Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade Shares of Hull Tactical US ETF Under NYSE Arca Equities Rule 8.600, 73377-73382 [2014-28879]
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Federal Register / Vol. 79, No. 237 / Wednesday, December 10, 2014 / Notices
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73741; File No. SR–
NYSEArca–2014–30]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–EDGX–2014–27 on the subject
line.
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change, as Modified by
Amendment No. 1, To List and Trade
Shares of Hull Tactical US ETF Under
NYSE Arca Equities Rule 8.600
Paper Comments
I. Introduction
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
On March 24, 2014, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of Hull Tactical US ETF
(‘‘Fund’’) under NYSE Arca Equities
Rule 8.600. The proposed rule change
was published for comment in the
Federal Register on April 11, 2014.3 On
May 21, 2014, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On July 9, 2014,
the Commission instituted proceedings
to determine whether to approve or
disapprove the proposed rule change.6
The Commission received one comment
letter.7 On October 8, 2014, the
Commission designated a longer period
of time for Commission action on the
proposed rule change.8 On October 23,
2014, the Exchange filed Amendment
mstockstill on DSK4VPTVN1PROD with NOTICES
All submissions should refer to File No.
SR–EDGX–2014–27. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–EDGX–
2014–27 and should be submitted on or
before December 31, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–28909 Filed 12–9–14; 8:45 am]
BILLING CODE 8011–01–P
25 17
CFR 200.30–3(a)(12).
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December 4, 2014.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71894
(Apr. 7, 2014), 79 FR 20273 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 Securities Exchange Act Release No. 72214 (May
21, 2014), 79 FR 30672 (May 28, 2014). The
Commission determined that it was appropriate to
designate a longer period within which to take
action on the proposed rule change so that it would
have sufficient time to consider the proposed rule
change. Accordingly, the Commission designated
July 10, 2014 as the date by which it should
approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule
change.
6 Securities Exchange Act Release No. 72571 (July
9, 2014), 79 FR 41330 (July 15, 2014).
7 See Letter from Christopher S. Jones, Associate
Professor, University of Southern California to
Elizabeth M. Murphy, Secretary, Commission (Sept.
16, 2014) (‘‘Jones Letter’’).
8 See Securities Exchange Act Release No. 73320,
79 FR 61911 (Oct. 15, 2014) (designating December
5, 2014 as the date by which the Commission must
either approve or disapprove the proposed rule
change).
2 17
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73377
No. 1 to the proposal.9 This order grants
approval of the proposed rule change, as
modified by Amendment No. 1.
II. Description of Proposed Rule Change
The Exchange proposes to list and
trade Shares of the Fund pursuant to
NYSE Arca Equities Rule 8.600, which
governs the listing and trading of
Managed Fund Shares on the Exchange.
The Shares will be offered by the
Exchange Traded Concepts Trust
(‘‘Trust’’), a Delaware statutory trust.
The Trust is registered with the
Commission as an investment
company.10 Exchange Traded Concepts,
LLC will be the investment adviser
(‘‘Adviser’’) to the Fund. HTAA, LLC
will be the sub-adviser to the Fund
(‘‘Sub-Adviser’’).11 SEI Investments Co.
will serve as the administrator of the
Fund (‘‘Administrator’’). JP Morgan
Chase Bank N.A. will serve as the
custodian, transfer agent and dividend
disbursing agent of the Fund. SEI
Investments Distribution Co. will serve
as the distributor for the Trust.
The Exchange has made the following
representations and statements in
describing the Fund and its investment
9 In Amendment No. 1, the Exchange clarified
that the Sub-Adviser will utilize more than one
proprietary, analytical investment model to make
investment decisions for the Fund, that the SubAdviser’s determination whether to take certain
long or short positions in S&P 500-related ETFs and
S&P 500-related futures will depend on the
investment signals delivered by the models and on
the judgment of the Sub-Advisor, and that the SubAdviser may adjust the Fund’s long and short
positions when necessary to take into account new
market conditions as well as data from the models.
Because Amendment No. 1 provides clarification to
the proposed rule change and does not materially
affect the substance of the proposed rule change or
raise any unique or novel regulatory issues,
Amendment No. 1 does not require notice and
comment.
10 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). The Exchange
states that on July 26, 2013, the Trust filed with the
Commission a post-effective amendment to its
registration statement on Form N–1A relating to the
Fund (File Nos. 333–156529 and 811–22263)
(‘‘Registration Statement’’). In addition, the
Exchange states that the Commission has issued an
order granting certain exemptive relief to the Trust
under the 1940 Act. See Investment Company Act
Release No.30445 (Apr. 2, 2013) (File No. 812–
13969) (‘‘Exemptive Order’’).
11 The Exchange states that neither the Adviser
nor the Sub-Adviser is, or is affiliated with, a
broker-dealer. The Exchange states that, in the event
(a) the Adviser or Sub-Adviser becomes, or becomes
newly affiliated with, a broker-dealer, or (b) any
new manager, adviser or sub-adviser is, or becomes
affiliated with, a broker-dealer, the adviser or subadviser will implement a fire wall with respect to
its relevant personnel or broker-dealer affiliate, as
applicable, regarding access to information
concerning the composition of or changes to the
portfolio, and that adviser or sub-adviser will be
subject to procedures designed to prevent the use
and dissemination of material non-public
information regarding such portfolio.
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strategies, including portfolio holdings
and investment restrictions.12
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General
The investment objective of the Fund
will be to seek long-term capital
appreciation. The Fund will be actively
managed.
Under normal market conditions,13
the Fund will seek to achieve its
investment objective by taking long and
short positions 14 in one or more
exchange traded funds (‘‘ETFs’’) 15 that
seek to track the performance of the S&P
500 Index (each, an ‘‘S&P 500-related
ETF’’). The ETFs the Fund invests in all
will be listed and traded in the U.S. on
registered exchanges. Under normal
market conditions, substantially all of
the Fund’s assets will be invested in one
or more S&P 500-related ETFs; ETFs
that provide leveraged or inverse
exposure to the S&P 500 Index; and, to
seek the desired exposure to the S&P
500 Index, futures contracts. The Fund
may also, as described below, invest in
cash instruments.
The Sub-Adviser will utilize a
proprietary, analytical investment
model that examines current and
historical market data to attempt to
predict the performance of the S&P 500
Index. The model will deliver
investment signals that the Sub-Adviser
will use to make investment decisions
for the Fund. Depending on the
12 The Commission notes that additional
information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks, net
asset value (‘‘NAV’’) calculation, creation and
redemption procedures, fees, Fund holdings
disclosure policies, distributions, and taxes, among
other information, is included in the Notice and the
Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 3 and 10,
respectively.
13 The term ‘‘under normal market conditions’’
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; and 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.
14 Short sales are transactions in which the Fund
sells a security it does not own. To complete the
transaction, the Fund must borrow or otherwise
obtain the security to make delivery to the buyer.
The Fund is then obligated to replace the security
borrowed by purchasing the security at the market
price at the time of replacement. The Fund may use
repurchase agreements to satisfy delivery
obligations in short sales transactions. The Fund
may use up to 100% of its net assets to engage in
short sales transactions and collateralize its open
short positions.
15 ETFs are securities registered under the 1940
Act such as those listed and traded on the Exchange
under NYSE Arca Equities Rules 5.2(j)(3)
(Investment Company Units), 8.100 (Portfolio
Depositary Receipts) and 8.600 (Managed Fund
Shares).
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investment signal delivered by the
model, the Sub-Adviser will take certain
long or short positions in one or more
S&P 500-related ETFs: (1) If the model
indicates bull-market conditions, the
Sub-Adviser will take long positions; or
(2) if the model indicates bear-market
conditions, the Sub-Adviser will take
short positions. When the Fund takes
long positions, it may maintain long
exposure of up to 200% of net assets;
exposure to short positions will be
limited to no more than 100% of net
assets. The Sub-Adviser will adjust the
Fund’s long and short positions when
necessary to take into account new data
from the model that reflects changing
market conditions. Positions may be
adjusted as the model predictions
fluctuate.
The Fund will enter into futures
contracts to seek the desired exposure to
the S&P 500 Index.16 The Fund will
limit its investment in futures contracts
such that either (1) the aggregate net
notional value of its futures investments
will not exceed the value of the Fund’s
net assets, after taking into account
unrealized profits and unrealized losses
on the futures positions it has entered
into; or (2) the aggregate initial margin
and premiums required to establish
positions in its futures investments will
not exceed 5% of the Fund’s net assets,
after taking into account unrealized
profits and unrealized losses on any
such positions. The Fund will only
enter into futures contracts traded on a
national futures exchange regulated by
the CFTC. The Fund will trade futures
when the Sub-Adviser determines that
doing so may provide an efficient means
of seeking exposure to the S&P 500
Index that is complimentary to its
investment in shares of one or more S&P
500-related ETFs.
In addition to investments in the S&P
500-related ETFs and futures contracts,
the Fund may invest up to 10% of its
total assets in leveraged ETFs or inverse
ETFs that seek to deliver multiples, or
the inverse, of the performance of the
16 To the extent the Fund enters into futures
contracts or invests in underlying ETFs that invest
in futures, options on futures or other instruments
subject to regulation by the U.S. Commodity
Futures Trading Commission (‘‘CFTC’’), it will do
so in reliance upon and in accordance with CFTC
Rule 4.5. The Exchange states that the Trust has
filed a notice of eligibility for exclusion from the
definition of the term ‘‘commodity pool operator’’
in accordance with CFTC Rule 4.5. Therefore,
neither the Trust nor any of its series is deemed to
be a ‘‘commodity pool’’ or ‘‘commodity pool
operator’’ under the Commodity Exchange Act
(‘‘CEA’’), and they are not subject to registration or
regulation as such under the CEA. In addition,
neither the Adviser nor the Sub-Adviser is deemed
to be a ‘‘commodity pool operator’’ or ‘‘commodity
trading adviser’’ with respect to the advisory
services it provides to the Fund.
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
S&P 500 Index, respectively
(collectively with S&P 500-related ETFs,
‘‘Underlying ETFs’’). Such investments
will be made in accordance with the
1940 Act and consistent with the Fund’s
investment objective and policies, and
they will not be used to seek
performance that is the multiple or
inverse multiple (e.g., 2X or 3X) of any
securities market index. The inverse and
leveraged ETFs held by the Fund may
utilize leverage (i.e., borrowing) to
acquire their underlying portfolio
investments.17
The Fund may invest in Underlying
ETFs that are primarily index-based
ETFs that hold substantially all of their
assets in securities representing a
specific index. The Fund also may
invest in Underlying ETFs that are
actively managed. The Underlying ETFs
in which the Fund may invest may
invest in equity securities. Equity
securities consist of common stocks,
preferred stocks, warrants to acquire
common stock, securities convertible
into common stock,18 investments in
master limited partnerships (‘‘MLPs’’) 19
and rights.20
The Underlying ETFs in which the
Fund may invest may engage in futures
and options transactions. The Fund will
only invest in Underlying ETFs that
engage in futures contracts if such
futures contracts are traded on a
national futures exchange regulated by
the CFTC. Underlying ETFs in which
the Fund may invest may use futures
contracts and related options 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. When an Underlying ETF
purchases or sells a futures contract, or
sells an option thereon, it is required to
cover its position in order to limit
leveraging and related risks.
17 The use of leverage may exaggerate changes in
an ETF’s share price and the return on its
investments. Inverse and leveraged ETFs are
designed to achieve their objectives for a single day
only.
18 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.
19 MLPs are limited partnerships in which the
ownership units are publicly traded. MLP units are
registered with the Commission and are freely
traded on a securities exchange or in the over-thecounter market.
20 A right is a privilege granted to existing
shareholders of a corporation to subscribe to shares
of a new issue of common stock before it is issued.
Rights normally have a short life of usually two to
four weeks.
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The Underlying ETFs in which the
Fund may invest may buy and sell
index futures contracts with respect to
any index that is traded on a recognized
exchange or board of trade.
The Underlying ETFs in which the
Fund may invest may purchase and
write (sell) put and call options on
indices and enter into related closing
transactions.21 All such options written
on indices or securities must be covered
by the Underlying ETF.
An Underlying ETF in which the
Fund may invest may trade put and call
options on securities, securities indices,
and currencies, as the Underlying ETF’s
investment adviser determines is
appropriate in seeking the ETF’s
investment objective, and except as
restricted by the Underlying ETF’s
investment limitations. An Underlying
ETF 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. An Underlying ETF 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. An Underlying ETF
may purchase and write options on an
exchange or over-the-counter.
The Underlying ETFs in which the
Fund may invest may enter into swaps,
including, but not limited to, total
return swaps, index swaps, and interest
rate swaps. An Underlying ETF may
utilize swaps in an attempt to gain
exposure to the securities in a market
without actually purchasing those
securities, or to hedge a position.22 The
Underlying ETFs in which the Fund
may invest may enter into swaps to
invest in a market without owning or
21 A put option on a security gives the purchaser
of the option the right to sell, and the writer of the
option the obligation to buy, the underlying
security. A call option on a security gives the
purchaser of the option the right to buy, and the
writer of the option the obligation to sell, the
underlying security. Put and call options on indices
are similar to options on securities except that
options on an index give the holder the right to
receive, upon exercise of the option, an amount of
cash if the closing level of the underlying index is
greater than (or less than, in the case of puts) the
exercise price of the option.
22 Forms of swaps include interest rate caps,
under which, in return for a premium, one party
agrees to make payments to the other to the extent
that interest rates exceed a specified rate, or ‘‘cap’’;
interest rate floors, under which, in return for a
premium, one party agrees to make payments to the
other to the extent that interest rates fall below a
specified level, or ‘‘floor’’; and interest rate collars,
under which a party sells a cap and purchases a
floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given
minimum or maximum levels.
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taking physical custody of the
underlying securities in circumstances
in which direct investment is restricted
for legal reasons or is otherwise
impracticable.
During periods when the Fund’s
assets (or portion thereof) are not fully
invested in one or more S&P 500-related
ETFs or otherwise exposed to the S&P
500 Index, all or a portion of the Fund
may be invested in cash instruments
(‘‘Cash Instruments’’), which include
U.S. Treasury obligations; cash and cash
equivalents including commercial
paper, certificates of deposit and
bankers’ acceptances; repurchase
agreements; 23 shares of money market
mutual funds; and high-quality, shortterm debt instruments including, in
addition to U.S. Treasury obligations,
other U.S. government securities.24
73379
depending on the Sub-Adviser’s
assessment of market conditions.
In addition to the Underlying ETFs
discussed above, which are primary
investments of the Fund, the Fund will
invest in money market mutual funds,
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 Commission or
interpretation thereof.
Restrictions on Investment
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
entering into futures contracts.
The Fund will not directly enter into
Other Investments
swaps or engage in options transactions.
The Fund may not, with respect to
In addition to the investments
75% of its total assets, purchase
described above, the Fund may invest in
securities of any issuer (except
other investments, as described below.
securities issued or guaranteed by the
In the absence of normal market
U.S. government, its agencies, or its
conditions,25 the Fund may invest 100% instrumentalities or shares of
of its assets, without limitation, in Cash investment companies) if, as a result,
Instruments. The Fund may be invested more than 5% of its total assets would
in this manner for extended periods,
be invested in the securities of such
issuer.
23 The Fund may enter into repurchase
The Fund may not acquire more than
agreements with financial institutions, which may
10% of the outstanding voting securities
be deemed to be loans. The Fund will effect
of any one issuer.
repurchase transactions only with large, wellThe Fund may not invest 25% or
capitalized, and well-established financial
more of its total assets in the securities
institutions whose condition will be continually
monitored by the Sub-Advisor. In addition, the
of one or more issuers conducting their
value of the collateral underlying the repurchase
principal business activities in the same
agreement will always be at least equal to the
industry or group of industries. This
repurchase price, including any accrued interest
limitation does not apply to investments
earned on the repurchase agreement.
24 Securities issued or guaranteed by the U.S.
in securities issued or guaranteed by the
government or its agencies or instrumentalities
U.S. government, its agencies or
include U.S. Treasury securities, which are backed
instrumentalities, or shares of
by the full faith and credit of the U.S. Treasury and
investment companies.
which differ only in their interest rates, maturities,
The Fund may hold up to an aggregate
and times of issuance. Certain U.S. government
securities are issued or guaranteed by agencies or
amount of 15% of its net assets in
instrumentalities of the U.S. government, including,
illiquid securities (calculated at the time
but not limited to, obligations of U.S. government
of investment), including securities
agencies or instrumentalities such as the Federal
deemed illiquid by the Adviser or SubNational Mortgage Association (‘‘Fannie Mae’’), the
Federal Home Loan Mortgage Corporation (‘‘Freddie Adviser consistent with Commission
Mac’’), the Government National Mortgage
guidance 26 and repurchase agreements
Association (‘‘Ginnie Mae’’), the Federal Home
that do not mature within seven days.
Loan Banks, and other agencies or
The Fund will monitor its portfolio
instrumentalities. Some obligations issued or
guaranteed by U.S. government agencies and
liquidity on an ongoing basis to
instrumentalities, including, for example, Ginnie
determine whether, in light of current
Mae pass-through certificates, are supported by the
circumstances, an adequate level of
full faith and credit of the U.S. Treasury. Other
obligations issued by or guaranteed by federal
agencies or instrumentalities, 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
or instrumentality, while other obligations issued
by or guaranteed by federal agencies or
instrumentalities, such as those of the Federal
Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. The Fund
may invest in U.S. Treasury zero-coupon bonds.
25 See note 13, supra.
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26 In reaching liquidity decisions, the Adviser and
Sub-Adviser may consider the following factors:
The frequency of trades and quotes for the security;
the number of dealers wishing to purchase or sell
the security and the number of other potential
purchasers; dealer undertakings to make a market
in the security; and the nature of the security and
the nature of the marketplace in which it trades
(e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of
transfer).
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liquidity is being maintained and will
consider taking appropriate steps in
order to maintain adequate liquidity, if
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid securities. Illiquid securities
include securities subject to contractual
or other restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund intends to qualify each year
as a regulated investment company
under Subchapter M of the Internal
Revenue Code of 1986, as amended.
III. Summary of Comment Letter
Received
The Commission received one
comment letter supporting the
Exchange’s proposal.27 The commenter
states that tactical asset allocation
strategies are beneficial to investors,
may have positive effects on market
stability, and should be encouraged both
by investment advisors and regulators.28
The commenter states his belief that
there is nothing inherently risky about
tactical asset allocation, especially for
strategies limited to holding cash and a
market index.29 Furthermore, the
commenter states that the managers of
the Fund have allowed him to see the
equity exposures that have arisen from
their model since 2001, and based on
this the commenter believes the Fund
should be ‘‘noticeably less risky than a
standard equity index fund.’’ 30
IV. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6 of the Act 31 and the rules and
regulations thereunder applicable to a
national securities exchange.32 In
particular, the Commission finds that
the proposal, as modified by
Amendment No. 1., is consistent with
27 See
Jones Letter, supra note 7.
at 2. The commenter states that maintaining
constant exposures to different asset classes is
suboptimal, that investors can reap greater longterm rewards without increasing risk by increasing
exposure to an asset class when its future returns
are predicted to be above average and by trimming
or shorting an asset class when its future returns are
predicted to be poor, and that there is strong
evidence from the finance literature that these
tactical asset allocation strategies have significant
value to investors who use them. Id. at 1.
29 Id. at 2.
30 Id.
31 15 U.S.C. 78f.
32 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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28 Id.
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Section 6(b)(5) of the Act,33 which
requires, among other things, that the
Exchange’s rules be designed to promote
just and equitable principles of trade, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission also
finds that the proposal to list and trade
the Shares on the Exchange is consistent
with Section 11A(a)(1)(C)(iii) of the
Act,34 which sets forth the finding of
Congress that it is in the public interest
and appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure the
availability to brokers, dealers, and
investors of information with respect to
quotations for, and transactions in,
securities.
The Commission notes that the
Exchange has represented that the
Shares are deemed to be equity
securities, thus rendering trading in the
Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. The Commission also
notes that, in support of this proposal,
the Exchange has made the following
representations:
(1) The Shares will be subject to Rule
8.600, which sets forth the initial and
continued listing criteria applicable to
Managed Fund Shares.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares and underlying
equity securities (including, without
limitation, ETFs) and futures contracts
with other markets and other entities
that are members of the Intermarket
Surveillance Group (‘‘ISG’’) and FINRA,
on behalf of the Exchange, may obtain
trading information regarding trading in
the Shares and underlying equity
securities (including, without
limitation, ETFs) and futures contracts
from such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares and underlying equity securities
(including, without limitation, ETFs)
and futures contracts from markets and
other entities that are members of ISG or
with which the Exchange has in place
a comprehensive surveillance sharing
agreement. 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
33 15
34 15
PO 00000
U.S.C. 78f(b)(5).
U.S.C. 78k–1(a)(1)(C)(iii).
Frm 00104
Fmt 4703
Sfmt 4703
Reporting and Compliance Engine
(‘‘TRACE’’).
(4) The ETFs the Fund invests in all
will be listed and traded in the U.S. on
registered exchanges. The Fund will
only enter into futures contracts traded
on a national futures exchange regulated
by the CFTC.
(5) 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. Specifically, the
Information Bulletin will discuss the
following: (a) The procedures for
purchases and redemptions of Shares in
creation unit aggregations (and that
Shares are not individually redeemable);
(b) 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; (c)
the risks involved in trading the Shares
during the Opening and Late Trading
Sessions when an updated Portfolio
Indicative Value will not be calculated
or publicly disseminated; (d) how
information regarding the Portfolio
Indicative Value is disseminated; (e) the
requirement that Equity Trading Permit
Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information.
(6) For initial and continued listing,
the Fund must be in compliance with
Rule 10A–3 under the Act,35 as
provided by NYSE Arca Equities Rule
5.3.
(7) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities (calculated
at the time of investment), including
securities deemed illiquid by the
Adviser or Sub-Adviser, consistent with
Commission guidance.
(8) Under normal market conditions,
substantially all of the Fund’s assets
will be invested in one or more S&P
500-related ETFs; ETFs that provide
leveraged or inverse exposure to the
S&P 500 Index; and, to seek the desired
exposure to the S&P 500 Index, futures
contracts. The Fund may also invest in
Cash Instruments.
(9) The Fund will limit its investment
in futures contracts such that either (1)
the aggregate net notional value of its
futures investments will not exceed the
value of the Fund’s net assets, after
taking into account unrealized profits
and unrealized losses on the futures
positions it has entered into; or (2) the
aggregate initial margin and premiums
35 17
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mstockstill on DSK4VPTVN1PROD with NOTICES
required to establish positions in its
futures investments will not exceed 5%
of the Fund’s net assets, after taking into
account unrealized profits and
unrealized losses on any such positions.
(10) The Fund may invest up to 10%
of its total assets in leveraged ETFs or
inverse ETFs that seek to deliver
multiples, or the inverse, of the
performance of the S&P 500 Index,
respectively. Such investments will be
made in accordance with the 1940 Act
and consistent with the Fund’s
investment objective and policies, and
they will not be used to seek
performance that is the multiple or
inverse multiple (e.g., 2X or 3X) of any
securities market index.
(11) The Fund will not directly enter
into swaps or engage in options
transactions.
(12) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.
Quotation and last-sale information
for the Shares will be available via the
Consolidated Tape Association (‘‘CTA’’)
high-speed line. In addition, the
Portfolio Indicative Value 36 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.37 On each
business day, before commencement of
trading in Shares in the Core Trading
Session on the Exchange, the Fund will
disclose on its Web site the identities
and quantities of the portfolio of
securities and other assets (‘‘Disclosed
Portfolio’’) held by the Fund that will
form the basis for the Fund’s calculation
of NAV at the end of the business day.38
36 According to the Exchange, the Portfolio
Indicative Value will be calculated using the
estimates of the value of the Fund’s NAV per Share
using market data converted into U.S. dollars at the
current currency rates. The Portfolio Indicative
Value will be based upon the current value for the
components of the Disclosed Portfolio. The
Portfolio Indicative Value will be based on quotes
and closing prices from the securities’ local market
and may not reflect events that occur subsequent to
the local market’s close. Premiums and discounts
between the Portfolio Indicative Value and the
market price may occur. The Portfolio Indicative
Value should not be viewed as a ‘‘real-time’’ update
of the NAV per Share of the Fund, which is
calculated once per day. All asset classes in which
the Fund will invest will be included in the
calculation of the Portfolio Indicative Value.
37 According to the Exchange, several major
market data vendors display or make widely
available Portfolio Indicative Values published on
CTA or other data feeds.
38 The Disclosed Portfolio will include each
portfolio security and other financial instruments of
the Fund with the following information on the
Fund’s Web site: Ticker symbol (if applicable),
name of security and financial instrument, number
of shares (if applicable) and dollar value of
securities and financial instruments held in the
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17:48 Dec 09, 2014
Jkt 235001
The Administrator, through the National
Securities Clearing Corporation
(‘‘NSCC’’), will make available on each
business day, immediately prior to the
opening of business on the Exchange
(currently 9:30 a.m., E.T.), the list of the
names and the required number of
shares of each security, and amount of
cash, to be delivered in exchange for a
creation unit of the Fund. The NAV of
the Fund will be calculated once each
business day as of the regularly
scheduled close of normal trading on
the Exchange (normally, 4:00 p.m.,
Eastern Time).39 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. The
intra-day, closing, and settlement prices
of the Fund investments will be readily
available from the exchanges trading
such securities, automated quotation
systems, published or other public
sources, or on-line information services
such as Bloomberg or Reuters.
Quotation and last sale information for
underlying U.S. exchange-traded
equities, including the Underlying
ETFs, will be available via the CTA
high-speed line and from the national
securities exchange on which they are
listed. Quotations and last sale
information for the Fund’s futures
investments will be available from the
futures exchange on which the futures
are listed. Quotation information from
brokers and dealers or pricing services
will be available for Cash Instruments
and non-exchange traded securities of
money market mutual funds held by the
Fund. Pricing information regarding
each asset class in which the Fund will
invest is generally available through
nationally recognized data service
providers through subscription
arrangements. The Fund’s Web site will
include a form of the prospectus for the
Fund and additional data relating to
NAV and other applicable quantitative
information.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
Fund, and percentage weighting of the security and
financial instrument in the Fund. The Web site
information will be publicly available at no charge.
39 The Fund will calculate 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.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
73381
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. 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.
Trading in Shares of a 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,40 and trading in
the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth additional circumstances under
which trading in the Shares of a Fund
may be halted. The Exchange states that
it has a general policy prohibiting the
distribution of material, non-public
information by its employees.
Consistent with NYSE Arca Equities
Rule 8.600(d)(2)(B)(ii), the Reporting
Authority must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the actual
components of the Fund’s portfolio. In
addition, the Exchange states that
neither the Adviser nor the Sub-Adviser
is or is affiliated with a broker-dealer.41
40 These reasons may include: (1) The extent to
which trading is not occurring in the securities or
financial instruments composing 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. 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.
41 See supra note 11. The Exchange states that an
investment adviser to an open-end fund is required
to be registered under the Investment Advisers Act
of 1940 (‘‘Advisers Act’’). As a result, the Adviser
and the 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
E:\FR\FM\10DEN1.SGM
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Federal Register / Vol. 79, No. 237 / Wednesday, December 10, 2014 / Notices
The Exchange represents that trading in
the Shares will be subject to the existing
trading surveillances, administered by
the Financial Industry Regulatory
Authority (‘‘FINRA’’) on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws.42 The
Exchange further 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.
Moreover, prior to the commencement
of trading, the Exchange states that it
will inform its Equity Trading Permit
Holders in an Information Bulletin of
the special characteristics and risks
associated with trading the Shares.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,43 Section 11A(a)(1)(C)(iii) of
the Act,44 and the rules and regulations
thereunder applicable to a national
securities exchange.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,45 that the
proposed rule change (SR–NYSEArca–
2014–30), as modified by Amendment
No. 1, be, and it hereby is, approved.46
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–28879 Filed 12–9–14; 8:45 am]
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BILLING CODE 8011–01–P
administering the policies and procedures adopted
under subparagraph (i) above.
42 The Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement and that the Exchange is
responsible for FINRA’s performance under this
regulatory services agreement.
43 15 U.S.C. 78f(b)(5).
44 15 U.S.C. 78k–1(a)(1)(C)(iii).
45 15 U.S.C. 78s(b)(2).
46 This approval order is based on all of the
Exchange’s representations, including those set
forth above and in the Notice, and the Exchange’s
description of the Fund.
47 17 CFR 200.30–3(a)(12).
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17:48 Dec 09, 2014
Jkt 235001
SECURITIES AND EXCHANGE
COMMISSION
and is set forth in Sections A, B, and C
below.
[Release No. 34–73739; File No. SR–
NASDAQ–2014–116)
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Proposed Rule Change Relating to the
NASDAQ Opening and Halt Cross
December 4, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
21, 2014, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by NASDAQ. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
NASDAQ proposes to modify and
reorganize Chapter VI (Trading
Systems), Section 8 (NASDAQ Opening
and Halt Cross) of the NASDAQ Options
Market, LLC (‘‘NOM’’). The proposal
would update or add Section 1 and
Section 8 definitions in respect of the
NASDAQ Opening and Halt Cross. The
proposal would also make changes
regarding: The criteria for opening of
trading or resumption of trading after a
halt; NASDAQ posting on its Web site
any changes to the dissemination
interval or prior Order Imbalance
Indicator; the procedure if more than
one price exists; the procedure if there
are unexecuted contracts; and the ability
of firms to elect that orders be returned
in symbols that were not opened on
NOM before the conclusion of the
Opening Order Cancel Timer.
The text of the proposed rule change
is available at https://
nasdaq.cchwallstreet.com/, at
NASDAQ’s principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASDAQ included statements
concerning the purpose of, and basis for,
the proposed rule change. The text of
these statements may be examined at
the places specified in Item IV below,
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00106
Fmt 4703
Sfmt 4703
1. Purpose
The purpose of the proposed rule
change is to modify NOM Chapter VI,
Section 1 and Section 8 to update or add
definitions, which include Current
Reference Price, NASDAQ Opening
Cross, Eligible Interest, Valid Width
National Best Bid or Offer (‘‘Valid
Width NBBO’’), Away Best Bid or Offer
(‘‘ABBO’’), and On the Open Order
(‘‘OPG’’). The purpose is to also make
changes regarding: The criteria for
opening of trading or resumption of
trading after a halt; NASDAQ posting on
its Web site any changes to the
dissemination interval or prior Order
Imbalance Indicator; the procedure if
more than one price exists; the
procedure if there are unexecuted
contracts; and the ability of firms to
elect that orders be returned in symbols
that were not opened on NOM before
the conclusion of the Opening Order
Cancel Timer.3
Section 8 of Chapter VI describes the
NASDAQ opening and halt cross and
opening imbalance process (‘‘Opening
Cross’’).4 Section 8(a) currently contains
definitions that are applicable to Section
8. Section 8(b) currently states that for
the opening of trading of System
Securities,5 the Opening Cross shall
occur at or after 9:30 a.m. Eastern Time 6
if any of the following ‘‘conditions’’
occur: (1) There is no Imbalance; 7 (2)
the dissemination of a regular market
hours quote or trade (as determined by
the Exchange on a class-by-class basis)
by the Market for the Underlying
Security 8 has occurred (or, in the case
3 The Exchange will explain the proposed change
to its participants via an Options Trader Alert.
4 See Securities Exchange Act Release No. 64463
(May 11, 2011), 76 FR 28257 (May 16, 2011)(SR–
NASDAQ–2011–037)(approval order regarding
updates to Opening Cross).
5 ‘‘System Securities’’ means all options that are
currently trading on NOM pursuant to Chapter IV.
All other options shall be ‘‘Non System Securities.’’
Chapter VI, Section 1(b).
6 In this proposal, all time is Eastern Time unless
otherwise noted.
7 ‘‘Imbalance’’ means the number of contracts of
Eligible Interest that may not be equal. Chapter VI,
Section 8(a)(1). ‘‘Eligible Interest’’ means any
quotation or any order that may be entered into the
system and designated with a time-in-force of IOC,
DAY, GTC. Chapter VI, Section 8(a)(4). The
Exchange is deleting the reference to Imbalance
from Section 8(b) because, as discussed, the
occurrence of the Opening Cross depends on the
parameters proposed in Section 8(b) rather than on
whether there is an imbalance.
8 ‘‘Market for the Underlying Security’’ means
either the primary listing market, the primary
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]]>Agencies
[Federal Register Volume 79, Number 237 (Wednesday, December 10, 2014)]
[Notices]
[Pages 73377-73382]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73741; File No. SR-NYSEArca-2014-30]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Shares of Hull Tactical US ETF Under NYSE Arca Equities
Rule 8.600
December 4, 2014.
I. Introduction
On March 24, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of Hull Tactical US ETF (``Fund'')
under NYSE Arca Equities Rule 8.600. The proposed rule change was
published for comment in the Federal Register on April 11, 2014.\3\ On
May 21, 2014, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to either approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to disapprove the proposed
rule change.\5\ On July 9, 2014, the Commission instituted proceedings
to determine whether to approve or disapprove the proposed rule
change.\6\ The Commission received one comment letter.\7\ On October 8,
2014, the Commission designated a longer period of time for Commission
action on the proposed rule change.\8\ On October 23, 2014, the
Exchange filed Amendment No. 1 to the proposal.\9\ This order grants
approval of the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71894 (Apr. 7,
2014), 79 FR 20273 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 72214 (May 21, 2014), 79
FR 30672 (May 28, 2014). The Commission determined that it was
appropriate to designate a longer period within which to take action
on the proposed rule change so that it would have sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated July 10, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\6\ Securities Exchange Act Release No. 72571 (July 9, 2014), 79
FR 41330 (July 15, 2014).
\7\ See Letter from Christopher S. Jones, Associate Professor,
University of Southern California to Elizabeth M. Murphy, Secretary,
Commission (Sept. 16, 2014) (``Jones Letter'').
\8\ See Securities Exchange Act Release No. 73320, 79 FR 61911
(Oct. 15, 2014) (designating December 5, 2014 as the date by which
the Commission must either approve or disapprove the proposed rule
change).
\9\ In Amendment No. 1, the Exchange clarified that the Sub-
Adviser will utilize more than one proprietary, analytical
investment model to make investment decisions for the Fund, that the
Sub-Adviser's determination whether to take certain long or short
positions in S&P 500-related ETFs and S&P 500-related futures will
depend on the investment signals delivered by the models and on the
judgment of the Sub-Advisor, and that the Sub-Adviser may adjust the
Fund's long and short positions when necessary to take into account
new market conditions as well as data from the models. Because
Amendment No. 1 provides clarification to the proposed rule change
and does not materially affect the substance of the proposed rule
change or raise any unique or novel regulatory issues, Amendment No.
1 does not require notice and comment.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to NYSE Arca Equities Rule 8.600, which governs the listing and trading
of Managed Fund Shares on the Exchange. The Shares will be offered by
the Exchange Traded Concepts Trust (``Trust''), a Delaware statutory
trust. The Trust is registered with the Commission as an investment
company.\10\ Exchange Traded Concepts, LLC will be the investment
adviser (``Adviser'') to the Fund. HTAA, LLC will be the sub-adviser to
the Fund (``Sub-Adviser'').\11\ SEI Investments Co. will serve as the
administrator of the Fund (``Administrator''). JP Morgan Chase Bank
N.A. will serve as the custodian, transfer agent and dividend
disbursing agent of the Fund. SEI Investments Distribution Co. will
serve as the distributor for the Trust.
---------------------------------------------------------------------------
\10\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). The Exchange states that on July 26, 2013, the
Trust filed with the Commission a post-effective amendment to its
registration statement on Form N-1A relating to the Fund (File Nos.
333-156529 and 811-22263) (``Registration Statement''). In addition,
the Exchange states that the Commission has issued an order granting
certain exemptive relief to the Trust under the 1940 Act. See
Investment Company Act Release No.30445 (Apr. 2, 2013) (File No.
812-13969) (``Exemptive Order'').
\11\ The Exchange states that neither the Adviser nor the Sub-
Adviser is, or is affiliated with, a broker-dealer. The Exchange
states that, in the event (a) the Adviser or Sub-Adviser becomes, or
becomes newly affiliated with, a broker-dealer, or (b) any new
manager, adviser or sub-adviser is, or becomes affiliated with, a
broker-dealer, the adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or broker-dealer affiliate,
as applicable, regarding access to information concerning the
composition of or changes to the portfolio, and that adviser or sub-
adviser will be subject to procedures designed to prevent the use
and dissemination of material non-public information regarding such
portfolio.
---------------------------------------------------------------------------
The Exchange has made the following representations and statements
in describing the Fund and its investment
[[Page 73378]]
strategies, including portfolio holdings and investment
restrictions.\12\
---------------------------------------------------------------------------
\12\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, Fund holdings disclosure policies,
distributions, and taxes, among other information, is included in
the Notice and the Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 3 and 10, respectively.
---------------------------------------------------------------------------
General
The investment objective of the Fund will be to seek long-term
capital appreciation. The Fund will be actively managed.
Under normal market conditions,\13\ the Fund will seek to achieve
its investment objective by taking long and short positions \14\ in one
or more exchange traded funds (``ETFs'') \15\ that seek to track the
performance of the S&P 500 Index (each, an ``S&P 500-related ETF'').
The ETFs the Fund invests in all will be listed and traded in the U.S.
on registered exchanges. Under normal market conditions, substantially
all of the Fund's assets will be invested in one or more S&P 500-
related ETFs; ETFs that provide leveraged or inverse exposure to the
S&P 500 Index; and, to seek the desired exposure to the S&P 500 Index,
futures contracts. The Fund may also, as described below, invest in
cash instruments.
---------------------------------------------------------------------------
\13\ The term ``under normal market conditions'' 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; and 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.
\14\ Short sales are transactions in which the Fund sells a
security it does not own. To complete the transaction, the Fund must
borrow or otherwise obtain the security to make delivery to the
buyer. The Fund is then obligated to replace the security borrowed
by purchasing the security at the market price at the time of
replacement. The Fund may use repurchase agreements to satisfy
delivery obligations in short sales transactions. The Fund may use
up to 100% of its net assets to engage in short sales transactions
and collateralize its open short positions.
\15\ ETFs are securities registered under the 1940 Act such as
those listed and traded on the Exchange under NYSE Arca Equities
Rules 5.2(j)(3) (Investment Company Units), 8.100 (Portfolio
Depositary Receipts) and 8.600 (Managed Fund Shares).
---------------------------------------------------------------------------
The Sub-Adviser will utilize a proprietary, analytical investment
model that examines current and historical market data to attempt to
predict the performance of the S&P 500 Index. The model will deliver
investment signals that the Sub-Adviser will use to make investment
decisions for the Fund. Depending on the investment signal delivered by
the model, the Sub-Adviser will take certain long or short positions in
one or more S&P 500-related ETFs: (1) If the model indicates bull-
market conditions, the Sub-Adviser will take long positions; or (2) if
the model indicates bear-market conditions, the Sub-Adviser will take
short positions. When the Fund takes long positions, it may maintain
long exposure of up to 200% of net assets; exposure to short positions
will be limited to no more than 100% of net assets. The Sub-Adviser
will adjust the Fund's long and short positions when necessary to take
into account new data from the model that reflects changing market
conditions. Positions may be adjusted as the model predictions
fluctuate.
The Fund will enter into futures contracts to seek the desired
exposure to the S&P 500 Index.\16\ The Fund will limit its investment
in futures contracts such that either (1) the aggregate net notional
value of its futures investments will not exceed the value of the
Fund's net assets, after taking into account unrealized profits and
unrealized losses on the futures positions it has entered into; or (2)
the aggregate initial margin and premiums required to establish
positions in its futures investments will not exceed 5% of the Fund's
net assets, after taking into account unrealized profits and unrealized
losses on any such positions. The Fund will only enter into futures
contracts traded on a national futures exchange regulated by the CFTC.
The Fund will trade futures when the Sub-Adviser determines that doing
so may provide an efficient means of seeking exposure to the S&P 500
Index that is complimentary to its investment in shares of one or more
S&P 500-related ETFs.
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\16\ To the extent the Fund enters into futures contracts or
invests in underlying ETFs that invest in futures, options on
futures or other instruments subject to regulation by the U.S.
Commodity Futures Trading Commission (``CFTC''), it will do so in
reliance upon and in accordance with CFTC Rule 4.5. The Exchange
states that the Trust has filed a notice of eligibility for
exclusion from the definition of the term ``commodity pool
operator'' in accordance with CFTC Rule 4.5. Therefore, neither the
Trust nor any of its series is deemed to be a ``commodity pool'' or
``commodity pool operator'' under the Commodity Exchange Act
(``CEA''), and they are not subject to registration or regulation as
such under the CEA. In addition, neither the Adviser nor the Sub-
Adviser is deemed to be a ``commodity pool operator'' or ``commodity
trading adviser'' with respect to the advisory services it provides
to the Fund.
---------------------------------------------------------------------------
In addition to investments in the S&P 500-related ETFs and futures
contracts, the Fund may invest up to 10% of its total assets in
leveraged ETFs or inverse ETFs that seek to deliver multiples, or the
inverse, of the performance of the S&P 500 Index, respectively
(collectively with S&P 500-related ETFs, ``Underlying ETFs''). Such
investments will be made in accordance with the 1940 Act and consistent
with the Fund's investment objective and policies, and they will not be
used to seek performance that is the multiple or inverse multiple
(e.g., 2X or 3X) of any securities market index. The inverse and
leveraged ETFs held by the Fund may utilize leverage (i.e., borrowing)
to acquire their underlying portfolio investments.\17\
---------------------------------------------------------------------------
\17\ The use of leverage may exaggerate changes in an ETF's
share price and the return on its investments. Inverse and leveraged
ETFs are designed to achieve their objectives for a single day only.
---------------------------------------------------------------------------
The Fund may invest in Underlying ETFs that are primarily index-
based ETFs that hold substantially all of their assets in securities
representing a specific index. The Fund also may invest in Underlying
ETFs that are actively managed. The Underlying ETFs in which the Fund
may invest may invest in equity securities. Equity securities consist
of common stocks, preferred stocks, warrants to acquire common stock,
securities convertible into common stock,\18\ investments in master
limited partnerships (``MLPs'') \19\ and rights.\20\
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\18\ 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.
\19\ MLPs are limited partnerships in which the ownership units
are publicly traded. MLP units are registered with the Commission
and are freely traded on a securities exchange or in the over-the-
counter market.
\20\ A right is a privilege granted to existing shareholders of
a corporation to subscribe to shares of a new issue of common stock
before it is issued. Rights normally have a short life of usually
two to four weeks.
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The Underlying ETFs in which the Fund may invest may engage in
futures and options transactions. The Fund will only invest in
Underlying ETFs that engage in futures contracts if such futures
contracts are traded on a national futures exchange regulated by the
CFTC. Underlying ETFs in which the Fund may invest may use futures
contracts and related options 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. When
an Underlying ETF purchases or sells a futures contract, or sells an
option thereon, it is required to cover its position in order to limit
leveraging and related risks.
[[Page 73379]]
The Underlying ETFs in which the Fund may invest may buy and sell
index futures contracts with respect to any index that is traded on a
recognized exchange or board of trade.
The Underlying ETFs in which the Fund may invest may purchase and
write (sell) put and call options on indices and enter into related
closing transactions.\21\ All such options written on indices or
securities must be covered by the Underlying ETF.
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\21\ A put option on a security gives the purchaser of the
option the right to sell, and the writer of the option the
obligation to buy, the underlying security. A call option on a
security gives the purchaser of the option the right to buy, and the
writer of the option the obligation to sell, the underlying
security. Put and call options on indices are similar to options on
securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying index is greater than (or less than,
in the case of puts) the exercise price of the option.
---------------------------------------------------------------------------
An Underlying ETF in which the Fund may invest may trade put and
call options on securities, securities indices, and currencies, as the
Underlying ETF's investment adviser determines is appropriate in
seeking the ETF's investment objective, and except as restricted by the
Underlying ETF's investment limitations. An Underlying ETF 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. An Underlying ETF 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. An Underlying ETF may purchase and write options on an
exchange or over-the-counter.
The Underlying ETFs in which the Fund may invest may enter into
swaps, including, but not limited to, total return swaps, index swaps,
and interest rate swaps. An Underlying ETF may utilize swaps in an
attempt to gain exposure to the securities in a market without actually
purchasing those securities, or to hedge a position.\22\ The Underlying
ETFs in which the Fund may invest may enter into swaps 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.
---------------------------------------------------------------------------
\22\ Forms of swaps include interest rate caps, under which, in
return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or
``cap''; interest rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or ``floor''; and
interest rate collars, under which a party sells a cap and purchases
a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
---------------------------------------------------------------------------
During periods when the Fund's assets (or portion thereof) are not
fully invested in one or more S&P 500-related ETFs or otherwise exposed
to the S&P 500 Index, all or a portion of the Fund may be invested in
cash instruments (``Cash Instruments''), which include U.S. Treasury
obligations; cash and cash equivalents including commercial paper,
certificates of deposit and bankers' acceptances; repurchase
agreements; \23\ shares of money market mutual funds; and high-quality,
short-term debt instruments including, in addition to U.S. Treasury
obligations, other U.S. government securities.\24\
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\23\ 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-Advisor. In
addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement.
\24\ Securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities include U.S. Treasury securities,
which are backed by the full faith and credit of the U.S. Treasury
and which differ only in their interest rates, maturities, and times
of issuance. Certain U.S. government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. government,
including, but not limited to, obligations of U.S. government
agencies or instrumentalities such as the Federal National Mortgage
Association (``Fannie Mae''), the Federal Home Loan Mortgage
Corporation (``Freddie Mac''), the Government National Mortgage
Association (``Ginnie Mae''), the Federal Home Loan Banks, and other
agencies or instrumentalities. 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 or instrumentalities, 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 or instrumentality, while other
obligations issued by or guaranteed by federal agencies or
instrumentalities, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the U.S.
Treasury. The Fund may invest in U.S. Treasury zero-coupon bonds.
---------------------------------------------------------------------------
Other Investments
In addition to the investments described above, the Fund may invest
in other investments, as described below.
In the absence of normal market conditions,\25\ the Fund may invest
100% of its assets, without limitation, in Cash Instruments. The Fund
may be invested in this manner for extended periods, depending on the
Sub-Adviser's assessment of market conditions.
---------------------------------------------------------------------------
\25\ See note 13, supra.
---------------------------------------------------------------------------
In addition to the Underlying ETFs discussed above, which are
primary investments of the Fund, the Fund will invest in money market
mutual funds, 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 Commission or interpretation thereof.
Restrictions on Investment
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
entering into futures contracts.
The Fund will not directly enter into swaps or engage in options
transactions.
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 its 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.
The Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer.
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 may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including securities deemed illiquid by the Adviser or Sub-Adviser
consistent with Commission guidance \26\ and repurchase agreements that
do not mature within seven days. The Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of
[[Page 73380]]
liquidity is being maintained and will consider taking appropriate
steps in order to maintain adequate liquidity, if through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid securities. Illiquid securities include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
---------------------------------------------------------------------------
\26\ In reaching liquidity decisions, the Adviser and Sub-
Adviser may consider the following factors: The frequency of trades
and quotes for the security; the number of dealers wishing to
purchase or sell the security and the number of other potential
purchasers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace in
which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
---------------------------------------------------------------------------
The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
III. Summary of Comment Letter Received
The Commission received one comment letter supporting the
Exchange's proposal.\27\ The commenter states that tactical asset
allocation strategies are beneficial to investors, may have positive
effects on market stability, and should be encouraged both by
investment advisors and regulators.\28\ The commenter states his belief
that there is nothing inherently risky about tactical asset allocation,
especially for strategies limited to holding cash and a market
index.\29\ Furthermore, the commenter states that the managers of the
Fund have allowed him to see the equity exposures that have arisen from
their model since 2001, and based on this the commenter believes the
Fund should be ``noticeably less risky than a standard equity index
fund.'' \30\
---------------------------------------------------------------------------
\27\ See Jones Letter, supra note 7.
\28\ Id. at 2. The commenter states that maintaining constant
exposures to different asset classes is suboptimal, that investors
can reap greater long-term rewards without increasing risk by
increasing exposure to an asset class when its future returns are
predicted to be above average and by trimming or shorting an asset
class when its future returns are predicted to be poor, and that
there is strong evidence from the finance literature that these
tactical asset allocation strategies have significant value to
investors who use them. Id. at 1.
\29\ Id. at 2.
\30\ Id.
---------------------------------------------------------------------------
IV. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \31\
and the rules and regulations thereunder applicable to a national
securities exchange.\32\ In particular, the Commission finds that the
proposal, as modified by Amendment No. 1., is consistent with Section
6(b)(5) of the Act,\33\ which requires, among other things, that the
Exchange's rules be designed to promote just and equitable principles
of trade, to remove impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission also finds
that the proposal to list and trade the Shares on the Exchange is
consistent with Section 11A(a)(1)(C)(iii) of the Act,\34\ which sets
forth the finding of Congress that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure the availability to brokers, dealers, and
investors of information with respect to quotations for, and
transactions in, securities.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f.
\32\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\33\ 15 U.S.C. 78f(b)(5).
\34\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
The Commission notes that the Exchange has represented that the
Shares are deemed to be equity securities, thus rendering trading in
the Shares subject to the Exchange's existing rules governing the
trading of equity securities. The Commission also notes that, in
support of this proposal, the Exchange has made the following
representations:
(1) The Shares will be subject to Rule 8.600, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and underlying equity securities
(including, without limitation, ETFs) and futures contracts with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG'') and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares and
underlying equity securities (including, without limitation, ETFs) and
futures contracts from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares and
underlying equity securities (including, without limitation, ETFs) and
futures contracts from markets and other entities that are members of
ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. 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'').
(4) The ETFs the Fund invests in all will be listed and traded in
the U.S. on registered exchanges. The Fund will only enter into futures
contracts traded on a national futures exchange regulated by the CFTC.
(5) 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.
Specifically, the Information Bulletin will discuss the following: (a)
The procedures for purchases and redemptions of Shares in creation unit
aggregations (and that Shares are not individually redeemable); (b)
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; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (d) how information regarding the
Portfolio Indicative Value is disseminated; (e) the requirement that
Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(6) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act,\35\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\35\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(7) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including securities deemed illiquid by the Adviser or Sub-Adviser,
consistent with Commission guidance.
(8) Under normal market conditions, substantially all of the Fund's
assets will be invested in one or more S&P 500-related ETFs; ETFs that
provide leveraged or inverse exposure to the S&P 500 Index; and, to
seek the desired exposure to the S&P 500 Index, futures contracts. The
Fund may also invest in Cash Instruments.
(9) The Fund will limit its investment in futures contracts such
that either (1) the aggregate net notional value of its futures
investments will not exceed the value of the Fund's net assets, after
taking into account unrealized profits and unrealized losses on the
futures positions it has entered into; or (2) the aggregate initial
margin and premiums
[[Page 73381]]
required to establish positions in its futures investments will not
exceed 5% of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such positions.
(10) The Fund may invest up to 10% of its total assets in leveraged
ETFs or inverse ETFs that seek to deliver multiples, or the inverse, of
the performance of the S&P 500 Index, respectively. Such investments
will be made in accordance with the 1940 Act and consistent with the
Fund's investment objective and policies, and they will not be used to
seek performance that is the multiple or inverse multiple (e.g., 2X or
3X) of any securities market index.
(11) The Fund will not directly enter into swaps or engage in
options transactions.
(12) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association (``CTA'') high-speed
line. In addition, the Portfolio Indicative Value \36\ 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.\37\ On each business day, before
commencement of trading in Shares in the Core Trading Session on the
Exchange, the Fund will disclose on its Web site the identities and
quantities of the portfolio of securities and other assets (``Disclosed
Portfolio'') held by the Fund that will form the basis for the Fund's
calculation of NAV at the end of the business day.\38\ The
Administrator, through the National Securities Clearing Corporation
(``NSCC''), will make available on each business day, immediately prior
to the opening of business on the Exchange (currently 9:30 a.m., E.T.),
the list of the names and the required number of shares of each
security, and amount of cash, to be delivered in exchange for a
creation unit of the Fund. The NAV of the Fund will be calculated once
each business day as of the regularly scheduled close of normal trading
on the Exchange (normally, 4:00 p.m., Eastern Time).\39\ 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. The intra-day, closing, and settlement prices of
the Fund investments will be readily available from the exchanges
trading such securities, automated quotation systems, published or
other public sources, or on-line information services such as Bloomberg
or Reuters. Quotation and last sale information for underlying U.S.
exchange-traded equities, including the Underlying ETFs, will be
available via the CTA high-speed line and from the national securities
exchange on which they are listed. Quotations and last sale information
for the Fund's futures investments will be available from the futures
exchange on which the futures are listed. Quotation information from
brokers and dealers or pricing services will be available for Cash
Instruments and non-exchange traded securities of money market mutual
funds held by the Fund. Pricing information regarding each asset class
in which the Fund will invest is generally available through nationally
recognized data service providers through subscription arrangements.
The Fund's Web site will include a form of the prospectus for the Fund
and additional data relating to NAV and other applicable quantitative
information.
---------------------------------------------------------------------------
\36\ According to the Exchange, the Portfolio Indicative Value
will be calculated using the estimates of the value of the Fund's
NAV per Share using market data converted into U.S. dollars at the
current currency rates. The Portfolio Indicative Value will be based
upon the current value for the components of the Disclosed
Portfolio. The Portfolio Indicative Value will be based on quotes
and closing prices from the securities' local market and may not
reflect events that occur subsequent to the local market's close.
Premiums and discounts between the Portfolio Indicative Value and
the market price may occur. The Portfolio Indicative Value should
not be viewed as a ``real-time'' update of the NAV per Share of the
Fund, which is calculated once per day. All asset classes in which
the Fund will invest will be included in the calculation of the
Portfolio Indicative Value.
\37\ According to the Exchange, several major market data
vendors display or make widely available Portfolio Indicative Values
published on CTA or other data feeds.
\38\ The Disclosed Portfolio will include each portfolio
security and other financial instruments of the Fund with the
following information on the Fund's Web site: Ticker symbol (if
applicable), name of security and financial instrument, number of
shares (if applicable) and dollar value of securities and financial
instruments held in the Fund, and percentage weighting of the
security and financial instrument in the Fund. The Web site
information will be publicly available at no charge.
\39\ The Fund will calculate 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 Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The 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. Trading in Shares of a 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,\40\ and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances
under which trading in the Shares of a Fund may be halted. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. Consistent with NYSE
Arca Equities Rule 8.600(d)(2)(B)(ii), the Reporting Authority must
implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the Fund's portfolio. In addition,
the Exchange states that neither the Adviser nor the Sub-Adviser is or
is affiliated with a broker-dealer.\41\
[[Page 73382]]
The Exchange represents that trading in the Shares will be subject to
the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\42\ The Exchange further 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.
Moreover, prior to the commencement of trading, the Exchange states
that it will inform its Equity Trading Permit Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares.
---------------------------------------------------------------------------
\40\ These reasons may include: (1) The extent to which trading
is not occurring in the securities or financial instruments
composing 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. 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.
\41\ See supra note 11. The Exchange states that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and the 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.
\42\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act,\43\ Section 11A(a)(1)(C)(iii) of the Act,\44\ and
the rules and regulations thereunder applicable to a national
securities exchange.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(5).
\44\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\45\ that the proposed rule change (SR-NYSEArca-2014-30), as
modified by Amendment No. 1, be, and it hereby is, approved.\46\
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78s(b)(2).
\46\ This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice,
and the Exchange's description of the Fund.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------
\47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28879 Filed 12-9-14; 8:45 am]
BILLING CODE 8011-01-P
