehensive surveillance agreement with the Exchange. Description of the Fund PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 E:\FR\FM\01AUN1.SGM 01AUN1 44880 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES agency interest-only CMOs in which the Fund will invest are intended to provide significant negative duration exposure and will generally benefit from rising interest rates.11 The overall duration of the Fund’s portfolio will generally range from ¥5 to ¥15 years. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates. A portfolio with negative duration generally incurs a loss when interest rates and yields fall. To counter the impact of such potential losses, the Fund’s negative duration may be partly offset with long positions in U.S. Treasury obligations, interest rate swaps and other positive duration products. According to the Registration Statement, in determining the Fund’s investment allocations, the Sub-Adviser will perform both top-down and security specific analysis. The overall negative duration target and allocation to specific subsectors of the mortgage interest-only market will be based on high-level macro and relative value analysis across fixed income markets. Using these targets, allocations to individual positions will be made based on detailed value analysis. Liquid U.S. Treasury obligations and interest rate swaps will be used to adjust the portfolio to certain negative duration targets. While such U.S. Treasury and interest rate swap hedges may be rebalanced daily, the portfolio of Agency MBS IOS and agency interestonly CMOs will be less frequently rebalanced. According to the Registration Statement, agency CMOs, including agency interest-only CMOs, are typically collateralized by portfolios of mortgage pass-through securities guaranteed by the Government National Mortgage Association (‘‘Ginnie Mae’’), the Federal Home Loan Mortgage Corporation (‘‘Freddie Mac’’), or Federal National Mortgage Association (‘‘Fannie Mae’’), and the income payments on such securities.12 CMOs, including agency 11 According to the Adviser, negative duration reflects price sensitivity to interest rate changes that is the inverse of how standard bond instruments behave. Specifically, negative duration instruments generally appreciate in price as interest rates rise. 12 According to the Registration Statement, Ginnie Mae, a wholly owned United States Government corporation, is one of the principal governmental guarantor [sic] of mortgage-related securities, such as agency CMOs. Ginnie Mae is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by Ginnie Mae and backed by pools of mortgages insured by the Federal Housing Administration (the ‘‘FHA’’), or guaranteed by the Department of Veterans Affairs VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 interest-only CMOs, are structured into multiple classes, often referred to as ‘‘tranches,’’ with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. The agency interest-only CMOs that the Fund may invest in include agency stripped mortgage-backed securities (‘‘SMBS’’).13 According to the Registration Statement, as CMOs have evolved, some classes of CMO bonds have become more common. For example, the Fund may invest in agency interest-only parallel-pay and planned amortization class (‘‘PAC’’) CMOs and agency interest-only multi-class pass through certificates.14 Any CMO or multi-class pass through structure that includes PAC securities must also have support tranches—known as support bonds, companion bonds or non-PAC bonds—which lend or absorb principal cash flows to allow the PAC securities to maintain their stated maturities and final distribution dates within a range of actual prepayment experience. Consistent with the Fund’s investment objectives and policies, the Sub-Adviser may invest in various tranches of agency interest-only CMO bonds, including support bonds. According to the Registration Statement, the Fund may enter into interest rate swaps. The Fund may utilize swap agreements in an attempt to gain exposure to the securities in a market without actually purchasing those securities, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods (the ‘‘VA’’). Government-related guarantors (i.e., not backed by the full faith and credit of the United States Government) include the governmentsponsored corporations Fannie Mae and Freddie Mac. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae, but are not backed by the full faith and credit of the United States Government. 13 According to the Registration Statement SMBS are derivative multi-class mortgage securities. SMBSs may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. 14 According to the Registration Statement, parallel-pay CMOs and multi-class pass-through certificates are structured to provide payments of principal on each payment date to more than one class. PACs generally require payments of a specified amount of principal on each payment date. PACs are parallel-pay CMOs with the required principal amount on such securities having the highest priority after interest has been paid to all classes. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 ranging from a day to more than oneyear. In a standard ‘‘swap’’ transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or ‘‘swapped’’ between the parties are calculated with respect to a ‘‘notional amount,’’ i.e., the return on or increase in value of a particular dollar amount invested in a ‘‘basket’’ of securities representing a particular index. According to the Registration Statement, the Fund’s obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating assets determined to be liquid. The Fund will not enter into any swap agreement unless the Adviser believes that the other party to the transaction is creditworthy.15 According to the Registration Statement, the Fund may enter into swap agreements to invest in a market without owning or taking physical custody of the underlying securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. According to the Registration Statement, the Fund intends to invest in U.S. Treasury securities and U.S. Treasury futures. U.S. Treasury securities are backed by the full faith and credit of the U.S. Treasury and differ only in their interest rates, maturities, and times of issuance. The Fund may invest in U.S. Treasury zerocoupon bonds. These securities are U.S. Treasury bonds which have been stripped of their unmatured interest coupons, the coupons themselves, and receipts or certificates representing interests in such stripped debt obligations and coupons. Interest is not paid in cash during the term of these securities, but is accrued and paid at maturity. 15 The Fund will seek, where possible, to use counterparties, as applicable, whose financial status is such that the risk of default is reduced. The Adviser’s Execution Committee will evaluate the creditworthiness of counterparties on an ongoing basis. In addition to information provided by credit agencies, the Adviser’s analysts will evaluate each approved counterparty using various methods of analysis, including the counterparty’s liquidity in the event of default, the broker-dealer’s reputation, the Adviser’s past experience with the brokerdealer, the Financial Industry Regulatory Authority’s (‘‘FINRA’’) BrokerCheck and disciplinary history and its share of market participation. E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Other Investments While the Fund’s principal investments, under normal circumstances,16 will be as described above, the Fund may invest the balance of its assets in the investments described below. According to the Registration Statement, the Fund may invest in other mortgage-related securities in addition to the agency interest-only CMOs described above. Such mortgage-related securities are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. More specifically, the Fund may hold MBS, mortgage dollar rolls,17 CMO residuals,18 and equity or debt securities issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage loans, including savings and loan associations homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts, and special purpose entities of the foregoing. In addition to the agency interest-only CMOs described above, the MBS that the Fund will invest in are other agency CMOs, non-agency CMOs (including non-agency SMBS) and Adjustable Rate Mortgage Backed Securities (‘‘ARMBS’’). According to the Registration Statement, such mortgage-related 16 See note 8, supra. According to the Registration Statement, in the absence of normal circumstances the Fund may invest 100% of its total assets, without limitation, in debt securities and money market instruments, either directly or through exchange traded funds (‘‘ETFs’’). Debt securities and money market instruments include shares of other mutual funds, commercial paper, U.S. government securities, repurchase agreements and bonds that are rated BBB or higher. The Fund may be invested in this manner for extended periods, depending on the Sub-Adviser’s assessment of market conditions. While the Fund is in a defensive position, the opportunity to achieve its investment objectives will be limited. Furthermore, to the extent that the Fund invests in money market mutual funds the Fund would bear its pro rata portion of each such money market fund’s advisory fees and operational expenses. 17 Dollar rolls are a type of repurchase transaction in the mortgage pass-through securities market in which the buy side trade counterparty of a ‘‘to be announced’’ (‘‘TBA’’) trade agrees to sell off the same TBA trade in the current month and to buy back the same trade in a future month at a lower price, constituting a forward contract. 18 According to the Registration Statement, CMO residuals are mortgage securities issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage loans. The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses and any management fee of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Transactions in CMO residuals will generally be completed only after careful review of the characteristics of the securities in question. VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 securities include privately issued mortgage-related securities, where issuers create pass-through pools of conventional residential mortgage loans.19 Timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities or private insurers. The Fund may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originators/servicers and poolers, the Sub-Adviser determines that the securities meet the Trust’s investment quality standards. Privately issued mortgage-related securities are not traded on an exchange. The Fund may purchase privately issued mortgage-related securities that are originated, packaged and serviced by third party entities. According to the Registration Statement, the Fund may invest in assetbacked securities (‘‘ABSs’’), which are bonds backed by pools of loans or other receivables. ABSs are created from many types of assets, including auto loans, credit card receivables, home equity loans, and student loans. ABSs are issued through special purpose vehicles that are bankruptcy remote from the issuer of the collateral. According to the Registration Statement, the Fund may invest in each of collateralized bond obligations (‘‘CBOs’’), collateralized loan obligations (‘‘CLOs’’), other collateralized debt obligations (‘‘CDOs’’) and other similarly structured securities. CBOs, CLOs and other CDOs are types of ABS. A CBO is a trust which is often backed by a diversified pool of high risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities such as high yield debt, residential privately issued mortgage-related securities, commercial privately issued mortgagerelated securities, trust preferred securities and emerging market debt. A CLO is a trust typically collateralized by a pool of loans, which may include, 19 According to the Registration Statement, in determining whether and how much to invest in privately issued mortgage-related securities, and how to allocate those assets, the Sub-Adviser will consider a number of factors. These include, but are not limited to: (1) The nature of the borrowers (e.g., residential vs. commercial); (2) the collateral loan type (e.g., for residential: First Lien—Jumbo/Prime, First Lien—Alt-A, First Lien—Subprime, First Lien—Pay-Option or Second Lien; for commercial: Conduit, Large Loan or Single Asset/Single Borrower); and (3) in the case of residential loans, whether they are fixed rate or adjustable mortgages. PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 44881 among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Other CDOs are trusts backed by other types of assets representing obligations of various parties. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. According to the Adviser, the Fund will limit investments in ABS and MBS that are issued or guaranteed by nongovernment entities to 15% of the Fund’s net assets. According to the Registration Statement, in addition to interest–only swaps and interest rate swaps, which are primary investments, the Fund may enter into other types of swap agreements. The swap agreements will have MBS as reference assets, including CMOs. According to the Registration Statement, the Fund may invest directly and indirectly in foreign currencies. The Fund may conduct foreign currency transactions on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. At the discretion of the Adviser, the Fund may, but is not obligated to, enter into forward currency exchange contracts for hedging purposes to help reduce the risks and volatility caused by changes in foreign currency exchange rates, or to gain exposure to certain currencies in an effort to achieve the Fund’s investment objective. According to the Registration Statement, the Fund may invest in equity securities. The Fund may invest in common stock, preferred stock, warrants, convertible securities, master limited partnerships (‘‘MLPs’’) and rights. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. MLPs are limited partnerships in which the ownership units are publicly traded. According to the Registration Statement, the Fund may invest in shares of exchange traded real estate investment trusts (‘‘REITs’’). REITs are E:\FR\FM\01AUN1.SGM 01AUN1 44882 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES pooled investment vehicles which invest primarily in real estate or real estate related loans. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. According to the Registration Statement, the Fund may invest in exchange-traded notes (‘‘ETNs’’).20 It is expected that the ETN issuer’s credit rating will be investment grade at the time of investment. According to the Registration Statement, in addition to the U.S. Treasury debt securities described above, the Fund intends to invest in other fixed income securities. The fixed income securities the Fund may invest in are variable and floating rate instruments; bank obligations, including certificates of deposit, bankers’ acceptances, and fixed time deposits; commercial paper; U.S. government securities other than U.S. Treasuries; 21 municipal securities; repurchase agreements; reverse repurchase agreements; corporate debt securities; convertible securities; and MBS. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Except as discussed herein, the Fund may invest in investment-grade debt securities, non-investment-grade debt securities, and unrated debt securities.22 The Fund may invest assets in 20 ETNs are securities listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(6) (‘‘Index-Linked Securities’’). ETNs are senior, unsecured unsubordinated debt securities issued by an underwriting bank that are designed to provide returns that are linked to a particular benchmark less investor fees. ETNs have a maturity date and, generally, are backed only by the creditworthiness of the issuer. 21 According to the Registration Statement, some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. 22 According to the Registration Statement, noninvestment-grade securities, also referred to as ‘‘high yield securities’’ or ‘‘junk bonds,’’ are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (for example, lower than Baa3 by Moody’s Investors Service, Inc. (‘‘Moody’s’’) or lower than BBB- by Standard and Poor’s Ratings Services (‘‘S&P’’)) or are determined to be of comparable quality by the Fund’s SubAdviser. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed by the Sub-Adviser to determine whether to purchase unrated bonds. VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 obligations of foreign banks which meet the conditions set forth herein. According to the Registration Statement, the Fund may seek to invest in corporate debt securities representative of one or more high yield bond or credit derivative indices, which may change from time to time. Selection will generally be dependent on independent credit analysis or fundamental analysis performed by the Sub-Adviser. According to the Registration Statement, the Fund may enter into repurchase agreements with financial institutions, which may be deemed to be loans. The Fund will effect repurchase transactions only with large, wellcapitalized and well-established financial institutions whose condition will be continually monitored by the Sub-Adviser. According to the Registration Statement, the Fund may enter into reverse repurchase agreements. Reverse repurchase agreements involve sales by the Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. According to the Registration Statement, the Fund will only invest in commercial paper rated A–1 or A–2 by S&P or Prime-1 or Prime-2 by Moody’s. According to the Registration Statement, the Fund may invest in inflation-indexed bonds, which are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. According to the Registration Statement, the Fund may invest in securities that are indirectly linked to the performance of foreign issuers, specifically: American Depositary Receipts (‘‘ADRs’’), Global Depositary Receipts (‘‘GDRs’’), European Depositary Receipts (‘‘EDRs’’), International Depository Receipts (‘‘IDRs’’), ‘‘ordinary shares,’’ ‘‘New York shares’’ issued and traded in the U.S.23 and exchange traded products (‘‘ETPs’’). 23 ADRs are U.S. dollar denominated receipts typically issued by U.S. banks and trust companies that evidence ownership of underlying securities issued by a foreign issuer. The underlying securities may not necessarily be denominated in the same currency as the securities into which they may be converted. Generally, ADRs are designed for use in domestic securities markets and are traded on exchanges or OTC in the U.S. GDRs, EDRs, and IDRs are similar to ADRs in that they are certificates evidencing ownership of shares of a foreign issuer; however, GDRs, EDRs, and IDRs may be issued in bearer form and denominated in other currencies, and are generally designed for use in specific or multiple securities markets outside the U.S. EDRs, for example, are designed for use in European securities markets while GDRs are designed for use throughout the world. Ordinary shares are shares of foreign issuers that are traded abroad and on a U.S. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 According to the Registration Statement, the Fund may invest in the securities of other investment companies to the extent that such an investment would be consistent with the requirements of Section 12(d)(1) of the 1940 Act, or any rule, regulation or order of the SEC or interpretation thereof. Consistent with such restrictions, the Fund may invest in several different types of investment companies from time to time, including mutual funds, ETFs, closed-end funds, and business development companies (‘‘BDCs’’), when the Adviser or the SubAdviser believes such an investment is in the best interests of the Fund and its shareholders. Closed-end funds are pooled investment vehicles that are registered under the 1940 Act and whose shares are listed and traded on U.S. national securities exchanges. A BDC is a less common type of closedend investment company that more closely resembles an operating company than a typical investment company. Investment companies may include index-based investments, such as ETFs that hold substantially all of their assets in securities representing a specific index. According to the Registration Statement, in addition to the U.S. Treasury Futures, Agency MBS IOS and interest rate swaps discussed above, the Fund intends to invest in other derivatives. The derivatives in which the Fund may invest are other futures contracts, forward contracts,24 options, options on futures, other swaps, hybrid instruments and structured notes. The Fund typically will use derivatives as a substitute for taking a position directly in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as currency risk. Not more than 10% of the net assets of the Fund in the aggregate shall consist of options 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. exchange. New York shares are shares that a foreign issuer has allocated for trading in the U.S. ADRs, ordinary shares, and New York shares all may be purchased with and sold for U.S. dollars. With the exception of ADRs traded OTC, which will comprise no more than 10% of the Fund’s net assets, all equity securities, including, without limitation, exchange-traded ADRs, GDRs, EDRs, IDRs, New York shares and ordinary shares, that the Fund may invest in will trade on markets that are members of the ISG or that have entered into a comprehensive surveillance agreement with the Exchange. 24 Specifically, in addition to the forward currency exchange contracts discussed above, the Fund may invest in mortgage dollar rolls, which constitute forward contracts. E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES According to the Registration Statement, the Fund will only enter into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission (‘‘CFTC’’) and whose principal market is a member of ISG or is a market with which the Exchange has a comprehensive surveillance sharing agreement.25 The Fund will only use futures contracts that have U.S. Treasury securities and interest rate swaps as their underlying reference assets. The Fund may use futures contracts and options on futures for bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. According to the Registration Statement, the Fund may write (sell) and purchase put and call options on indices and enter into related closing transactions. According to the Registration Statement, the Fund may trade put and call options on securities, securities indices and currencies, as the Sub-Adviser determines is appropriate in seeking the Fund’s investment objective, and except as restricted by the Fund’s investment limitations. The Fund may purchase put and call options on securities to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the 25 To the extent the Fund invests in futures, options on futures or other instruments subject to regulation by the CFTC, it will do so in reliance on and in compliance with CFTC regulations in effect from time to time and in accordance with the Fund’s policies. The Trust, on behalf of certain of its series, has filed a notice of eligibility for exclusion from the definition of the term ‘‘commodity pool operator’’ in accordance with CFTC Regulation 4.5. Therefore, neither the Trust nor the Fund is deemed to be a ‘‘commodity pool’’ or ‘‘commodity pool operator’’ with respect to the Fund under the Commodity Exchange Act (‘‘CEA’’), and they are not subject to registration or regulation as such under the CEA. In addition, as of the date of this filing, the Adviser is not deemed to be a ‘‘commodity pool operator’’ or ‘‘commodity trading adviser’’ with respect to the advisory services it provides to the Fund. The CFTC recently adopted amendments to CFTC Regulation 4.5 and has proposed additional regulatory requirements that may affect the extent to which the Fund invests in instruments that are subject to regulation by the CFTC and impose additional regulatory obligations on the Fund and the Adviser. The Fund reserves the right to engage in transactions involving futures, options thereon and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Fund’s policies. VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 Fund may seek to purchase in the future. The Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. The Fund may purchase and write options on an exchange or OTC. According to the Registration Statement, the Fund may invest in hybrid instruments. A hybrid instrument is a type of potentially highrisk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some security, commodity, currency or securities index or another interest rate or some other economic factor (each a ‘‘benchmark’’). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. According to the Registration Statement, certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, and are considered hybrid instruments because they have both security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable. The Fund will only invest in commodity-linked hybrid instruments that qualify, under applicable rules of the CFTC, for an exemption from the provisions of the CEA. According to the Registration Statement, the Fund may invest in structured notes, which are debt obligations that also contain an embedded derivative component with characteristics that adjust the obligation’s risk/return profile. Generally, the performance of a structured note will track that of the underlying debt obligation and the derivative embedded within it. The Fund have the right to receive periodic interest payments from the issuer of the structured notes at an agreed-upon interest rate and a return of the principal at the maturity date. PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 44883 According to the Registration Statement, the Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued, delayed-delivery or forward commitment basis (i.e., delivery and payment can take place between a month and 120 days after the date of the transaction). The Fund will not purchase securities on a when-issued, delayed-delivery or forward commitment basis if, as a result, more than 15% of the Fund’s net assets would be so invested. Investment Restrictions According to the Registration Statement, the Fund may not purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent the Fund from purchasing, selling and entering into futures contracts, options on financial futures contracts, warrants, swaps, forward contracts, foreign currency spot and forward contracts or other derivative instruments that are not related to physical commodities. The Fund will only use futures contracts that have U.S. Treasury securities and interest rate swaps as their underlying assets. According to the Registration Statement, the Fund may not, with respect to 75% of its total assets, purchase securities of any issuer (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or shares of investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer; or acquire more than 10% of the outstanding voting securities of any one issuer.26 According to the Registration Statement, the Fund may not invest 25% or more of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry or group of industries. This limitation does not apply to investments in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or shares of investment companies. The Fund will 26 The diversification standard is set forth in Section 5(b)(1) of the 1940 Act. According to the Registration Statement, in the case of privately issued mortgage-related securities, the Fund takes the position that mortgage-related securities do not represent interests in any particular ‘‘industry’’ or group of industries. Therefore, the Fund may invest more or less than 25% of its total assets in privately issued mortgage-related securities. E:\FR\FM\01AUN1.SGM 01AUN1 44884 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES not invest 25% or more of its total assets in any investment company that so concentrates.27 According to the Registration Statement, the Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including securities deemed illiquid by the Adviser consistent with Commission guidance. The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are held in illiquid assets. Illiquid assets include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance.28 According to the Registration Statement, the Fund will seek to qualify for treatment as a Regulated Investment Company under the Internal Revenue Code.29 The Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. According to the Registration Statement, while the Fund does not anticipate doing so, the Fund may borrow money for investment purposes. The Fund may also borrow money to facilitate management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments 27 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). 28 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. 29 26 U.S.C. 851. VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 would be inconvenient or disadvantageous. Such borrowing is not for investment purposes, will be repaid by the Fund promptly and will be consistent with the requirements of the 1940 Act and the rules thereunder. According to the Registration Statement, the Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. These loans, if and when made, may not exceed 331⁄3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser, Sub-Adviser, or their affiliates, unless it has applied for and received specific authority to do so from the Commission. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Net Asset Value According to the Registration Statement, the Fund will calculate its NAV by: (i) Taking the current market value of its total assets; (ii) subtracting any liabilities; and (iii) dividing that amount by the total number of Shares owned by shareholders. The Fund will calculate NAV once each business day as of the regularly scheduled close of trading on the Exchange (normally, 4:00 p.m., Eastern Time). In calculating NAV, the Fund’s securities holdings will be valued based on their last readily available market price. Futures contracts, exchange-traded options, and options on futures, will be valued at the closing settlement price determined by the applicable exchange. Other exchange-traded securities, including equity securities (including ETPs such as exchange-traded ADRs, GDRs, EDRs, IDRs, ordinary shares, New York shares, ETNs, and ETFs), and exchange-traded REITs, will be valued at market value, which will generally be determined using the last reported official closing or last trading price on the exchange or market on which the security is primarily traded at the time of valuation or, if no sale has occurred, at the last quoted bid price on the primary market or exchange on which they are traded. If market prices are unavailable or the Fund believes that they are unreliable, or when the value of a security has been materially affected by events occurring after the relevant market closes, the Fund will price those securities at fair value as PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 determined in good faith using methods approved by the Trust’s Board of Trustees. ADRs traded OTC will be valued on the basis of the market closing price on the exchange where the stock of the foreign issuer that underlies the ADR is listed. Investment company securities (other than ETFs), including mutual funds, closed end funds, and BDCs, will be valued at net asset value. Non-exchange-traded derivatives, including forward contracts, swaps, options traded OTC, options on futures traded OTC, hybrid instruments and structured notes, will normally 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. Prices obtained from independent pricing services use information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Fixed income securities, including CMOs (including agency interest-only CMOs), CMO residuals, mortgage dollar rolls, U.S. Treasury securities, other obligations issued or guaranteed by U.S. government agencies and instrumentalities, bonds, bank obligations, ABS, MBS, shares of other mutual funds, commercial paper, repurchase agreements, reverse repurchase agreements, corporate debt securities, municipal securities, convertible securities, certificates of deposits and bankers’ acceptances generally trade in the OTC market rather than on a securities exchange. The Fund will generally value these portfolio assets by relying on independent pricing services. The Fund’s pricing services will use valuation models or matrix pricing to determine current value. In general, pricing services use information with respect to comparable bond and note transactions, quotations from bond dealers or by reference to other assets that are considered comparable in such characteristics as rating, interest rate, maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves. Matrix price is an estimated price or value for a fixed-income security. Matrix pricing is considered a form of fair value pricing. The Fund’s debt securities will generally be valued at bid prices. In certain cases, some of the Fund’s debt securities may be valued at the mean between the last available bid and ask prices. Foreign exchange rates will be priced using 4:00 p.m. (Eastern Time) mean prices from major market data vendors. E:\FR\FM\01AUN1.SGM 01AUN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices Creation and Redemption of Shares According to the Registration Statement, the Fund will issue and redeem Shares on a continuous basis at NAV in aggregated lots which shall initially be of 25,000 Shares (each, a ‘‘Creation Unit’’). All orders to create or redeem Creation Units must be received by the Distributor no later than 3:00 p.m., Eastern Time in order for the creation or redemption of Creation Units to be effected based on the NAV of Shares of the Fund as next determined on such date. The Trust reserves the right to offer an ‘‘all cash’’ option for creations and redemptions of Creation Units for the Fund.30 The consideration for purchase of a Creation Unit of each Fund generally will consist of an in-kind deposit of a designated portfolio of securities—the ‘‘Deposit Securities’’—per each Creation Unit constituting a substantial replication, or a representation, of the securities included in the Fund’s portfolio and an amount of cash—the ‘‘Cash Component.’’ Together, the Deposit Securities and the Cash Component will constitute the ‘‘Fund Deposit,’’ which represents the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Cash Component is an amount equal to the difference between the NAV of the Shares of the Fund (per Creation Unit) and the market value of the Deposit Securities. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash—i.e., a ‘‘cash in lieu’’ amount—to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for transfer through the clearing process, or which may not be eligible for trading by an authorized participant or the investor for which it is acting. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Fund through the Administrator and only on a business day. The Trust will not redeem Shares of the Fund in amounts less than Creation Units. Unless cash redemptions are available or specified, the redemption proceeds for a Creation Unit generally will consist of ‘‘the Fund Securities’’—as announced by the Administrator on the business day of the request for redemption received in proper form—plus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities, less a redemption transaction fee. The Administrator, through the National Securities Clearing Corporation (‘‘NSCC’’), will make available immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time) on each business day, the Fund Securities that will be applicable to redemption requests received in proper form on that day as well as the estimated Cash Component. According to the Registration Statement, if it is not possible to effect deliveries of the Fund Securities, for example if the investor is not able to accept delivery, the Trust may in its discretion exercise its option to redeem Shares of the Fund in cash, and the redeeming beneficial owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which the Fund may, in its sole discretion, permit.31 In either case, the investor will receive a cash payment equal to the NAV of its Shares based on the NAV of Shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions, as described in the Registration Statement). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the applicable Fund Securities but does not differ in NAV. Redemptions of Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An authorized participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit may be paid an equivalent amount of cash. 30 The Adviser represents that, to the extent the Trust effects the creation of Shares in cash, such transactions will be effected in the same manner for all authorized participants. 31 The Adviser represents that, to the extent the Trust effects the redemption of Shares in cash, such transactions will be effected in the same manner for all authorized participants. VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 44885 Availability of Information The Fund’s Web site (www.advisorshares.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The Fund’s Web site will include additional quantitative information updated on a daily basis, including, for the Fund, (1) daily trading volume, the prior business day’s reported closing price, NAV and midpoint of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/ Ask Price’’),32 and a calculation of the premium and discount of the Bid/Ask Price against the NAV, and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. On each business day, before commencement of trading in Shares in the Core Trading Session on the Exchange, the Fund’s Web site will disclose the Disclosed Portfolio that will form the basis for the Fund’s calculation of NAV at the end of the business day.33 On a daily basis, the Adviser, on behalf of the Fund, will disclose on the Fund’s Web site the following information regarding each portfolio holding of the Fund, as applicable to the type of holding: Ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index, or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in the Fund’s portfolio. The Web site information will be publicly available at no charge. Investors can also obtain the Trust’s Statement of Additional Information (‘‘SAI’’), the Fund’s Shareholder Reports, and its Form N–CSR and Form N–SAR, filed twice a year. The Trust’s SAI and Shareholder Reports will be 32 The Bid/Ask Price of the Fund is determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 33 Under accounting procedures followed by the Fund, trades made on the prior business day (‘‘T’’) will be booked and reflected in NAV on the current business day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day. E:\FR\FM\01AUN1.SGM 01AUN1 tkelley on DSK3SPTVN1PROD with NOTICES 44886 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices available free upon request from the Trust, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen or downloaded from the Commission’s Web site at www.sec.gov. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last sale information for the Shares and the underlying U.S. exchange-traded equity securities will be available via the Consolidated Tape Association (‘‘CTA’’) high-speed line, and from the national securities exchange on which they are listed. Quotation and last sale information for exchange-listed options will be available via the Options Price Reporting Authority. Price information regarding the futures contracts, exchange-traded options, options on futures, equity securities (including ETPs such as exchange-listed ADRs, GDRs, EDRs, IDRs, ordinary shares and New York shares as well as ETNs, and ETFs), and exchange-traded REITs, held by the Fund will be available from the U.S. and non-U.S. exchanges trading such assets. Quotation information from brokers and dealers or pricing services will be available for ADRs traded OTC; investment company securities other than ETFs; non-exchange-traded derivatives, including forward contracts, IOS and other swaps, options traded OTC, options on futures, hybrid instruments and structured notes; fixed income securities, including CMOs (including agency interest-only CMOs), CMO residuals, mortgage dollar rolls, U.S. Treasury securities, other obligations issued or guaranteed by U.S. government agencies and instrumentalities, bonds, bank obligations, ABS, MBS, shares of other mutual funds, commercial paper, repurchase agreements, reverse repurchase agreements, corporate debt securities, municipal securities, convertible securities, certificates of deposit and bankers’ acceptances. Pricing information regarding each asset class in which the Fund will invest is generally available through nationally recognized data service providers through subscription agreements. Foreign exchange prices are available from major market data vendors. In addition, the Portfolio Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 disseminated at least every 15 seconds during the Core Trading Session by one or more major market data vendors.34 The dissemination of the Portfolio Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the trading day. Additional information regarding the Trust and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, distributions and taxes is included in the Registration Statement. All terms relating to the Fund that are referred to, but not defined in, this proposed rule change are defined in the Registration Statement. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund.35 Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace from 4 a.m. to 8 p.m. Eastern Time in accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading Sessions). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Equities Rule 7.6, Commentary .03, 34 Currently, it is the Exchange’s understanding that several major market data vendors display and/ or make widely available Portfolio Indicative Values taken from CTA or other data feeds. 35 See NYSE Arca Equities Rule 7.12, Commentary .04. PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 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 Adviser will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material nonpublic information regarding the actual components of the Fund’s portfolio. The Exchange represents that, for initial and/or continued listing, the Fund will be in compliance with Rule 10A–3 36 under the Exchange Act, as provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio as defined in NYSE Arca Equities Rule 8.600(c)(2) 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 FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws. 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 applicable federal securities laws.37 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.38 36 17 CFR 240.10A–3. surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 38 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. 37 FINRA E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts with other markets and other entities that are members of the ISG and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. As noted above, with the exception of ADRs traded OTC, which will comprise no more than 10% of the Fund’s net assets, all equity securities, including, without limitation, exchange-traded ADRs, GDRs, EDRs, IDRs, New York shares and ordinary shares, that the Fund may invest in will trade on markets that are members of ISG or that have entered into a comprehensive surveillance agreement with the Exchange. In addition, FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA’s Trade Reporting and Compliance Engine (‘‘TRACE’’). In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Bulletin Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit 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 Equity Trading Permit 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 Portfolio Indicative Value will not be calculated or publicly disseminated; (4) how information regarding the Portfolio Indicative Value is disseminated; (5) the VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 requirement that Equity Trading Permit Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. In addition, the Bulletin will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Bulletin will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Exchange Act. The Bulletin will also disclose that the NAV for the Shares will be calculated after 4:00 p.m. Eastern Time each trading day. 2. Statutory Basis The basis under the Exchange Act for this proposed rule change is the requirement under Section 6(b)(5) 39 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 deter and detect violations of Exchange rules and applicable federal securities laws. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts with other markets and other entities that are members of the ISG and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, exchange-listed equity securities, futures contracts and exchange-listed options contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. As noted above, with the exception of ADRs traded OTC, which will comprise PO 00000 39 15 U.S.C. 78f(b)(5). Frm 00150 Fmt 4703 Sfmt 4703 44887 no more than 10% of the Fund’s net assets, all equity securities, including, without limitation, exchange-traded ADRs, GDRs, EDRs, IDRs, New York shares and ordinary shares, and Treasury futures that the Fund may invest in will trade on markets that are members of ISG or that have entered into a comprehensive surveillance agreement with the Exchange. In addition, FINRA, on behalf of the Exchange, is able to access, as needed, trade information for certain fixed income securities held by the Fund reported to TRACE. Not more than 10% of the net assets of the Fund in the aggregate shall consist of options 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 will limit investments in ABS and MBS that are issued or guaranteed by non-government entities to 15% of the Fund’s net assets. The Fund may not purchase or hold illiquid assets if, in the aggregate, more than 15% of its net assets would be invested in illiquid securities. The Exchange 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. Neither the Adviser nor the Sub-Adviser is a broker-dealer or is affiliated with a broker-dealer. In the event (a) the Adviser becomes newly affiliated with a broker-dealer, (b) the Sub-Adviser becomes newly affiliated with a broker-dealer, or (c) any new adviser or sub-adviser becomes affiliated with a broker-dealer, it will implement a fire wall with respect to such broker-dealer regarding access to information concerning the composition and/or changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. The Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information is publicly available regarding the Fund and the Shares, thereby promoting market transparency. Quotation and last sale information for the Shares and the E:\FR\FM\01AUN1.SGM 01AUN1 tkelley on DSK3SPTVN1PROD with NOTICES 44888 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices underlying U.S. exchange-traded equity securities will be available via the CTA high-speed line, and from the national securities exchange on which they are listed. Quotation and last sale information for exchange-listed options will be available via the Options Price Reporting Authority. Price information regarding the futures contracts, exchange-traded options, options on futures, equity (including ETPs such as ADRs traded OTC, GDRs, EDRs, IDRs, ordinary shares and New York shares as well as ETNs, and ETFs), and exchangetraded REITs, held by the Fund will be available from the U.S. and non-U.S. exchanges trading such assets. Quotation information from brokers and dealers or pricing services will be available for ADRs traded OTC; investment company securities other than ETFs; non-exchange-traded derivatives, including forward contracts, IOS and other swaps, options traded OTC, options on futures, hybrid instruments and structured notes; fixed income securities, including CMOs (including agency interest-only CMOs), CMO residuals, mortgage dollar rolls, U.S. Treasury securities, other obligations issued or guaranteed by U.S. government agencies and instrumentalities, bonds, bank obligations, ABS, MBS, shares of other mutual funds, commercial paper, repurchase agreements, reverse repurchase agreements, corporate debt securities, municipal securities, convertible securities, certificates of deposit and bankers’ acceptances. Pricing information regarding each asset class in which the Fund will invest is generally available through nationally recognized data service providers through subscription agreements. Foreign exchange prices are available from major market data vendors. In addition, the Portfolio Indicative Value will be widely disseminated by the Exchange at least every 15 seconds during the Core Trading Session. The Fund’s Web site will include a form of the prospectus for the Fund that may be downloaded, as well as additional quantitative information updated on a daily basis. On each business day, before commencement of trading in Shares in the Core Trading Session on the Exchange, the Fund’s Web site will disclose the Disclosed Portfolio that will form the basis for the Fund’s calculation of NAV at the end of the business day. On a daily basis, the Adviser, on behalf of the Fund, will disclose on the Fund’s Web site the following information regarding each portfolio holding of the Fund, as applicable to the type of holding: ticker symbol, CUSIP number VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 or other identifier, if any; a description of the holding (including the type of holding, such as the type of swap); the identity of the security, commodity, index, or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and the percentage weighting of the holding in the Fund’s portfolio. Moreover, prior to the commencement of trading, the Exchange will inform its Equity Trading Permit Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Portfolio Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of activelymanaged exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Portfolio Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Exchange Act. The Exchange notes that the proposed rule PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 change will facilitate the listing and trading of an additional type of activelymanaged exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2014–71 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–2014–71. 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 (http://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 E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 79, No. 148 / Friday, August 1, 2014 / Notices 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 Section, 100 F Street NE., Washington, DC 20549 on official business days between 10 a.m. and 3 p.m. Copies of the filing will also be available for inspection and copying at the Exchange’s principal office and on its Internet Web site at www.nyse.com. 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–2014–71 and should be submitted on or before August 22, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.40 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–18114 Filed 7–31–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 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 clarify for Members 3 and non-Members the Exchange’s use of certain data feeds for order handling and execution, order routing, and regulatory compliance. The Exchange has designated this proposal as non-controversial and provided the Commission with the notice required by Rule 19b–4(f)(6)(iii) under the Act.4 The text of the proposed rule change is available at the Exchange’s Web site at http://www.batstrading.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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. [Release No. 34–72685; File No. SR–BATS– 2014–029] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Clarify for Members and Non-Members the Use of Certain Data Feeds for Order Handling and Execution, Order Routing and Regulatory Compliance of BATS Exchange, Inc. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange submits this filing to clarify for Members and non-Members the Exchange’s use of certain data feeds for order handling and execution, order routing, and regulatory compliance. tkelley on DSK3SPTVN1PROD with NOTICES July 28, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that, on July 15, 2014, BATS Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit 40 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 22:09 Jul 31, 2014 Jkt 232001 Order Handling and Execution In order to calculate the national best bid and offer (‘‘NBBO’’) in its Matching Engine (the ‘‘ME’’), the Exchange uses quotes disseminated by market centers through proprietary data feeds (generally referred to as ‘‘Direct Feeds’’) as well as by the Securities Information Processors (‘‘SIP’’). The ME uses quotes disseminated from SIP feeds for the Chicago Stock Exchange, Inc. and NYSE MKT LLC. The Exchange notes that the 3 The term ‘‘Member’’ is defined as ‘‘any registered broker or dealer that has been admitted to membership in the Exchange. A Member will have the status of a ‘‘member’’ of the Exchange as that term is defined in Section 3(a)(3) of the Act.’’ See Exchange Rule 1.5(n). 4 17 CFR 240.19b–4(f)(6)(iii). PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 44889 ME receives Direct Feeds from the Exchange’s affiliates, BATS Y-Exchange Inc., EDGA Exchange, Inc., and EDGX Exchange, Inc. In addition to receiving Direct Feeds and SIP feeds, the ME’s calculation of the NBBO may be adjusted based on orders sent to other venues with protected quotations, execution reports received from those venues, and certain orders received by the Exchange (collectively ‘‘Feedback’’). The Exchange does not include its quotes in the calculation of the Exchange’s NBBO because the system is designed such that all incoming orders are separately compared to the Exchange’s Best Bid or Offer and the Exchange calculated NBBO, which together create a complete view of the NBBO, prior to display, execution, or routing. Feedback from the receipt of Intermarket Sweep Orders (‘‘ISOs’’) with a time-in-force of Day (‘‘Day ISOs’’) and feedback from the Exchange’s routing broker/dealer, BATS Trading, Inc., (‘‘BATS Trading’’), as described below, are used to augment the market data received by Direct Feeds and the SIP feeds. The Exchange’s ME will update the NBBO upon receipt of a Day ISO. When a Day ISO is posted on the BATS Book,5 the ME uses the receipt of a Day ISO as evidence that the protected quotes have been cleared, and the ME does not check away markets for equal or better-priced protected quotes.6 The ME will then display and execute nonISO orders at the same price as the Day ISO. All Feedback expires as soon as: (i) One (1) second passes; (ii) the Exchange receives new quote information; or (iii) the Exchange receives updated Feedback information. With the exception of Day ISO Feedback, the Exchange only generates Feedback where the order was routed using one of the following routing strategies: Parallel D, Parallel 2D, Parallel T, SLIM, and TRIM (collectively ‘‘Smart Order Routing’’).7 5 See Exchange Rule 1.5(e). to Regulation NMS, a broker-dealer routing a Day ISO is required to simultaneously route one or more additional ISOs, as necessary, to execute against the full displayed size of any protected quote priced equal to or better than the Day ISO. See also Question 5.02 in the ‘‘Division of Trading and Markets, Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS’’ (last updated April 4, 2008) available at http://www.sec.gov/divisions/ marketreg/nmsfaq610-11.htm. 7 See Exchange Rule 11.13(a)(3). Thus, the Exchange does not generate Feedback from routing options where the User directs the Exchange to route an order to a particular venue, such as Destination Specific Orders and Directed ISOs, as defined in Rules 11.9(c)(12) and 11.9(d)(2), 6 Pursuant E:\FR\FM\01AUN1.SGM Continued 01AUN1

Agencies

[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44878-44889]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72679; File No. SR-NYSEArca-2014-71]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Proposing To List and Trade Shares of Treesdale 
Rising Rates ETF Under NYSE Arca Equities Rule 8.600

July 28, 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 July 14, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to proposes to list and trade the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): 
Treesdale Rising Rates ETF. The text of the proposed rule change is 
available on the Exchange's Web site at www.nyse.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares:\4\ Treesdale Rising Rates 
ETF (``Fund'').\5\ The Shares

[[Page 44879]]

will be offered by AdvisorShares Trust (the ``Trust''), a statutory 
trust organized under the laws of the State of Delaware and registered 
with the Securities and Exchange Commission (the ``Commission'') as an 
open-end management investment company.\6\ The investment adviser to 
the Fund is AdvisorShares Investments, LLC (the ``Adviser''). The sub-
adviser to the Fund is Treesdale Partners, LLC (``Sub-Adviser''), which 
will provide day-to-day portfolio management of the Fund. Foreside Fund 
Services, LLC (the ``Distributor'') is the principal underwriter and 
distributor of the Fund's Shares. The Bank of New York Mellon (the 
``Administrator'') serves as the administrator, custodian, transfer 
agent and fund accounting agent for the Fund.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Commission has approved listing and trading on the 
Exchange of a number of actively managed funds under Rule 8.600. 
See, e.g., Securities Exchange Act Release Nos. 69591 (May 16, 
2013), 78 FR 30372 (May 22, 2013) (SR-NYSEArca-2013-33) (order 
approving Exchange listing and trading of International Bear ETF); 
69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-
2013-01) (order approving Exchange listing and trading of Newfleet 
Multi-Sector Income ETF); and 67277 (June 27, 2012), 77 FR 39554 
(July 3, 2012) (SR-NYSEArca-2012-39) (order approving Exchange 
listing and trading of the Global Alpha & Beta ETF).
    \6\ The Trust is registered under the 1940 Act. On September 4, 
2013, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act of 1933 
(15 U.S.C. 77a) and under the 1940 Act relating to the Fund (File 
Nos. 333-157876 and 811-22110) (``Registration Statement''). The 
description of the operation of the Trust and the Fund herein is 
based, in part, on the Registration Statement. In addition, the 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. See Investment Company Act Release No. 
29291 (May 28, 2010) (File No. 812-13677) (``Exemptive Order'').
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    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. 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.\7\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. 
Neither the Adviser nor the Sub-Adviser is a broker-dealer or is 
affiliated with a broker-dealer. In the event (a) the Adviser or Sub-
Adviser becomes, or becomes newly affiliated with, a broker-dealer, or 
(b) any new adviser or sub-adviser is, or becomes affiliated with, a 
broker-dealer, it will implement a fire wall with respect to its 
relevant personnel or broker-dealer affiliate, as applicable, regarding 
access to information concerning the composition and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding such 
portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and Sub-Adviser and their related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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Description of the Fund
    According to the Registration Statement, the Fund will seek to 
generate current income while providing protection for investors 
against loss of principal in a rising interest rate environment.
    According to the Registration Statement, the Fund will be actively 
managed and thus will not seek to replicate the performance of a 
specified passive index of securities. Instead, it will use an active 
investment strategy to seek to meet its investment objectives. The Sub-
Adviser, subject to the oversight of the Adviser and the Board of 
Trustees, will have discretion on a daily basis to manage the Fund's 
portfolio in accordance with the Fund's investment objectives and 
investment policies.
    According to the Registration Statement, the Fund will seek to 
achieve its investment objectives by investing, under normal 
circumstances,\8\ at least 80% of its net assets in positions in agency 
interest-only collateralized mortgage obligations (``CMOs''), interest-
only swaps (``IOS'') that reference interest only cash flows from 
agency mortgage-backed securities (``MBS'') pools with certain coupons 
and specified origination periods (``Agency MBS IOS''), interest rate 
swaps, U.S. Treasury obligations, including U.S. Treasury zero-coupon 
bonds, and U.S. Treasury futures.\9\ Under normal circumstances, the 
Sub-Adviser will seek to generate enhanced returns in an environment of 
rising interest rates by investing in agency interest-only CMOs and 
Agency MBS IOS to maintain a negative portfolio duration with a 
generally positive current yield. Under normal circumstances, the Fund 
will utilize the U.S. Treasury obligations, U.S. Treasury futures and 
interest rate swaps, which are liquid interest rate products, to manage 
duration risks. Aside from Treasury futures, which will be exchange 
traded,\10\ all the Fund's principal investments will be U.S. dollar-
denominated and traded over the counter (``OTC'').
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    \8\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of adverse market, economic, political or 
other conditions, including extreme volatility or trading halts in 
the equity 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.
    \9\ According to the Registration Statement, CMOs are debt 
obligations of a legal entity that are collateralized by mortgages 
and divided into classes. Futures contracts provide for the future 
sale by one party and purchase by another party of a specified 
amount of a specific security at a specified future time and at a 
specified price. The Fund will only use futures contracts that have 
U.S. Treasury securities and interest rate swaps as their underlying 
reference assets.
    \10\ The futures in which the Fund may invest will trade on 
markets that are members of the Intermarket Surveillance Group 
(``ISG'') or that have entered into a comprehensive surveillance 
agreement with the Exchange.
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    According to the Adviser, the mortgage-backed securities market, 
which includes interest-only CMOs, is the largest sector of the U.S. 
fixed income markets. It is diverse, with both highly liquid 
instruments as well as less liquid products. The primary focus of the 
Fund will be on the Agency MBS IOS sector, where liquidity is provided 
by multiple market makers that actively make two-sided markets. 
Additionally, Markit publishes daily closing prices based on dealer 
marks. Pricing in this market is transparent and provided by major 
market makers. The Agency MBS IOS are analogous to interest-only CMOs 
in swap form with differences in the composition of underlying MBS 
collateral. IOS are total rate of return swaps.
    According to the Registration Statement, the Agency MBS IOS and

[[Page 44880]]

agency interest-only CMOs in which the Fund will invest are intended to 
provide significant negative duration exposure and will generally 
benefit from rising interest rates.\11\ The overall duration of the 
Fund's portfolio will generally range from -5 to -15 years. Duration is 
a measure used to determine the sensitivity of a security's price to 
changes in interest rates. The longer a security's duration, the more 
sensitive it will be to changes in interest rates. A portfolio with 
negative duration generally incurs a loss when interest rates and 
yields fall. To counter the impact of such potential losses, the Fund's 
negative duration may be partly offset with long positions in U.S. 
Treasury obligations, interest rate swaps and other positive duration 
products.
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    \11\ According to the Adviser, negative duration reflects price 
sensitivity to interest rate changes that is the inverse of how 
standard bond instruments behave. Specifically, negative duration 
instruments generally appreciate in price as interest rates rise.
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    According to the Registration Statement, in determining the Fund's 
investment allocations, the Sub-Adviser will perform both top-down and 
security specific analysis. The overall negative duration target and 
allocation to specific subsectors of the mortgage interest-only market 
will be based on high-level macro and relative value analysis across 
fixed income markets. Using these targets, allocations to individual 
positions will be made based on detailed value analysis. Liquid U.S. 
Treasury obligations and interest rate swaps will be used to adjust the 
portfolio to certain negative duration targets. While such U.S. 
Treasury and interest rate swap hedges may be rebalanced daily, the 
portfolio of Agency MBS IOS and agency interest-only CMOs will be less 
frequently rebalanced.
    According to the Registration Statement, agency CMOs, including 
agency interest-only CMOs, are typically collateralized by portfolios 
of mortgage pass-through securities guaranteed by the Government 
National Mortgage Association (``Ginnie Mae''), the Federal Home Loan 
Mortgage Corporation (``Freddie Mac''), or Federal National Mortgage 
Association (``Fannie Mae''), and the income payments on such 
securities.\12\ CMOs, including agency interest-only CMOs, are 
structured into multiple classes, often referred to as ``tranches,'' 
with each class bearing a different stated maturity and entitled to a 
different schedule for payments of principal and interest, including 
pre-payments.
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    \12\ According to the Registration Statement, Ginnie Mae, a 
wholly owned United States Government corporation, is one of the 
principal governmental guarantor [sic] of mortgage-related 
securities, such as agency CMOs. Ginnie Mae is authorized to 
guarantee, with the full faith and credit of the United States 
Government, the timely payment of principal and interest on 
securities issued by institutions approved by Ginnie Mae and backed 
by pools of mortgages insured by the Federal Housing Administration 
(the ``FHA''), or guaranteed by the Department of Veterans Affairs 
(the ``VA''). Government-related guarantors (i.e., not backed by the 
full faith and credit of the United States Government) include the 
government-sponsored corporations Fannie Mae and Freddie Mac. Pass-
through securities issued by Fannie Mae are guaranteed as to timely 
payment of principal and interest by Fannie Mae, but are not backed 
by the full faith and credit of the United States Government.
---------------------------------------------------------------------------

    The agency interest-only CMOs that the Fund may invest in include 
agency stripped mortgage-backed securities (``SMBS'').\13\ According to 
the Registration Statement, as CMOs have evolved, some classes of CMO 
bonds have become more common. For example, the Fund may invest in 
agency interest-only parallel-pay and planned amortization class 
(``PAC'') CMOs and agency interest-only multi-class pass through 
certificates.\14\ Any CMO or multi-class pass through structure that 
includes PAC securities must also have support tranches--known as 
support bonds, companion bonds or non-PAC bonds--which lend or absorb 
principal cash flows to allow the PAC securities to maintain their 
stated maturities and final distribution dates within a range of actual 
prepayment experience. Consistent with the Fund's investment objectives 
and policies, the Sub-Adviser may invest in various tranches of agency 
interest-only CMO bonds, including support bonds.
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    \13\ According to the Registration Statement SMBS are derivative 
multi-class mortgage securities. SMBSs may be issued by agencies or 
instrumentalities of the U.S. government, or by private originators 
of, or investors in, mortgage loans, including savings and loan 
associations, mortgage banks, commercial banks, investment banks and 
special purpose entities of the foregoing. SMBSs are usually 
structured with two classes that receive different proportions of 
the interest and principal distributions on a pool of mortgage 
assets.
    \14\ According to the Registration Statement, parallel-pay CMOs 
and multi-class pass-through certificates are structured to provide 
payments of principal on each payment date to more than one class. 
PACs generally require payments of a specified amount of principal 
on each payment date. PACs are parallel-pay CMOs with the required 
principal amount on such securities having the highest priority 
after interest has been paid to all classes.
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    According to the Registration Statement, the Fund may enter into 
interest rate swaps. The Fund may utilize swap agreements in an attempt 
to gain exposure to the securities in a market without actually 
purchasing those securities, or to hedge a position. Swap agreements 
are two-party contracts entered into primarily by institutional 
investors for periods ranging from a day to more than one-year. In a 
standard ``swap'' transaction, two parties agree to exchange the 
returns (or differentials in rates of return) earned or realized on 
particular predetermined investments or instruments. The gross returns 
to be exchanged or ``swapped'' between the parties are calculated with 
respect to a ``notional amount,'' i.e., the return on or increase in 
value of a particular dollar amount invested in a ``basket'' of 
securities representing a particular index.
    According to the Registration Statement, the Fund's obligations 
under a swap agreement will be accrued daily (offset against any 
amounts owing to the Fund) and any accrued but unpaid net amounts owed 
to a swap counterparty will be covered by segregating assets determined 
to be liquid. The Fund will not enter into any swap agreement unless 
the Adviser believes that the other party to the transaction is 
creditworthy.\15\
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    \15\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced. The Adviser's Execution Committee will evaluate 
the creditworthiness of counterparties on an ongoing basis. In 
addition to information provided by credit agencies, the Adviser's 
analysts will evaluate each approved counterparty using various 
methods of analysis, including the counterparty's liquidity in the 
event of default, the broker-dealer's reputation, the Adviser's past 
experience with the broker-dealer, the Financial Industry Regulatory 
Authority's (``FINRA'') BrokerCheck and disciplinary history and its 
share of market participation.
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    According to the Registration Statement, the Fund may enter into 
swap agreements to invest in a market without owning or taking physical 
custody of the underlying securities in circumstances in which direct 
investment is restricted for legal reasons or is otherwise 
impracticable.
    According to the Registration Statement, the Fund intends to invest 
in U.S. Treasury securities and U.S. Treasury futures. U.S. Treasury 
securities are backed by the full faith and credit of the U.S. Treasury 
and differ only in their interest rates, maturities, and times of 
issuance. The Fund may invest in U.S. Treasury zero-coupon bonds. These 
securities are U.S. Treasury bonds which have been stripped of their 
unmatured interest coupons, the coupons themselves, and receipts or 
certificates representing interests in such stripped debt obligations 
and coupons. Interest is not paid in cash during the term of these 
securities, but is accrued and paid at maturity.

[[Page 44881]]

Other Investments
    While the Fund's principal investments, under normal 
circumstances,\16\ will be as described above, the Fund may invest the 
balance of its assets in the investments described below.
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    \16\ See note 8, supra. According to the Registration Statement, 
in the absence of normal circumstances the Fund may invest 100% of 
its total assets, without limitation, in debt securities and money 
market instruments, either directly or through exchange traded funds 
(``ETFs''). Debt securities and money market instruments include 
shares of other mutual funds, commercial paper, U.S. government 
securities, repurchase agreements and bonds that are rated BBB or 
higher. The Fund may be invested in this manner for extended 
periods, depending on the Sub-Adviser's assessment of market 
conditions. While the Fund is in a defensive position, the 
opportunity to achieve its investment objectives will be limited. 
Furthermore, to the extent that the Fund invests in money market 
mutual funds the Fund would bear its pro rata portion of each such 
money market fund's advisory fees and operational expenses.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may invest in 
other mortgage-related securities in addition to the agency interest-
only CMOs described above. Such mortgage-related securities are 
securities that directly or indirectly represent a participation in, or 
are secured by and payable from, mortgage loans on real property. More 
specifically, the Fund may hold MBS, mortgage dollar rolls,\17\ CMO 
residuals,\18\ and equity or debt securities issued by agencies or 
instrumentalities of the U.S. government or by private originators of, 
or investors in, mortgage loans, including savings and loan 
associations homebuilders, mortgage banks, commercial banks, investment 
banks, partnerships, trusts, and special purpose entities of the 
foregoing. In addition to the agency interest-only CMOs described 
above, the MBS that the Fund will invest in are other agency CMOs, non-
agency CMOs (including non-agency SMBS) and Adjustable Rate Mortgage 
Backed Securities (``ARMBS'').
---------------------------------------------------------------------------

    \17\ Dollar rolls are a type of repurchase transaction in the 
mortgage pass-through securities market in which the buy side trade 
counterparty of a ``to be announced'' (``TBA'') trade agrees to sell 
off the same TBA trade in the current month and to buy back the same 
trade in a future month at a lower price, constituting a forward 
contract.
    \18\ According to the Registration Statement, CMO residuals are 
mortgage securities issued by agencies or instrumentalities of the 
U.S. government or by private originators of, or investors in, 
mortgage loans. The cash flow generated by the mortgage assets 
underlying a series of CMOs is applied first to make required 
payments of principal and interest on the CMOs and second to pay the 
related administrative expenses and any management fee of the 
issuer. The residual in a CMO structure generally represents the 
interest in any excess cash flow remaining after making the 
foregoing payments. Transactions in CMO residuals will generally be 
completed only after careful review of the characteristics of the 
securities in question.
---------------------------------------------------------------------------

    According to the Registration Statement, such mortgage-related 
securities include privately issued mortgage-related securities, where 
issuers create pass-through pools of conventional residential mortgage 
loans.\19\ Timely payment of interest and principal of these pools may 
be supported by various forms of insurance or guarantees, including 
individual loan, title, pool and hazard insurance and letters of 
credit, which may be issued by governmental entities or private 
insurers. The Fund may buy mortgage-related securities without 
insurance or guarantees if, through an examination of the loan 
experience and practices of the originators/servicers and poolers, the 
Sub-Adviser determines that the securities meet the Trust's investment 
quality standards. Privately issued mortgage-related securities are not 
traded on an exchange. The Fund may purchase privately issued mortgage-
related securities that are originated, packaged and serviced by third 
party entities.
---------------------------------------------------------------------------

    \19\ According to the Registration Statement, in determining 
whether and how much to invest in privately issued mortgage-related 
securities, and how to allocate those assets, the Sub-Adviser will 
consider a number of factors. These include, but are not limited to: 
(1) The nature of the borrowers (e.g., residential vs. commercial); 
(2) the collateral loan type (e.g., for residential: First Lien--
Jumbo/Prime, First Lien--Alt-A, First Lien--Subprime, First Lien--
Pay-Option or Second Lien; for commercial: Conduit, Large Loan or 
Single Asset/Single Borrower); and (3) in the case of residential 
loans, whether they are fixed rate or adjustable mortgages.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may invest in 
asset-backed securities (``ABSs''), which are bonds backed by pools of 
loans or other receivables. ABSs are created from many types of assets, 
including auto loans, credit card receivables, home equity loans, and 
student loans. ABSs are issued through special purpose vehicles that 
are bankruptcy remote from the issuer of the collateral. According to 
the Registration Statement, the Fund may invest in each of 
collateralized bond obligations (``CBOs''), collateralized loan 
obligations (``CLOs''), other collateralized debt obligations 
(``CDOs'') and other similarly structured securities. CBOs, CLOs and 
other CDOs are types of ABS. A CBO is a trust which is often backed by 
a diversified pool of high risk, below investment grade fixed income 
securities. The collateral can be from many different types of fixed 
income securities such as high yield debt, residential privately issued 
mortgage-related securities, commercial privately issued mortgage-
related securities, trust preferred securities and emerging market 
debt. A CLO is a trust typically collateralized by a pool of loans, 
which may include, among others, domestic and foreign senior secured 
loans, senior unsecured loans, and subordinate corporate loans, 
including loans that may be rated below investment grade or equivalent 
unrated loans. Other CDOs are trusts backed by other types of assets 
representing obligations of various parties. Normally, CBOs, CLOs and 
other CDOs are privately offered and sold, and thus, are not registered 
under the securities laws.
    According to the Adviser, the Fund will limit investments in ABS 
and MBS that are issued or guaranteed by non-government entities to 15% 
of the Fund's net assets.
    According to the Registration Statement, in addition to interest-
only swaps and interest rate swaps, which are primary investments, the 
Fund may enter into other types of swap agreements. The swap agreements 
will have MBS as reference assets, including CMOs.
    According to the Registration Statement, the Fund may invest 
directly and indirectly in foreign currencies. The Fund may conduct 
foreign currency transactions on a spot (i.e., cash) or forward basis 
(i.e., by entering into forward contracts to purchase or sell foreign 
currencies). Forward contracts are generally traded in an interbank 
market directly between currency traders (usually large commercial 
banks) and their customers. At the discretion of the Adviser, the Fund 
may, but is not obligated to, enter into forward currency exchange 
contracts for hedging purposes to help reduce the risks and volatility 
caused by changes in foreign currency exchange rates, or to gain 
exposure to certain currencies in an effort to achieve the Fund's 
investment objective.
    According to the Registration Statement, the Fund may invest in 
equity securities. The Fund may invest in common stock, preferred 
stock, warrants, convertible securities, master limited partnerships 
(``MLPs'') and rights. Convertible securities are bonds, debentures, 
notes, preferred stocks or other securities that may be converted or 
exchanged (by the holder or by the issuer) into shares of the 
underlying common stock (or cash or securities of equivalent value) at 
a stated exchange ratio. A convertible security may also be called for 
redemption or conversion by the issuer after a particular date and 
under certain circumstances (including a specified price) established 
upon issue. MLPs are limited partnerships in which the ownership units 
are publicly traded.
    According to the Registration Statement, the Fund may invest in 
shares of exchange traded real estate investment trusts (``REITs''). 
REITs are

[[Page 44882]]

pooled investment vehicles which invest primarily in real estate or 
real estate related loans. REITs are generally classified as equity 
REITs, mortgage REITs or a combination of equity and mortgage REITs.
    According to the Registration Statement, the Fund may invest in 
exchange-traded notes (``ETNs'').\20\ It is expected that the ETN 
issuer's credit rating will be investment grade at the time of 
investment.
---------------------------------------------------------------------------

    \20\ ETNs are securities listed and traded on the Exchange under 
NYSE Arca Equities Rule 5.2(j)(6) (``Index-Linked Securities''). 
ETNs are senior, unsecured unsubordinated debt securities issued by 
an underwriting bank that are designed to provide returns that are 
linked to a particular benchmark less investor fees. ETNs have a 
maturity date and, generally, are backed only by the 
creditworthiness of the issuer.
---------------------------------------------------------------------------

    According to the Registration Statement, in addition to the U.S. 
Treasury debt securities described above, the Fund intends to invest in 
other fixed income securities. The fixed income securities the Fund may 
invest in are variable and floating rate instruments; bank obligations, 
including certificates of deposit, bankers' acceptances, and fixed time 
deposits; commercial paper; U.S. government securities other than U.S. 
Treasuries; \21\ municipal securities; repurchase agreements; reverse 
repurchase agreements; corporate debt securities; convertible 
securities; and MBS. Some debt securities, such as zero coupon bonds, 
do not make regular interest payments but are issued at a discount to 
their principal or maturity value. Except as discussed herein, the Fund 
may invest in investment-grade debt securities, non-investment-grade 
debt securities, and unrated debt securities.\22\ The Fund may invest 
assets in obligations of foreign banks which meet the conditions set 
forth herein.
---------------------------------------------------------------------------

    \21\ According to the Registration Statement, some obligations 
issued or guaranteed by U.S. government agencies and 
instrumentalities, including, for example, Ginnie Mae pass-through 
certificates, are supported by the full faith and credit of the U.S. 
Treasury. Other obligations issued by or guaranteed by federal 
agencies, such as those securities issued by Fannie Mae, are 
supported by the discretionary authority of the U.S. government to 
purchase certain obligations of the federal agency, while other 
obligations issued by or guaranteed by federal agencies, such as 
those of the Federal Home Loan Banks, are supported by the right of 
the issuer to borrow from the U.S. Treasury.
    \22\ According to the Registration Statement, non-investment-
grade securities, also referred to as ``high yield securities'' or 
``junk bonds,'' are debt securities that are rated lower than the 
four highest rating categories by a nationally recognized 
statistical rating organization (for example, lower than Baa3 by 
Moody's Investors Service, Inc. (``Moody's'') or lower than BBB- by 
Standard and Poor's Ratings Services (``S&P'')) or are determined to 
be of comparable quality by the Fund's Sub-Adviser. The 
creditworthiness of the issuer, as well as any financial institution 
or other party responsible for payments on the security, will be 
analyzed by the Sub-Adviser to determine whether to purchase unrated 
bonds.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may seek to 
invest in corporate debt securities representative of one or more high 
yield bond or credit derivative indices, which may change from time to 
time. Selection will generally be dependent on independent credit 
analysis or fundamental analysis performed by the Sub-Adviser.
    According to the Registration Statement, the Fund may enter into 
repurchase agreements with financial institutions, which may be deemed 
to be loans. The Fund will effect repurchase transactions only with 
large, well-capitalized and well-established financial institutions 
whose condition will be continually monitored by the Sub-Adviser.
    According to the Registration Statement, the Fund may enter into 
reverse repurchase agreements. Reverse repurchase agreements involve 
sales by the Fund of portfolio assets concurrently with an agreement by 
the Fund to repurchase the same assets at a later date at a fixed 
price.
    According to the Registration Statement, the Fund will only invest 
in commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by 
Moody's.
    According to the Registration Statement, the Fund may invest in 
inflation-indexed bonds, which are fixed income securities whose 
principal value is periodically adjusted according to the rate of 
inflation.
    According to the Registration Statement, the Fund may invest in 
securities that are indirectly linked to the performance of foreign 
issuers, specifically: American Depositary Receipts (``ADRs''), Global 
Depositary Receipts (``GDRs''), European Depositary Receipts 
(``EDRs''), International Depository Receipts (``IDRs''), ``ordinary 
shares,'' ``New York shares'' issued and traded in the U.S.\23\ and 
exchange traded products (``ETPs'').
---------------------------------------------------------------------------

    \23\ ADRs are U.S. dollar denominated receipts typically issued 
by U.S. banks and trust companies that evidence ownership of 
underlying securities issued by a foreign issuer. The underlying 
securities may not necessarily be denominated in the same currency 
as the securities into which they may be converted. Generally, ADRs 
are designed for use in domestic securities markets and are traded 
on exchanges or OTC in the U.S. GDRs, EDRs, and IDRs are similar to 
ADRs in that they are certificates evidencing ownership of shares of 
a foreign issuer; however, GDRs, EDRs, and IDRs may be issued in 
bearer form and denominated in other currencies, and are generally 
designed for use in specific or multiple securities markets outside 
the U.S. EDRs, for example, are designed for use in European 
securities markets while GDRs are designed for use throughout the 
world. Ordinary shares are shares of foreign issuers that are traded 
abroad and on a U.S. exchange. New York shares are shares that a 
foreign issuer has allocated for trading in the U.S. ADRs, ordinary 
shares, and New York shares all may be purchased with and sold for 
U.S. dollars. With the exception of ADRs traded OTC, which will 
comprise no more than 10% of the Fund's net assets, all equity 
securities, including, without limitation, exchange-traded ADRs, 
GDRs, EDRs, IDRs, New York shares and ordinary shares, that the Fund 
may invest in will trade on markets that are members of the ISG or 
that have entered into a comprehensive surveillance agreement with 
the Exchange.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may invest in the 
securities of other investment companies to the extent that such an 
investment would be consistent with the requirements of Section 
12(d)(1) of the 1940 Act, or any rule, regulation or order of the SEC 
or interpretation thereof. Consistent with such restrictions, the Fund 
may invest in several different types of investment companies from time 
to time, including mutual funds, ETFs, closed-end funds, and business 
development companies (``BDCs''), when the Adviser or the Sub-Adviser 
believes such an investment is in the best interests of the Fund and 
its shareholders. Closed-end funds are pooled investment vehicles that 
are registered under the 1940 Act and whose shares are listed and 
traded on U.S. national securities exchanges. A BDC is a less common 
type of closed-end investment company that more closely resembles an 
operating company than a typical investment company. Investment 
companies may include index-based investments, such as ETFs that hold 
substantially all of their assets in securities representing a specific 
index.
    According to the Registration Statement, in addition to the U.S. 
Treasury Futures, Agency MBS IOS and interest rate swaps discussed 
above, the Fund intends to invest in other derivatives. The derivatives 
in which the Fund may invest are other futures contracts, forward 
contracts,\24\ options, options on futures, other swaps, hybrid 
instruments and structured notes. The Fund typically will use 
derivatives as a substitute for taking a position directly in the 
underlying asset and/or as part of a strategy designed to reduce 
exposure to other risks, such as currency risk. Not more than 10% of 
the net assets of the Fund in the aggregate shall consist of options 
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.
---------------------------------------------------------------------------

    \24\ Specifically, in addition to the forward currency exchange 
contracts discussed above, the Fund may invest in mortgage dollar 
rolls, which constitute forward contracts.

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[[Page 44883]]

    According to the Registration Statement, the Fund will only enter 
into futures contracts that are traded on a national futures exchange 
regulated by the Commodities Futures Trading Commission (``CFTC'') and 
whose principal market is a member of ISG or is a market with which the 
Exchange has a comprehensive surveillance sharing agreement.\25\ The 
Fund will only use futures contracts that have U.S. Treasury securities 
and interest rate swaps as their underlying reference assets. The Fund 
may use futures contracts and options on futures for bona fide hedging; 
attempting to offset changes in the value of securities held or 
expected to be acquired or be disposed of; attempting to gain exposure 
to a particular market, index or instrument; or other risk management 
purposes. An option on a futures contract gives the purchaser the 
right, in exchange for a premium, to assume a position in a futures 
contract at a specified exercise price during the term of the option.
---------------------------------------------------------------------------

    \25\ To the extent the Fund invests in futures, options on 
futures or other instruments subject to regulation by the CFTC, it 
will do so in reliance on and in compliance with CFTC regulations in 
effect from time to time and in accordance with the Fund's policies. 
The Trust, on behalf of certain of its series, has filed a notice of 
eligibility for exclusion from the definition of the term 
``commodity pool operator'' in accordance with CFTC Regulation 4.5. 
Therefore, neither the Trust nor the Fund is deemed to be a 
``commodity pool'' or ``commodity pool operator'' with respect to 
the Fund under the Commodity Exchange Act (``CEA''), and they are 
not subject to registration or regulation as such under the CEA. In 
addition, as of the date of this filing, the Adviser is not deemed 
to be a ``commodity pool operator'' or ``commodity trading adviser'' 
with respect to the advisory services it provides to the Fund. The 
CFTC recently adopted amendments to CFTC Regulation 4.5 and has 
proposed additional regulatory requirements that may affect the 
extent to which the Fund invests in instruments that are subject to 
regulation by the CFTC and impose additional regulatory obligations 
on the Fund and the Adviser. The Fund reserves the right to engage 
in transactions involving futures, options thereon and swaps to the 
extent allowed by CFTC regulations in effect from time to time and 
in accordance with the Fund's policies.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may write (sell) 
and purchase put and call options on indices and enter into related 
closing transactions. According to the Registration Statement, the Fund 
may trade put and call options on securities, securities indices and 
currencies, as the Sub-Adviser determines is appropriate in seeking the 
Fund's investment objective, and except as restricted by the Fund's 
investment limitations. The Fund may purchase put and call options on 
securities to protect against a decline in the market value of the 
securities in its portfolio or to anticipate an increase in the market 
value of securities that the Fund may seek to purchase in the future. 
The Fund may write covered call options on securities as a means of 
increasing the yield on its assets and as a means of providing limited 
protection against decreases in its market value. The Fund may purchase 
and write options on an exchange or OTC.
    According to the Registration Statement, the Fund may invest in 
hybrid instruments. A hybrid instrument is a type of potentially high-
risk derivative that combines a traditional stock, bond, or commodity 
with an option or forward contract. Generally, the principal amount, 
amount payable upon maturity or redemption, or interest rate of a 
hybrid is tied (positively or negatively) to the price of some 
security, commodity, currency or securities index or another interest 
rate or some other economic factor (each a ``benchmark''). The interest 
rate or (unlike most fixed income securities) the principal amount 
payable at maturity of a hybrid security may be increased or decreased, 
depending on changes in the value of the benchmark.
    According to the Registration Statement, certain hybrid instruments 
may provide exposure to the commodities markets. These are derivative 
securities with one or more commodity-linked components that have 
payment features similar to commodity futures contracts, commodity 
options, or similar instruments. Commodity-linked hybrid instruments 
may be either equity or debt securities, and are considered hybrid 
instruments because they have both security and commodity-like 
characteristics. A portion of the value of these instruments may be 
derived from the value of a commodity, futures contract, index or other 
economic variable. The Fund will only invest in commodity-linked hybrid 
instruments that qualify, under applicable rules of the CFTC, for an 
exemption from the provisions of the CEA.
    According to the Registration Statement, the Fund may invest in 
structured notes, which are debt obligations that also contain an 
embedded derivative component with characteristics that adjust the 
obligation's risk/return profile. Generally, the performance of a 
structured note will track that of the underlying debt obligation and 
the derivative embedded within it. The Fund have the right to receive 
periodic interest payments from the issuer of the structured notes at 
an agreed-upon interest rate and a return of the principal at the 
maturity date.
    According to the Registration Statement, the Fund, from time to 
time, in the ordinary course of business, may purchase securities on a 
when-issued, delayed-delivery or forward commitment basis (i.e., 
delivery and payment can take place between a month and 120 days after 
the date of the transaction). The Fund will not purchase securities on 
a when-issued, delayed-delivery or forward commitment basis if, as a 
result, more than 15% of the Fund's net assets would be so invested.
Investment Restrictions
    According to the Registration Statement, the Fund may not purchase 
or sell commodities or commodity contracts unless acquired as a result 
of ownership of securities or other instruments issued by persons that 
purchase or sell commodities or commodities contracts; but this shall 
not prevent the Fund from purchasing, selling and entering into futures 
contracts, options on financial futures contracts, warrants, swaps, 
forward contracts, foreign currency spot and forward contracts or other 
derivative instruments that are not related to physical commodities. 
The Fund will only use futures contracts that have U.S. Treasury 
securities and interest rate swaps as their underlying assets.
    According to the Registration Statement, the Fund may not, with 
respect to 75% of its total assets, purchase securities of any issuer 
(except securities issued or guaranteed by the U.S. government, its 
agencies or instrumentalities or shares of investment companies) if, as 
a result, more than 5% of its total assets would be invested in the 
securities of such issuer; or acquire more than 10% of the outstanding 
voting securities of any one issuer.\26\
---------------------------------------------------------------------------

    \26\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act. According to the Registration Statement, in 
the case of privately issued mortgage-related securities, the Fund 
takes the position that mortgage-related securities do not represent 
interests in any particular ``industry'' or group of industries. 
Therefore, the Fund may invest more or less than 25% of its total 
assets in privately issued mortgage-related securities.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may not invest 
25% or more of its total assets in the securities of one or more 
issuers conducting their principal business activities in the same 
industry or group of industries. This limitation does not apply to 
investments in securities issued or guaranteed by the U.S. government, 
its agencies or instrumentalities, or shares of investment companies. 
The Fund will

[[Page 44884]]

not invest 25% or more of its total assets in any investment company 
that so concentrates.\27\
---------------------------------------------------------------------------

    \27\ 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).
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund may hold up to an 
aggregate amount of 15% of its net assets in illiquid assets 
(calculated at the time of investment), including securities deemed 
illiquid by the Adviser consistent with Commission guidance. The Fund 
will monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.\28\
---------------------------------------------------------------------------

    \28\ 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.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund will seek to 
qualify for treatment as a Regulated Investment Company under the 
Internal Revenue Code.\29\
---------------------------------------------------------------------------

    \29\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
    According to the Registration Statement, while the Fund does not 
anticipate doing so, the Fund may borrow money for investment purposes. 
The Fund may also borrow money to facilitate management of the Fund's 
portfolio by enabling the Fund to meet redemption requests when the 
liquidation of portfolio instruments would be inconvenient or 
disadvantageous. Such borrowing is not for investment purposes, will be 
repaid by the Fund promptly and will be consistent with the 
requirements of the 1940 Act and the rules thereunder.
    According to the Registration Statement, the Fund may lend 
portfolio securities to brokers, dealers and other financial 
organizations that meet capital and other credit requirements or other 
criteria established by the Fund's Board of Trustees. These loans, if 
and when made, may not exceed 33\1/3\% of the total asset value of the 
Fund (including the loan collateral). The Fund will not lend portfolio 
securities to the Adviser, Sub-Adviser, or their affiliates, unless it 
has applied for and received specific authority to do so from the 
Commission. Loans of portfolio securities will be fully collateralized 
by cash, letters of credit or U.S. government securities, and the 
collateral will be maintained in an amount equal to at least 100% of 
the current market value of the loaned securities by marking to market 
daily.
Net Asset Value
    According to the Registration Statement, the Fund will calculate 
its NAV by: (i) Taking the current market value of its total assets; 
(ii) subtracting any liabilities; and (iii) dividing that amount by the 
total number of Shares owned by shareholders. The Fund will calculate 
NAV once each business day as of the regularly scheduled close of 
trading on the Exchange (normally, 4:00 p.m., Eastern Time).
    In calculating NAV, the Fund's securities holdings will be valued 
based on their last readily available market price.
    Futures contracts, exchange-traded options, and options on futures, 
will be valued at the closing settlement price determined by the 
applicable exchange. Other exchange-traded securities, including equity 
securities (including ETPs such as exchange-traded ADRs, GDRs, EDRs, 
IDRs, ordinary shares, New York shares, ETNs, and ETFs), and exchange-
traded REITs, will be valued at market value, which will generally be 
determined using the last reported official closing or last trading 
price on the exchange or market on which the security is primarily 
traded at the time of valuation or, if no sale has occurred, at the 
last quoted bid price on the primary market or exchange on which they 
are traded. If market prices are unavailable or the Fund believes that 
they are unreliable, or when the value of a security has been 
materially affected by events occurring after the relevant market 
closes, the Fund will price those securities at fair value as 
determined in good faith using methods approved by the Trust's Board of 
Trustees.
    ADRs traded OTC will be valued on the basis of the market closing 
price on the exchange where the stock of the foreign issuer that 
underlies the ADR is listed. Investment company securities (other than 
ETFs), including mutual funds, closed end funds, and BDCs, will be 
valued at net asset value.
    Non-exchange-traded derivatives, including forward contracts, 
swaps, options traded OTC, options on futures traded OTC, hybrid 
instruments and structured notes, will normally 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. Prices obtained from independent pricing services use 
information provided by market makers or estimates of market values 
obtained from yield data relating to investments or securities with 
similar characteristics.
    Fixed income securities, including CMOs (including agency interest-
only CMOs), CMO residuals, mortgage dollar rolls, U.S. Treasury 
securities, other obligations issued or guaranteed by U.S. government 
agencies and instrumentalities, bonds, bank obligations, ABS, MBS, 
shares of other mutual funds, commercial paper, repurchase agreements, 
reverse repurchase agreements, corporate debt securities, municipal 
securities, convertible securities, certificates of deposits and 
bankers' acceptances generally trade in the OTC market rather than on a 
securities exchange. The Fund will generally value these portfolio 
assets by relying on independent pricing services. The Fund's pricing 
services will use valuation models or matrix pricing to determine 
current value. In general, pricing services use information with 
respect to comparable bond and note transactions, quotations from bond 
dealers or by reference to other assets that are considered comparable 
in such characteristics as rating, interest rate, maturity date, option 
adjusted spread models, prepayment projections, interest rate spreads 
and yield curves. Matrix price is an estimated price or value for a 
fixed-income security. Matrix pricing is considered a form of fair 
value pricing. The Fund's debt securities will generally be valued at 
bid prices. In certain cases, some of the Fund's debt securities may be 
valued at the mean between the last available bid and ask prices.
    Foreign exchange rates will be priced using 4:00 p.m. (Eastern 
Time) mean prices from major market data vendors.

[[Page 44885]]

Creation and Redemption of Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares on a continuous basis at NAV in aggregated lots which 
shall initially be of 25,000 Shares (each, a ``Creation Unit'').
    All orders to create or redeem Creation Units must be received by 
the Distributor no later than 3:00 p.m., Eastern Time in order for the 
creation or redemption of Creation Units to be effected based on the 
NAV of Shares of the Fund as next determined on such date.
    The Trust reserves the right to offer an ``all cash'' option for 
creations and redemptions of Creation Units for the Fund.\30\
---------------------------------------------------------------------------

    \30\ The Adviser represents that, to the extent the Trust 
effects the creation of Shares in cash, such transactions will be 
effected in the same manner for all authorized participants.
---------------------------------------------------------------------------

    The consideration for purchase of a Creation Unit of each Fund 
generally will consist of an in-kind deposit of a designated portfolio 
of securities--the ``Deposit Securities''--per each Creation Unit 
constituting a substantial replication, or a representation, of the 
securities included in the Fund's portfolio and an amount of cash--the 
``Cash Component.'' Together, the Deposit Securities and the Cash 
Component will constitute the ``Fund Deposit,'' which represents the 
minimum initial and subsequent investment amount for a Creation Unit of 
the Fund. The Cash Component is an amount equal to the difference 
between the NAV of the Shares of the Fund (per Creation Unit) and the 
market value of the Deposit Securities.
    In addition, the Trust reserves the right to permit or require the 
substitution of an amount of cash--i.e., a ``cash in lieu'' amount--to 
be added to the Cash Component to replace any Deposit Security which 
may not be available in sufficient quantity for delivery or which may 
not be eligible for transfer through the clearing process, or which may 
not be eligible for trading by an authorized participant or the 
investor for which it is acting.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form by the 
Fund through the Administrator and only on a business day. The Trust 
will not redeem Shares of the Fund in amounts less than Creation Units. 
Unless cash redemptions are available or specified, the redemption 
proceeds for a Creation Unit generally will consist of ``the Fund 
Securities''--as announced by the Administrator on the business day of 
the request for redemption received in proper form--plus cash in an 
amount equal to the difference between the NAV of the Shares being 
redeemed, as next determined after a receipt of a request in proper 
form, and the value of the Fund Securities, less a redemption 
transaction fee. The Administrator, through the National Securities 
Clearing Corporation (``NSCC''), will make available immediately prior 
to the opening of business on the Exchange (currently 9:30 a.m., 
Eastern Time) on each business day, the Fund Securities that will be 
applicable to redemption requests received in proper form on that day 
as well as the estimated Cash Component.
    According to the Registration Statement, if it is not possible to 
effect deliveries of the Fund Securities, for example if the investor 
is not able to accept delivery, the Trust may in its discretion 
exercise its option to redeem Shares of the Fund in cash, and the 
redeeming beneficial owner will be required to receive its redemption 
proceeds in cash. In addition, an investor may request a redemption in 
cash which the Fund may, in its sole discretion, permit.\31\ In either 
case, the investor will receive a cash payment equal to the NAV of its 
Shares based on the NAV of Shares of the Fund next determined after the 
redemption request is received in proper form (minus a redemption 
transaction fee and additional charge for requested cash redemptions, 
as described in the Registration Statement). The Fund may also, in its 
sole discretion, upon request of a shareholder, provide such redeemer a 
portfolio of securities which differs from the exact composition of the 
applicable Fund Securities but does not differ in NAV.
---------------------------------------------------------------------------

    \31\ The Adviser represents that, to the extent the Trust 
effects the redemption of Shares in cash, such transactions will be 
effected in the same manner for all authorized participants.
---------------------------------------------------------------------------

    Redemptions of Shares for Fund Securities will be subject to 
compliance with applicable federal and state securities laws and the 
Fund (whether or not it otherwise permits cash redemptions) reserves 
the right to redeem Creation Units for cash to the extent that the Fund 
could not lawfully deliver specific Fund Securities upon redemptions or 
could not do so without first registering the Fund Securities under 
such laws. An authorized participant or an investor for which it is 
acting subject to a legal restriction with respect to a particular 
stock included in the Fund Securities applicable to the redemption of a 
Creation Unit may be paid an equivalent amount of cash.
Availability of Information
    The Fund's Web site (www.advisorshares.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Fund's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) 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''),\32\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Core Trading Session on the Exchange, the 
Fund's Web site will disclose the Disclosed Portfolio that will form 
the basis for the Fund's calculation of NAV at the end of the business 
day.\33\
---------------------------------------------------------------------------

    \32\ The Bid/Ask Price of the Fund is determined using the mid-
point of the highest bid and the lowest offer on the Exchange as of 
the time of calculation of the Fund's NAV. The records relating to 
Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \33\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Adviser, on behalf of the Fund, will disclose 
on the Fund's Web site the following information regarding each 
portfolio holding of the Fund, as applicable to the type of holding: 
Ticker symbol, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding, such as the type of 
swap); the identity of the security, commodity, index, or other asset 
or instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity date, 
if any; coupon rate, if any; effective date, if any; market value of 
the holding; and the percentage weighting of the holding in the Fund's 
portfolio. The Web site information will be publicly available at no 
charge.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports will be

[[Page 44886]]

available free upon request from the Trust, and those documents and the 
Form N-CSR and Form N-SAR may be viewed on-screen or downloaded from 
the Commission's Web site at www.sec.gov. Information regarding market 
price and trading volume of the Shares will be continually available on 
a real-time basis throughout the day on brokers' computer screens and 
other electronic services. Information regarding the previous day's 
closing price and trading volume information for the Shares will be 
published daily in the financial section of newspapers.
    Quotation and last sale information for the Shares and the 
underlying U.S. exchange-traded equity securities will be available via 
the Consolidated Tape Association (``CTA'') high-speed line, and from 
the national securities exchange on which they are listed. Quotation 
and last sale information for exchange-listed options will be available 
via the Options Price Reporting Authority. Price information regarding 
the futures contracts, exchange-traded options, options on futures, 
equity securities (including ETPs such as exchange-listed ADRs, GDRs, 
EDRs, IDRs, ordinary shares and New York shares as well as ETNs, and 
ETFs), and exchange-traded REITs, held by the Fund will be available 
from the U.S. and non-U.S. exchanges trading such assets.
    Quotation information from brokers and dealers or pricing services 
will be available for ADRs traded OTC; investment company securities 
other than ETFs; non-exchange-traded derivatives, including forward 
contracts, IOS and other swaps, options traded OTC, options on futures, 
hybrid instruments and structured notes; fixed income securities, 
including CMOs (including agency interest-only CMOs), CMO residuals, 
mortgage dollar rolls, U.S. Treasury securities, other obligations 
issued or guaranteed by U.S. government agencies and instrumentalities, 
bonds, bank obligations, ABS, MBS, shares of other mutual funds, 
commercial paper, repurchase agreements, reverse repurchase agreements, 
corporate debt securities, municipal securities, convertible 
securities, certificates of deposit and bankers' acceptances. Pricing 
information regarding each asset class in which the Fund will invest is 
generally available through nationally recognized data service 
providers through subscription agreements. Foreign exchange prices are 
available from major market data vendors.
    In addition, the Portfolio Indicative Value, as defined in NYSE 
Arca Equities Rule 8.600(c)(3), will be widely disseminated at least 
every 15 seconds during the Core Trading Session by one or more major 
market data vendors.\34\ The dissemination of the Portfolio Indicative 
Value, together with the Disclosed Portfolio, will allow investors to 
determine the value of the underlying portfolio of the Fund on a daily 
basis and will provide a close estimate of that value throughout the 
trading day.
---------------------------------------------------------------------------

    \34\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Portfolio Indicative Values taken from CTA or other data feeds.
---------------------------------------------------------------------------

    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes is included in the Registration Statement. All terms relating 
to the Fund that are referred to, but not defined in, this proposed 
rule change are defined in the Registration Statement.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\35\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 have been reached. Trading also may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \35\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. Eastern Time in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Adviser will implement and 
maintain, or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the actual 
components of the Fund's portfolio. The Exchange represents that, for 
initial and/or continued listing, the Fund will be in compliance with 
Rule 10A-3 \36\ under the Exchange Act, as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding at 
the commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
as defined in NYSE Arca Equities Rule 8.600(c)(2) will be made 
available to all market participants at the same time.
---------------------------------------------------------------------------

    \36\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by FINRA on behalf 
of the Exchange, which are designed to detect violations of Exchange 
rules and applicable federal securities laws. 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 applicable federal securities 
laws.\37\
---------------------------------------------------------------------------

    \37\ 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.\38\
---------------------------------------------------------------------------

    \38\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.

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

[[Page 44887]]

    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-listed equity securities, 
futures contracts and exchange-listed options contracts with other 
markets and other entities that are members of the ISG and FINRA, on 
behalf of the Exchange, may obtain trading information regarding 
trading in the Shares, exchange-listed equity securities, futures 
contracts and exchange-listed options contracts from such markets and 
other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares, exchange-listed equity securities, 
futures contracts and exchange-listed options contracts from markets 
and other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement. As noted 
above, with the exception of ADRs traded OTC, which will comprise no 
more than 10% of the Fund's net assets, all equity securities, 
including, without limitation, exchange-traded ADRs, GDRs, EDRs, IDRs, 
New York shares and ordinary shares, that the Fund may invest in will 
trade on markets that are members of ISG or that have entered into a 
comprehensive surveillance agreement with the Exchange. In addition, 
FINRA, on behalf of the Exchange, is able to access, as needed, trade 
information for certain fixed income securities held by the Fund 
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE'').
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit 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 Equity Trading Permit 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 Portfolio Indicative Value will not be 
calculated or publicly disseminated; (4) how information regarding the 
Portfolio Indicative Value is disseminated; (5) the requirement that 
Equity Trading Permit Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Exchange Act. 
The Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m. Eastern Time each trading day.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \39\ 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.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. FINRA, on behalf of the Exchange, 
will communicate as needed regarding trading in the Shares, exchange-
listed equity securities, futures contracts and exchange-listed options 
contracts with other markets and other entities that are members of the 
ISG and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, exchange-listed equity 
securities, futures contracts and exchange-listed options contracts 
from such markets and other entities. In addition, the Exchange may 
obtain information regarding trading in the Shares, exchange-listed 
equity securities, futures contracts and exchange-listed options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. As noted above, with the exception of ADRs traded 
OTC, which will comprise no more than 10% of the Fund's net assets, all 
equity securities, including, without limitation, exchange-traded ADRs, 
GDRs, EDRs, IDRs, New York shares and ordinary shares, and Treasury 
futures that the Fund may invest in will trade on markets that are 
members of ISG or that have entered into a comprehensive surveillance 
agreement with the Exchange. In addition, FINRA, on behalf of the 
Exchange, is able to access, as needed, trade information for certain 
fixed income securities held by the Fund reported to TRACE. Not more 
than 10% of the net assets of the Fund in the aggregate shall consist 
of options 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 will limit investments in ABS and MBS that 
are issued or guaranteed by non-government entities to 15% of the 
Fund's net assets. The Fund may not purchase or hold illiquid assets 
if, in the aggregate, more than 15% of its net assets would be invested 
in illiquid securities. The Exchange 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. 
Neither the Adviser nor the Sub-Adviser is a broker-dealer or is 
affiliated with a broker-dealer. In the event (a) the Adviser becomes 
newly affiliated with a broker-dealer, (b) the Sub-Adviser becomes 
newly affiliated with a broker-dealer, or (c) any new adviser or sub-
adviser becomes affiliated with a broker-dealer, it will implement a 
fire wall with respect to such broker-dealer regarding access to 
information concerning the composition and/or changes to the portfolio, 
and will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding such 
portfolio. The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Quotation and last sale 
information for the Shares and the

[[Page 44888]]

underlying U.S. exchange-traded equity securities will be available via 
the CTA high-speed line, and from the national securities exchange on 
which they are listed. Quotation and last sale information for 
exchange-listed options will be available via the Options Price 
Reporting Authority. Price information regarding the futures contracts, 
exchange-traded options, options on futures, equity (including ETPs 
such as ADRs traded OTC, GDRs, EDRs, IDRs, ordinary shares and New York 
shares as well as ETNs, and ETFs), and exchange-traded REITs, held by 
the Fund will be available from the U.S. and non-U.S. exchanges trading 
such assets. Quotation information from brokers and dealers or pricing 
services will be available for ADRs traded OTC; investment company 
securities other than ETFs; non-exchange-traded derivatives, including 
forward contracts, IOS and other swaps, options traded OTC, options on 
futures, hybrid instruments and structured notes; fixed income 
securities, including CMOs (including agency interest-only CMOs), CMO 
residuals, mortgage dollar rolls, U.S. Treasury securities, other 
obligations issued or guaranteed by U.S. government agencies and 
instrumentalities, bonds, bank obligations, ABS, MBS, shares of other 
mutual funds, commercial paper, repurchase agreements, reverse 
repurchase agreements, corporate debt securities, municipal securities, 
convertible securities, certificates of deposit and bankers' 
acceptances. Pricing information regarding each asset class in which 
the Fund will invest is generally available through nationally 
recognized data service providers through subscription agreements. 
Foreign exchange prices are available from major market data vendors. 
In addition, the Portfolio Indicative Value will be widely disseminated 
by the Exchange at least every 15 seconds during the Core Trading 
Session. The Fund's Web site will include a form of the prospectus for 
the Fund that may be downloaded, as well as additional quantitative 
information updated on a daily basis. On each business day, before 
commencement of trading in Shares in the Core Trading Session on the 
Exchange, the Fund's Web site will disclose the Disclosed Portfolio 
that will form the basis for the Fund's calculation of NAV at the end 
of the business day. On a daily basis, the Adviser, on behalf of the 
Fund, will disclose on the Fund's Web site the following information 
regarding each portfolio holding of the Fund, as applicable to the type 
of holding: ticker symbol, CUSIP number or other identifier, if any; a 
description of the holding (including the type of holding, such as the 
type of swap); the identity of the security, commodity, index, or other 
asset or instrument underlying the holding, if any; for options, the 
option strike price; quantity held (as measured by, for example, par 
value, notional value or number of shares, contracts or units); 
maturity date, if any; coupon rate, if any; effective date, if any; 
market value of the holding; and the percentage weighting of the 
holding in the Fund's portfolio. Moreover, prior to the commencement of 
trading, the Exchange will inform its Equity Trading Permit Holders in 
an Information Bulletin of the special characteristics and risks 
associated with trading the Shares. Trading in Shares of the Fund will 
be halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached or because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. Trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted. In addition, as noted above, 
investors will have ready access to information regarding the Fund's 
holdings, the Portfolio Indicative Value, the Disclosed Portfolio, and 
quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the Portfolio Indicative Value, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Exchange Act. The Exchange notes 
that the proposed rule change will facilitate the listing and trading 
of an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace.

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-71 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-2014-71. 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 (http://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

[[Page 44889]]

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 Section, 100 F Street NE., 
Washington, DC 20549 on official business days between 10 a.m. and 3 
p.m. Copies of the filing will also be available for inspection and 
copying at the Exchange's principal office and on its Internet Web site 
at www.nyse.com. 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-2014-71 and should be submitted on or before August 22, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18114 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P