Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the iShares U.S. Fixed Income Balanced Risk ETF of the iShares U.S. ETF Trust Under Rule 14.11(i), 585-593 [2014-30901]
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. The Commission is
instituting proceedings to allow for
additional analysis of, and input from,
commenters with regard to the proposed
rule change’s consistency with Section
6 of the Act, and in particular Sections
6(b)(5).28 Section 6(b)(5) requires that
the rules of an exchange be designed,
among other things, to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.29
V. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data and
arguments with respect to the concerns
identified above, as well as any others
they may have with the proposal. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change is inconsistent with Section 6 or
any other provision, of the Act, or the
rules and regulations thereunder.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b-4, any
request for an opportunity to make an
oral presentation.30
Interested persons are invited to
submit written data, views and
arguments regarding whether the
proposed rule change should be
approved or disapproved by January 27,
2015. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
February 10, 2015.
Comments may be submitted by any
of the following methods:
28 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(5).
30 Section 19(b) (2) of the Act, as amended by the
Securities Act Amendments of 1975, Pub. L. 94–29
(June 4, 1975), grants the Commission flexibility to
determine what type of proceeding—either oral or
notice and opportunity for written comments—is
appropriate for consideration of a particular
proposal by a self-regulatory organization. See
Securities Act Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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29 15
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2014–43 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2014–43. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
publicly available. All submissions
should refer to File Number SR–ISE–
2014–43 and should be submitted on or
before January 27, 2015. If comments are
received, any rebuttal comments should
be submitted by February 10, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Brent J. Fields,
Secretary.
[FR Doc. 2014–30979 Filed 1–5–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73965; File No. SR–BATS–
2014–056]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To List and
Trade Shares of the iShares U.S. Fixed
Income Balanced Risk ETF of the
iShares U.S. ETF Trust Under Rule
14.11(i)
December 30, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
19, 2014, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange filed a proposal list and
trade shares of the iShares U.S. Fixed
Income Balanced Risk ETF (the ‘‘Fund’’)
of the iShares U.S. ETF Trust (the
‘‘Trust’’) under BATS Rule 14.11(i)
(‘‘Managed Fund Shares’’). The shares of
the Fund are collectively referred to
herein as the ‘‘Shares.’’
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.batstrading.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
1 15
31 17
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade the Shares under BATS Rule
14.11(i), which governs the listing and
trading of Managed Fund Shares on the
Exchange.3 The Fund will be an actively
managed fund. The Shares will be
offered by the Trust, which was
established as a Delaware statutory trust
on June 21, 2011. The Trust is registered
with the Commission as an open-end
investment company and has filed a
registration statement on behalf of the
Fund on Form N–1A (‘‘Registration
Statement’’) with the Commission.4
tkelley on DSK3SPTVN1PROD with NOTICES
Description of the Shares and the Fund
BlackRock Fund Advisors is the
investment adviser (‘‘BFA’’ or
‘‘Adviser’’) to the Fund.5 State Street
Bank and Trust Company is the
administrator, custodian, and transfer
agent for the Trust. BlackRock
Investments, LLC (‘‘Distributor’’) serves
as the distributor for the Trust.
BATS Rule 14.11(i)(7) provides that, if
the investment adviser to the
investment company issuing Managed
Fund Shares is affiliated with a brokerdealer, such investment adviser shall
erect a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.6 In addition, Rule
3 The Commission approved BATS Rule 14.11(i)
in Securities Exchange Act Release No. 65225
(August 30, 2011), 76 FR 55148 (September 6, 2011)
(SR–BATS–2011–018).
4 See Registration Statement on Form N–1A for
the Trust, dated April 21, 2014 (File Nos. 333–
179904 and 811–22649). The descriptions of the
Fund and the Shares contained herein are based, in
part, on information in the Registration Statement.
The Commission has issued an order granting
certain exemptive relief to the Company under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’) (the ‘‘Exemptive Order’’). See
Investment Company Act Release No. 29571
(January 24, 2011) (File No. 812–13601).
5 BlackRock Fund Advisors is an indirect wholly
owned subsidiary of BlackRock, Inc.
6 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
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19:38 Jan 05, 2015
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14.11(i)(7) further requires that
personnel who make decisions on the
investment company’s portfolio
composition must be subject to
procedures designed to prevent the use
and dissemination of material
nonpublic information regarding the
applicable investment company
portfolio. Rule 14.11(i)(7) is similar to
BATS Rule 14.11(b)(5)(A)(i), however,
Rule 14.11(i)(7) in connection with the
establishment of a ‘‘fire wall’’ between
the investment adviser and the brokerdealer reflects the applicable open-end
fund’s portfolio, not an underlying
benchmark index, as is the case with
index-based funds. The Adviser is not a
registered broker-dealer, but is affiliated
with multiple broker-dealers and has
implemented ‘‘fire walls’’ with respect
to such broker-dealers regarding access
to information concerning the
composition and/or changes to the
Fund’s portfolio. In addition, Adviser
personnel who make decisions
regarding the Fund’s portfolio are
subject to procedures designed to
prevent the use and dissemination of
material nonpublic information
regarding the Fund’s portfolio. In the
event that (a) the Adviser becomes a
broker-dealer or newly affiliated with a
broker-dealer, or (b) any new adviser or
sub-adviser is a broker-dealer or
becomes affiliated with a broker-dealer,
it will implement a fire wall with
respect to its relevant personnel or such
broker-dealer affiliate, as applicable,
regarding access to information
concerning the composition and/or
changes to the portfolio, and will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio.
iShares U.S. Fixed Income Balanced
Risk Fund
According to the Registration
Statement, the Fund will seek total
return and preservation of capital. To
achieve its objective, the Fund will
invest, under normal circumstances,7 at
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.
7 The term ‘‘under normal circumstances’’
includes, but is not limited to, the absence of
adverse market, economic, political, or other
conditions, including extreme volatility or trading
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least 80% of its net assets in U.S. dollardenominated investment-grade and
high-yield fixed-income securities,
futures, and swaps, as described below.
The Fund seeks to provide exposure to
a portfolio of Fixed Income Securities,
as defined below, where the expected
contribution of interest rate risk and
credit spread risk are approximately
equal. The Fund will attempt to achieve
an aggregate credit spread risk based on
the credit spread risk of the underlying
securities (as determined by BFA)
primarily by adjusting the allocation
among underlying securities. To the
extent necessary, the Fund will attempt
to balance the aggregate interest rate risk
against the aggregate credit spread risk
of the underlying securities (as
determined by BFA) primarily by taking
short or long positions in U.S. Treasury
futures contracts and interest rate
swaps, as further described below. In
the absence of normal circumstances,
the Fund may temporarily depart from
its normal investment process, provided
that such departure is, in the opinion of
BFA, consistent with the Fund’s
investment objective and in the best
interests of the Fund. For example, the
Fund may hold a higher than normal
proportion of its assets in cash in
response to adverse market, economic,
or political conditions.
The Fund is a non-diversified fund
and therefore may invest a greater
portion of its assets in the securities of
one or more issuers than a diversified
fund. The Fund, however, will not
purchase the securities of issuers
conducting their principal business
activity in the same industry if,
immediately after the purchase and as a
result thereof, the value of the Fund’s
investments in that industry would
equal or exceed 25% of the current
value of the Fund’s total assets,
provided that this restriction does not
limit the Fund’s: (i) Investments in
securities of other investment
companies, (ii) investments in securities
issued or guaranteed by the U.S.
government, its agencies or
instrumentalities, or (iii) investments in
repurchase agreements collateralized by
U.S. government securities.8
halts in the fixed income markets or the financial
markets generally; operational issues causing
dissemination of inaccurate market information; or
force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot, or labor disruption,
or any similar intervening circumstance.
8 See Form N–1A, Item 9. The Commission has
taken the position that a fund is concentrated if it
invests in more than 25% of the value of its total
assets in any one industry. See, e.g., Investment
Company Act Release No. 9011 (October 30, 1975),
40 FR 54241 (November 21, 1975).
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
The Fund intends to qualify each year
as a regulated investment company (a
‘‘RIC’’) under Subchapter M of the
Internal Revenue Code of 1986, as
amended.9 The Fund will invest its
assets, and otherwise conduct its
operations, in a manner that is intended
to satisfy the qualifying income,
diversification and distribution
requirements necessary to establish and
maintain RIC qualification under
Subchapter M.
Principal Holdings—Fixed Income
Securities and Derivatives
The Fund intends to achieve its
investment objective by investing, under
normal circumstances, at least 80% of
its net assets in a portfolio of U.S.
dollar-denominated investment-grade
and high-yield fixed-income securities
(‘‘Fixed Income Securities’’), futures,
and swaps, as described below. The
Fund may invest, without limitation, in
high-yield securities rated CCC or
higher by Moody’s Investors Service,
Inc. or equivalently rated by Standard &
Poor’s Financial Services LLC and/or
Fitch, or, if unrated, determined by BFA
to be of equivalent quality.10 Under
normal circumstances, the Fund will
invest primarily in fixed-rate Fixed
Income Securities of varying maturities.
The Fund seeks to balance interest
rate and credit spread risk by investing
in a portfolio of Fixed Income Securities
that in the aggregate has approximately
equal exposure to credit spread risk and
interest rate risk, which are measured by
BFA as the volatility of returns of a
security associated with changes in the
security’s credit spread or changes in
interest rates. The Fund will adjust the
allocation among its underlying
securities in an effort to achieve a target
credit spread risk and interest rate risk
for the Fund’s portfolio. When
necessary to balance the Fund’s
exposure to interest rate risk against its
exposure to credit spread risk, the Fund
may take short or long positions in U.S.
Treasury futures and, through
transactions in interest rate swaps, take
short positions in U.S. Treasury
securities. BFA will determine the
aggregate credit spread risk and interest
rate risk of the Fund’s portfolio. The
9 26
U.S.C. 851.
to the Adviser, BFA may determine
that unrated Fixed Income Securities are of
‘‘equivalent quality’’ based on such credit quality
factors that it deems appropriate, which may
include among other things, performing an analysis
similar, to the extent possible, to that performed by
a nationally recognized statistical ratings
organization when rating similar securities and
issuers. In making such a determination, BFA may
consider internal analyses and risk ratings, third
party research and analysis, and other sources of
information, as deemed appropriate by the Adviser.
tkelley on DSK3SPTVN1PROD with NOTICES
10 According
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Fund may also invest in other interest
rate futures contracts, including but not
limited to, Eurodollar and Federal
Funds futures. The Fund’s short
positions in U.S. Treasury futures and
similar positions through transaction in
interest rate swaps are not intended to
mitigate credit spread risk or other
factors influencing the price of nongovernment bonds, which may have a
greater impact than interest rates.11
Fixed Income Securities will include
only the following instruments: Fixed
and floating rate debt securities, such as
corporate 12 and government bonds,
agency securities,13 instruments of nonU.S. issuers,14 privately-issued
securities,15 municipal bonds, money
market securities,16 and exchange
11 Derivatives held as part of the Fund’s principal
investment strategy will be exchange traded and/or
centrally cleared, and they will be collateralized.
12 While the Fund is permitted to invest without
restriction in corporate bonds, the Adviser expects
that, under normal circumstances, the Fund will
generally invest in corporate bond issuances that
have at least $250 million par amount outstanding.
13 ‘‘Agency securities’’ for these purposes
generally includes securities issued by the
following entities: Government National Mortgage
Association (Ginnie Mae), Federal National
Mortgage Association (Fannie Mae), Federal Home
Loan Banks (FHLBanks), Federal Home Loan
Mortgage Corporation (Freddie Mac), Farm Credit
System (FCS) Farm Credit Banks (FCBanks),
Student Loan Marketing Association (Sallie Mae),
Resolution Funding Corporation (REFCORP),
Financing Corporation (FICO), and the Farm Credit
System (FCS) Financial Assistance Corporation
(FAC). Agency securities can include, but are not
limited to, mortgage-backed securities.
14 ‘‘Instruments of non-U.S. issuers’’ means U.S.
dollar-denominated fixed income securities issued
by non-U.S. corporate or sovereign entities.
15 ‘‘Privately-issued securities’’ generally includes
Rule 144A securities and, in this context, may
include both mortgage-backed and non-mortgage
144A securities. To the Extent that the Fund’s
holding of privately-issued securities include nonagency mortgage-backed securities or illiquid assets,
such holdings will be subject to the limitations
established in the ‘‘Other Portfolio Holdings’’ and
‘‘Investment Restrictions’’ sections set forth below,
as applicable.
16 The Adviser expects that, under normal
circumstances, the Fund intends to invest in money
market securities (as described below) in a manner
consistent with its investment objective in order to
help manage cash flows in and out of the Fund,
such as in connection with payment of dividends
or expenses, and to satisfy margin requirements, to
provide collateral or to otherwise back investments
in derivative instruments. For these purposes,
money market securities include: Short-term, highquality obligations issued or guaranteed by the U.S.
Treasury or the agencies or instrumentalities of the
U.S. government; short-term, high-quality securities
issued or guaranteed by non-U.S. governments,
agencies and instrumentalities; repurchase
agreements; money market mutual funds;
commercial paper; and deposits and other
obligations of U.S. and non-U.S. banks and
financial institutions. All money market securities
acquired by the Fund will be rated investment
grade. The Fund does not intend to invest in any
unrated money market securities. However, it may
do so, to a limited extent, such as where a rated
money market security becomes unrated, if such
money market security is determined by the
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587
traded and non-exchange traded
investment companies (including
investment companies advised by BFA
or its affiliates) that invest in such Fixed
Income Securities.17 18
BFA utilizes a model-based
proprietary investment process to
assemble an investment portfolio
comprised of (i) long positions in U.S.
dollar denominated investment-grade
corporate bonds selected by BFA based
on certain criteria determined by BFA to
be indicators of creditworthiness; (ii)
long positions in U.S. dollardenominated high-yield corporate
bonds selected by BFA based on certain
criteria determined by BFA to be
indicators of creditworthiness; (iii) long
positions in U.S. dollar-denominated
agency mortgage backed securities; (iv)
long positions in U.S. dollar
denominated agency mortgage to-beannounced transactions; (v) long
positions in U.S. Treasury securities;
(vi) short positions in U.S. Treasury
futures; and (vii) short positions in U.S.
Treasury securities through transactions
in interest rate swaps. The Fund seeks
to invest in a portfolio of Fixed Income
Securities that in the aggregate has
approximately equal exposure to credit
spread risk and interest rate risk, which
is measured by BFA as the volatility of
returns of a security associated with
changes in the security’s credit spread
or changes in interest rates.
In selecting corporate securities for
the Fund, BFA may employ a credit
Adviser to be of comparable quality. BFA may
determine that unrated securities are of comparable
quality based on such credit quality factors that it
deems appropriate, which may include, among
other things, performing an analysis similar, to the
extent possible, to that performed by a nationally
recognized statistical rating organization rating
similar securities and issuers.
17 The Fund currently anticipates investing in
only registered open-end investment companies,
including mutual funds and the open-end
investment company funds described in BATS Rule
14.11, but notes that the Exemptive Order allows
the Fund to invest in ‘‘shares of other ETFs, shares
of money market mutual funds, or other investment
companies.’’
18 See BATS Rule 14.11(c)(4)(B)(i) governing fixed
income based Index Fund Shares. For the purposes
of this footnote, the term ‘‘fixed income securities’’
will include all holdings of the Fund. The Fund’s
portfolio will meet the following requirements of
Rule 14.11(c)(4)(B)(i): (1) Components that in the
aggregate account for at least 75% of the weight of
the index or portfolio must have a minimum
original principal amount outstanding of $100
million or more (Rule 14.11(c)(4)(B)(i)(b)); (2) a
component may be a convertible security, however,
once the convertible security component converts
to an underlying equity security, the component is
removed from the index or portfolio (Rule
14.11(c)(4)(B)(i)(c)); and (3) no component fixedincome security (excluding Treasury Securities)
will represent more than 30% of the weight of the
index or portfolio, and the five highest weighted
component fixed-income securities do not in the
aggregate account for more than 65% of the weight
of the index or portfolio (Rule 14.11(c)(4)(B)(i)(d)).
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
screening process centered on research
and analysis of issuer credit quality to
reduce exposure to credit issuers that
have potential for experiencing credit
deterioration. The remaining credit
portfolio is then constructed to match
the key target risk characteristics which
BFA determines to be relevant in
prevailing market conditions.
To adjust the exposure to interest rate
risks, BFA may employ short positions
primarily in U.S. Treasury futures and
interest rate swaps. By taking these
short positions, BFA seeks to mitigate,
but not eliminate, the impact of
Treasury interest rates on the
performance of the underlying bonds.
The short positions are not intended to
mitigate other factors influencing the
price of bonds.
The Fund is an actively-managed
fund that does not seek to replicate the
performance of a specified index.
Other Portfolio Holdings
tkelley on DSK3SPTVN1PROD with NOTICES
In addition to the derivatives holdings
described above as part of the Fund’s
principal investment strategy, the Fund
may also, to a limited extent (under
normal circumstances, less than 20% of
the Fund’s net assets), engage in
transactions in the following
instruments:
Treasury futures, interest rate swaps,
credit default swaps, asset-backed Fixed
Income Securities, non-Agency
mortgage-backed fixed-income
securities, and structured securities 19 in
order to serve additional investment
objectives of the Fund.20 Asset-backed
securities are fixed-income securities
that are backed by a pool of assets,
usually loans such as installment sale
contracts or credit card receivables.
Mortgage-backed securities are assetbacked securities based on a particular
type of asset, a mortgage. There are a
wide variety of mortgage-backed
securities involving commercial or
residential, fixed-rate or adjustable rate
19 ‘‘Structured securities’’ generally includes
privately-issued and publicly-issued structured
securities, including certain publicly-issued
structured securities that are not agency securities,
excluding agency mortgage backed securities.
Examples include, but are not limited to: Assetbacked securities backed by assets such as
consumer receivables, credit cards, student loans,
and equipment leases; asset-backed commercial
paper; credit linked notes; and secured funding
notes. Structured securities do not include agency
mortgage-backed securities.
20 In addition to the uses described above,
derivatives might be included in the Fund’s
investments to serve additional investment
objectives of the Fund. Such uses are limited to the
following: Using a combination of treasury futures,
interest rate swaps, and credit default swaps to
equitize coupon income and cash holdings. The
derivatives will be exchange traded and/or centrally
cleared, and they will be collateralized.
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mortgages and mortgages issued by
banks or government agencies.
Investment Restrictions
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including Rule 144A
securities deemed illiquid by the
Adviser 21 under the 1940 Act.22 The
Fund will monitor its portfolio liquidity
on an ongoing basis to determine
whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund’s investments will be
consistent with the Fund’s investment
objective and will not be used to
achieve leveraged or inverse leveraged
returns (i.e. two times or three times the
Fund’s benchmark).
Net Asset Value
According to the Registration
Statement, the net asset value (‘‘NAV’’)
21 In reaching liquidity decisions, the Adviser
may consider factors including: 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; 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); any
legal or contractual restrictions on the ability to
transfer the security or asset; significant
developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the
securities markets generally; and settlement
practices, registration procedures, limitations on
currency conversion or repatriation, and transfer
limitations (for foreign securities or other assets).
22 The Commission has stated that long-standing
Commission guidelines have required open-end
funds to hold no more than 15% of their net assets
in illiquid securities and other illiquid assets. See
Investment Company Act Release No. 28193 (March
11, 2008), 73 FR 14618 (March 18, 2008), footnote
34. See also, Investment Company Act Release No.
5847 (October 21, 1969), 35 FR 19989 (December
31, 1970) (Statement Regarding ‘‘Restricted
Securities’’); Investment Company Act Release No.
18612 (March 12, 1992), 57 FR 9828 (March 20,
1992) (Revisions of Guidelines to Form N–1A). A
fund’s portfolio security is illiquid if it cannot be
disposed of in the ordinary course of business
within seven days at approximately the value
ascribed to it by the fund. See Investment Company
Act Release No. 14983 (March 12, 1986), 51 FR
9773 (March 21, 1986) (adopting amendments to
Rule 2a–7 under the 1940 Act); Investment
Company Act Release No. 17452 (April 23, 1990),
55 FR 17933 (April 30, 1990) (adopting Rule 144A
under the Securities Act of 1933).
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of the Fund’s Shares generally will be
calculated once daily Monday through
Friday as of the close of regular trading
on the Exchange, generally 4:00 p.m.
Eastern Time (the ‘‘NAV Calculation
Time’’) on each day that the Exchange
is open for trading, based on prices at
the NAV Calculation Time. NAV per
Share is calculated by dividing the
Fund’s net assets by the number of Fund
Shares outstanding. The Fund’s net
assets are valued primarily on the basis
of market quotations.
According to the Registration
Statement, the Fund values nonexchange traded Fixed Income
Securities using prices provided directly
from one or more broker-dealers, market
makers, independent third-party pricing
services which may use matrix pricing
and valuation models to derive values,
or, for investment companies, NAV.
Exchange traded instruments, including
exchange traded Fixed Income
Securities and futures, will be valued at
market closing price or, if no sale has
occurred, at the last quoted bid price on
the primary exchange on which they are
traded. Price information for exchange
traded instruments, including exchange
traded derivatives, will be taken from
the exchange where the security is
primarily traded. Over-the-counter
derivatives are valued based upon
quotations from market makers or by a
pricing service in accordance with
valuation procedures approved by the
Fund’s board of directors. Certain shortterm debt securities will be valued on
the basis of amortized cost.
According to the Registration
Statement, generally, trading in certain
Fixed Income Securities is substantially
completed each day at various times
prior to the close of business on the
Exchange. Additionally, trading in
certain derivatives is substantially
completed each day at various times
prior to the close of business on the
Exchange. The values of such securities
and derivatives used in computing the
NAV of the Fund are determined at such
times.
According to the Registration
Statement, when market quotations are
not readily available or are believed by
BFA to be unreliable, the Fund’s
investments are valued at fair value.
Fair value determinations are made by
BFA in accordance with policies and
procedures approved by the Fund’s
board of directors and in accordance
with the 1940 Act. BFA may conclude
that a market quotation is not readily
available or is unreliable if a security or
other asset or liability is thinly traded,
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The Shares
The Fund will issue and redeem
Shares on a continuous basis at the NAV
per Share only in large blocks of a
specified number of Shares or multiples
thereof (‘‘Creation Units’’) in
transactions with authorized
participants who have entered into
agreements with the Distributor. The
Fund currently anticipates that a
Creation Unit will consist of 50,000
Shares, though this number may change
from time to time, including prior to
listing of the Fund. The exact number of
Shares that will constitute a Creation
Unit will be disclosed in the
Registration Statement of the Fund.
Once created, Shares of the Fund trade
on the secondary market in amounts
less than a Creation Unit.
The consideration for purchase of
Creation Units of the Fund generally
will consist of the in-kind deposit of a
designated portfolio of securities
(including any portion of such securities
for which cash may be substituted) (i.e.,
the ‘‘Deposit Securities’’), and the ‘‘Cash
Component’’ computed as described
below. Together, the Deposit Securities
and the Cash Component constitute the
‘‘Fund Deposit,’’ which represents the
minimum initial and subsequent
investment amount for a Creation Unit
of the Fund.
The portfolio of securities required for
purchase of a Creation Unit may not be
identical to the portfolio of securities
the Fund will deliver upon redemption
of Fund Shares. The Deposit Securities
and Fund Securities (as defined below),
as the case may be, in connection with
a purchase or redemption of a Creation
Unit, generally will correspond pro rata
to the securities held by the Fund.
The Cash Component will be an
amount equal to the difference between
the NAV of the Shares (per Creation
Unit) and the ‘‘Deposit Amount,’’ which
will be an amount equal to the market
value of the Deposit Securities, and
serve to compensate for any differences
between the NAV per Creation Unit and
the Deposit Amount. The Fund
generally offers Creation Units partially
for cash. BFA will make available
through the National Securities Clearing
Corporation (‘‘NSCC’’) on each business
day, prior to the opening of business on
the Exchange, the list of names and the
required number or par value of each
Deposit Security and the amount of the
Cash Component to be included in the
current Fund Deposit (based on
information as of the end of the
previous business day) for the Fund.
The identity and number or par value
of the Deposit Securities may change
pursuant to changes in the composition
of the Fund’s portfolio as rebalancing
adjustments and corporate action events
occur from time to time. The
composition of the Deposit Securities
may also change in response to
adjustments to the weighting or
composition of the holdings of the
Fund.
The Fund reserves the right to permit
or require the substitution of a ‘‘cash in
lieu’’ amount to be added to the Cash
Component to replace any Deposit
Security that may not be available in
sufficient quantity for delivery or that
may not be eligible for transfer through
the Depository Trust Company (‘‘DTC’’)
or the clearing process through the
NSCC.24
Except as noted below, all creation
orders must be placed for one or more
Creation Units and must be received by
the Distributor in proper form no later
than 4:00 p.m., Eastern Time, in each
case on the date such order is placed in
order for creation of Creation Units to be
effected based on the NAV of Shares of
the Fund as next determined on such
date after receipt of the order in proper
form. Orders requesting substitution of
a ‘‘cash in lieu’’ amount generally must
be received by the Distributor no later
than 2:00 p.m., Eastern Time on the
Settlement Date. The ‘‘Settlement Date’’
is generally the third business day after
the transmittal date. On days when the
Exchange or the bond markets close
earlier than normal, the Fund may
require orders to create or to redeem
Creation Units to be placed earlier in the
day.
23 A ‘‘significant event’’ is an event that, in the
judgment of BFA, is likely to cause a material
change to the closing market price of the asset or
liability held by the Fund.
24 The Adviser represents that, to the extent the
Trust permits or requires a ‘‘cash in lieu’’ amount,
such transactions will be effected in the same or
equitable manner for all authorized participants.
tkelley on DSK3SPTVN1PROD with NOTICES
or where there is a significant event 23
subsequent to the most recent market
quotation.
According to the Registration
Statement, fair value represents a good
faith approximation of the value of an
asset or liability. The fair value of an
asset or liability held by the Fund is the
amount the Fund might reasonably
expect to receive from the current sale
of that asset or the cost to extinguish
that liability in an arm’s-length
transaction. Valuing the Fund’s
investments using fair value pricing will
result in prices that may differ from
current valuations and that may not be
the prices at which those investments
could have been sold during the period
in which the particular fair values were
used.
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589
Fund Deposits must be delivered
through the Federal Reserve System (for
cash and government securities),
through DTC (for corporate and
municipal securities), or through a
central depository account, such as with
Euroclear or DTC, maintained by State
Street or a sub-custodian (a ‘‘Central
Depository Account’’) by an authorized
participant. Any portion of a Fund
Deposit that may not be delivered
through the Federal Reserve System or
DTC must be delivered through a
Central Depository Account. The Fund
Deposit transfer must be ordered by the
authorized participant in a timely
fashion so as to ensure the delivery of
the requisite number of Deposit
Securities to the account of the Fund by
no later than 3:00 p.m., Eastern Time,
on the Settlement Date.
A standard creation transaction fee
will be imposed to offset the transfer
and other transaction costs associated
with the issuance of Creation Units.
Shares of the Fund may be redeemed
only in Creation Units at their NAV next
determined after receipt of a redemption
request in proper form by the
Distributor and only on a business day.
BFA will make available through the
NSCC, prior to the opening of business
on the Exchange on each business day,
the designated portfolio of securities
(including any portion of such securities
for which cash may be substituted) that
will be applicable (subject to possible
amendment or correction) to
redemption requests received in proper
form on that day (‘‘Fund Securities’’).
Fund Securities received on redemption
may not be identical to Deposit
Securities that are applicable to
creations of Creation Units.
Unless cash redemptions are available
or specified for the Fund, the
redemption proceeds for a Creation Unit
generally will consist of a specified
amount of cash, Fund Securities, plus
additional cash in an amount equal to
the difference between the NAV of the
Shares being redeemed, as next
determined after the receipt of a request
in proper form, and the value of the
specified amount of cash and Fund
Securities, less a redemption transaction
fee. The Fund generally redeems
Creation Units partially for cash.
A standard redemption transaction fee
will be imposed to offset transfer and
other transaction costs that may be
incurred by the Fund.
Redemption requests for Creation
Units of the Fund must be submitted to
the Distributor by or through an
authorized participant no later than 4:00
p.m. Eastern Time on any business day,
in order to receive that day’s NAV. The
authorized participant must transmit the
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request for redemption in the form
required by the Fund to the Distributor
in accordance with procedures set forth
in the authorized participant agreement.
Additional information regarding the
Shares and the Fund, including
investment strategies, risks, creation and
redemption procedures, fees and
expenses, portfolio holdings disclosure
policies, distributions, taxes and reports
to be distributed to beneficial owners of
the Shares can be found in the
Registration Statement or on the Web
site for the Fund (www.iShares.com), as
applicable.
tkelley on DSK3SPTVN1PROD with NOTICES
Availability of Information
The Fund’s Web site, which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for the Fund that may
be downloaded. The Web site will
include additional quantitative
information updated on a daily basis,
including, for the Fund: (1) The prior
business day’s reported NAV, mid-point
of the bid/ask spread at the time of
calculation of such NAV (the ‘‘Bid/Ask
Price’’),25 daily trading volume, and a
calculation of the premium and
discount of the Bid/Ask Price against
the NAV; and (2) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters. Daily
trading volume information for the
Fund will also be available in the
financial section of newspapers, through
subscription services such as
Bloomberg, Thomson Reuters, and
International Data Corporation, which
can be accessed by authorized
participants and other investors, as well
as through other electronic services,
including major public Web sites. On
each business day, before
commencement of trading in Shares
during Regular Trading Hours 26 on the
Exchange, the Fund will disclose on its
Web site the identities and quantities of
the portfolio of securities and other
assets (the ‘‘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.27
25 The Bid/Ask Price of the Fund will be
determined using the midpoint of the highest bid
and the lowest offer on the Exchange as of the time
of calculation of the Fund’s NAV. The records
relating to Bid/Ask Prices will be retained by the
Fund and its service providers.
26 Regular Trading Hours are 9:30 a.m. to 4:00
p.m. Eastern Time.
27 Under accounting procedures to be followed by
the Fund, trades made on the prior business day
(‘‘T’’) will be booked and reflected in NAV on the
current business day (‘‘T + 1’’). Accordingly, the
Fund will be able to disclose at the beginning of the
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Jkt 235001
On a daily basis, the Disclosed
Portfolio displayed on the Fund’s Web
site will include the following
information regarding each portfolio
holding, as applicable to the type of
holding: Ticker symbol, if any, CUSIP
number or other identifier, if any; a
description of the holding (including
the type of holding, such as the type of
swap); the identity of the security or
other asset or instrument underlying the
holding,28 if any; quantity held (as
measured by, for example, par value,
notional value or number of shares,
contracts or units); maturity date, if any;
coupon rate, if any; market value of the
holding; and the percentage weighting
of the holding in the Fund’s portfolio.
The Web site information will be
publicly available at no charge.
In addition, for the Fund, an
estimated value, defined in BATS Rule
14.11(i)(3)(C) as the ‘‘Intraday Indicative
Value,’’ that reflects an estimated
intraday value of the Fund’s portfolio,
will be disseminated. Moreover, the
Intraday Indicative Value will be based
upon the current value for the
components of the Disclosed Portfolio
and will be updated and widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Exchange’s Regular
Trading Hours.29 In addition, the
quotations of certain of the Fund’s
holdings may not be updated during
U.S. trading hours if such holdings do
not trade in the United States or if
updated prices cannot be ascertained.
The dissemination of the Intraday
Indicative Value, together with the
Disclosed Portfolio, will allow investors
to determine the value of the underlying
portfolio of the Fund on a daily basis
and provide a close estimate of that
value throughout the trading day.
Intraday, executable price quotations
on Fixed Income Securities and nonexchange traded derivatives, including
non-exchange listed investment
companies, are available from major
broker-dealer firms and for exchangetraded assets, including exchange listed
investment companies and futures, such
intraday information is available
directly from the applicable listing
exchange. All such intraday price
information is available through
subscription services, such as
business day the portfolio that will form the basis
for the NAV calculation at the end of the business
day.
28 Derivatives that reference or allow delivery of
more than one asset, such as U.S. Treasury futures,
will identify the underlying asset generically.
29 Currently, it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available Intraday Indicative Values
published via the Consolidated Tape Association
(‘‘CTA’’) or other data feeds.
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Bloomberg, Thomson Reuters and
International Data Corporation, which
can be accessed by authorized
participants and other investors.
Information regarding market price
and trading volume will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services. The
previous day’s closing price and trading
volume information for the Shares will
be published daily in the financial
section of newspapers. Quotation and
last sale information for the Shares will
be available on the facilities of the CTA.
Initial and Continued Listing
The Shares will be subject to BATS
Rule 14.11(i), which sets forth the initial
and continued listing criteria applicable
to Managed Fund Shares. The Exchange
represents that, for initial and/or
continued listing, the Fund must be in
compliance with Rule 10A–3 under the
Act.30 A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange. The Exchange will obtain a
representation from the issuer of the
Shares that the NAV per Share will be
calculated daily and that the NAV and
the Disclosed Portfolio will be made
available to all market participants at
the same time.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares of
the Fund. The Exchange will halt
trading in the Shares under the
conditions specified in BATS Rule
11.18. Trading may be halted because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments 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. Trading in the
Shares also will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth
circumstances under which Shares of
the Fund may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. BATS will allow
trading in the Shares from 8:00 a.m.
30 See
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06JAN1
Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
until 5:00 p.m. Eastern Time. The
Exchange has appropriate rules to
facilitate transactions in the Shares
during all trading sessions. As provided
in BATS Rule 11.11(a), the minimum
price variation for quoting and entry of
orders in Managed Fund Shares traded
on the Exchange is $0.01, with the
exception of securities that are priced
less than $1.00, for which the minimum
price variation for order entry is
$0.0001.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including Managed
Fund Shares. The Exchange may obtain
information regarding trading in the
Shares and the underlying shares in
exchange traded investment companies
and futures via the Intermarket
Surveillance Group (‘‘ISG’’), from other
exchanges who are members or affiliates
of the ISG, or with which the Exchange
has entered into a comprehensive
surveillance sharing agreement.31 In
addition, the Exchange is able to access,
as needed, trade information for certain
fixed income instruments reported to
FINRA’s Trade Reporting and
Compliance Engine (‘‘TRACE’’). The
Exchange prohibits the distribution of
material non-public information by its
employees.
tkelley on DSK3SPTVN1PROD with NOTICES
Information Circular
Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (1) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (2) BATS Rule 3.7, which
imposes suitability obligations on
Exchange members with respect to
recommending transactions in the
31 For a list of the current members and affiliate
members of ISG, see www.isgportal.com. The
Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. The Exchange also
notes that all of the investment company securities
and futures will trade on markets that are a member
of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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19:38 Jan 05, 2015
Jkt 235001
Shares to customers; (3) how
information regarding the Intraday
Indicative Value and the Disclosed
Portfolio is disseminated; (4) the risks
involved in trading the Shares during
the Pre-Opening 32 and After Hours
Trading Sessions 33 when an updated
Intraday Indicative Value will not be
calculated or publicly disseminated; (5)
the requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (6) trading information.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Fund. Members
purchasing Shares from the Fund for
resale to investors will deliver a
prospectus to such investors. The
Information Circular will also discuss
any exemptive, no-action, and
interpretive relief granted by the
Commission from any rules under the
Act.
In addition, the Information Circular
will reference that the Fund is subject
to various fees and expenses described
in the Registration Statement. The
Information Circular will also disclose
the trading hours of the Shares of the
Fund and the applicable NAV
Calculation Time for the Shares. The
Information Circular will disclose that
information about the Shares of the
Fund will be publicly available on the
Fund’s Web site. In addition, the
Information Circular will reference that
the Trust is subject to various fees and
expenses described in the Fund’s
Registration Statement.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 34 in general and Section
6(b)(5) of the Act 35 in particular in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, 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 Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
32 The Pre-Opening Session is from 8:00 a.m. to
9:30 a.m. Eastern Time.
33 The After Hours Trading Session is from 4:00
p.m. to 5:00 p.m. Eastern Time.
34 15 U.S.C. 78f.
35 15 U.S.C. 78f(b)(5).
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591
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in BATS Rule 14.11(i).
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws. If the
investment adviser to the investment
company issuing Managed Fund Shares
is affiliated with a broker-dealer, such
investment adviser to the investment
company shall erect a ‘‘fire wall’’
between the investment adviser and the
broker-dealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio. The Adviser is not a
registered broker-dealer, but is affiliated
with multiple broker-dealers and has
implemented ‘‘fire walls’’ with respect
to such broker-dealers regarding access
to information concerning the
composition and/or changes to the
Fund’s portfolio. The Exchange may
obtain information regarding trading in
the Shares and the underlying shares in
investment companies and futures via
the ISG, from other exchanges who are
members or affiliates of the ISG, or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement.36
According to the Registration
Statement, the Fund expects that it will
have at least 80% of its assets invested
in U.S. dollar-denominated investment
grade Fixed Income Securities, futures,
and swaps. The Fund’s exposure to any
single industry will generally be limited
to 25% of the Fund’s assets. The Fund’s
investments will be consistent with the
Fund’s investment objective and will
not be used to achieve leveraged or
inverse leveraged returns (i.e. two times
or three times the Fund’s benchmark).
The Fund also may invest its net assets
in money market instruments at the
discretion of the Adviser. While the
Fund is permitted to invest without
restriction in corporate bonds, the
Adviser expects that, under normal
circumstances, the Fund will generally
invest in corporate bond issuances that
have at least $250 million par amount
outstanding. The Fund will not invest in
non-U.S. equity securities.
The Fund may employ short positions
primarily in U.S. Treasury futures and
interest rate swaps in order to mitigate
the impact of Treasury interest rates on
the performance of the underlying
bonds. The short positions are not
36 See
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06JAN1
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intended to mitigate other factors
influencing the price of bonds.
Additionally, the Fund may hold up
to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including Rule
144A securities. The Fund will monitor
its portfolio liquidity on an ongoing
basis to determine whether, in light of
current circumstances, an adequate
level of liquidity is being maintained,
and will consider taking appropriate
steps in order to maintain adequate
liquidity if, through a change in values,
net assets, or other circumstances, more
than 15% of the Fund’s net assets are
held in illiquid assets. Illiquid assets
include securities subject to contractual
or other restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
In addition to the derivatives holdings
described above as part of the Fund’s
principal investment strategy, the Fund
may also, to a limited extent (under
normal circumstances, less than 20% of
the Fund’s net assets), engage in
transactions in the following
instruments:
Treasury futures, interest rate swaps,
credit default swaps, asset-backed Fixed
Income Securities, non-Agency
mortgage-backed fixed-income
securities, and structured securities in
order to serve additional investment
objectives of the Fund, as described
above.37
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. In
addition, a large amount of information
is publicly available regarding the Fund
and the Shares, thereby promoting
market transparency. Moreover, the
Intraday Indicative Value will be
disseminated by one or more major
market data vendors at least every 15
seconds during Regular Trading Hours.
On each business day, before
commencement of trading in Shares
during Regular Trading Hours, the Fund
will disclose on its Web site the
Disclosed Portfolio that will form the
basis for the Fund’s calculation of NAV
at the end of the business day. Pricing
information will be available on the
Fund’s Web site including: (1) The prior
business day’s reported NAV, the Bid/
Ask Price of the Fund, and a calculation
37 See
supra note 20.
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of the premium and discount of the Bid/
Ask Price against the NAV; and (2) data
in chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. Additionally, information
regarding market price and trading of
the Shares will be continually available
on a real-time basis throughout the day
on brokers’ computer screens and other
electronic services, and quotation and
last sale information for the Shares will
be available on the facilities of the CTA.
The Web site for the Fund will include
a form of the prospectus for the Fund
and additional data relating to NAV and
other applicable quantitative
information. Trading in Shares of the
Fund will be halted under the
conditions specified in BATS Rule
11.18. Trading may also be halted
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. Finally, trading in the
Shares will be subject to BATS Rule
14.11(i)(4)(B)(iv), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, the
Exchange is able to access, as needed,
trade information for certain fixed
income instruments reported to FINRA’s
TRACE. As noted above, investors will
also have ready access to information
regarding the Fund’s holdings, the
Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale
information for the Shares.
Intraday, executable price quotations
on Fixed Income Securities and nonexchange traded derivatives are
available from major broker-dealer firms
and for exchange-traded assets,
including investment companies and
futures, such intraday information is
available directly from the applicable
listing exchange. All such intraday price
information is available through
subscription services, such as
Bloomberg, Thomson Reuters and
International Data Corporation, which
can be accessed by authorized
participants and other investors.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Exchange has in place surveillance
procedures relating to trading in the
Shares and may obtain information via
ISG from other exchanges that are
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
members of ISG or with which the
Exchange has entered into a
comprehensive surveillance sharing
agreement. In addition, as noted above,
investors will have ready access to
information regarding the Fund’s
holdings, the Intraday Indicative Value,
the Disclosed Portfolio, and quotation
and last sale information for the Shares.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
additional actively-managed exchangetraded product that will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
E:\FR\FM\06JAN1.SGM
06JAN1
Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BATS–2014–056 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BATS–2014–056. 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 at 100 F Street NE.,
Washington, DC 20549–1090 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BATS–
2014–056, and should be submitted on
or before January 27, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Brent J. Fields,
Secretary.
[FR Doc. 2014–30901 Filed 1–5–15; 8:45 am]
tkelley on DSK3SPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73957; File No. SR–MIAX–
2014–068]
Self-Regulatory Organizations; Miami
International Securities Exchange LLC;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Its Fee Schedule
December 30, 2014.
Pursuant to the provisions of 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 December 19, 2014, Miami
International Securities Exchange LLC
(‘‘MIAX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
modify the Trading Permit Fee for
EEMs.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.miaxoptions.com/filter/
wotitle/rule_filing, at MIAX’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, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to modify its
Monthly Trading Permit fee to increase
the monthly Trading Permit fee that
1 15
38 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
19:38 Jan 05, 2015
2 17
Jkt 235001
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00113
Fmt 4703
Sfmt 4703
593
applies to Electronic Exchange Members
(‘‘EEMs’’). Specifically, the Exchange
proposes to increase the monthly
Trading Permit fee that applies to EEMs
to $1,500, from the current level of
$1,000.
The Exchange issues Trading Permits
that confer the ability to transact on the
Exchange.3 The Exchange assesses
monthly fees for Trading Permits
depending upon the category of Member
that is issued a particular trading
permit.4 EEMs are assessed a monthly
fee of $1,000 for a Trading Permit. All
Market Makers, whether they are a
Registered Market Makers (‘‘RMMs’’),
Lead Market Makers (‘‘LMMs’’), or
Primary Lead Market Makers
(‘‘PLMMs’’), are assessed $4,000.00 per
month for a Trading Permit for an
assignment in up to 100 option classes,
$5,500.00 per month for a Trading
Permit for an assignment in up to 250
option classes, or $7,000.00 per month
for a Trading Permit for an assignment
in all option classes listed on the
Exchange.
The Exchange proposes to increase
the monthly Trading Permit fee that
applies to EEMs to $1,500, in order to
increase the Exchange’s non-transaction
fee revenues. The Exchange notes that
the proposed monthly Trading Permit
fees are generally lower than monthly
trading permit fees in place at CBOE
and the NASDAQ OMX PHLX LLC
(‘‘PHLX’’). The $1,500 monthly Trading
Permit fee to be assessed to EEMs is
lower than the CBOE’s monthly
electronic access trading permit fee
($1,600) and the PHLX’s monthly permit
fee for members ($2,150).
Members receiving Trading Permits
during the month will be assessed
Trading Permit Fees according to the
above schedule, except that the
calculation of the Trading Permit fee for
the first month in which the Trading
Permit is issued will be pro-rated based
on the number of trading days occurring
3 There is no limit on the number of Trading
Permits that may be issued by the Exchange;
however the Exchange has the authority to limit or
decrease the number of Trading Permits it has
determined to issue provided it complies with the
provisions set forth in Rule 200(a) and Section
6(c)(4) of the Exchange Act. See 15 U.S.C.
78(f)(c)(4). For a complete description of MIAX
Trading Permits, see MIAX Rule 200.
4 The monthly Trading Permit Fee is in addition
to the one-time application fee for MIAX
Membership. The Exchange charges a one-time
application fee based upon the applicant’s status as
either an Electronic Exchange Member (‘‘EEM’’) or
as a Market Maker. Applicants for MIAX
Membership as an EEM are assessed a one-time
Application Fee of $2,500.00. Applicants for MIAX
Membership as a Market Maker are assessed a onetime Application Fee of $3,000.00. The difference
in the fee charged to EEMs and Market Makers
reflects the additional review and processing effort
needed for Market Maker applications.
E:\FR\FM\06JAN1.SGM
06JAN1
]]>Agencies
[Federal Register Volume 80, Number 3 (Tuesday, January 6, 2015)]
[Notices]
[Pages 585-593]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30901]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73965; File No. SR-BATS-2014-056]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the
iShares U.S. Fixed Income Balanced Risk ETF of the iShares U.S. ETF
Trust Under Rule 14.11(i)
December 30, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 19, 2014, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange filed a proposal list and trade shares of the iShares
U.S. Fixed Income Balanced Risk ETF (the ``Fund'') of the iShares U.S.
ETF Trust (the ``Trust'') under BATS Rule 14.11(i) (``Managed Fund
Shares''). The shares of the Fund are collectively referred to herein
as the ``Shares.''
The text of the proposed rule change is available at the Exchange's
Web site at https://www.batstrading.com/, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
[[Page 586]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the Shares under BATS Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange.\3\ The Fund will be an actively managed fund. The
Shares will be offered by the Trust, which was established as a
Delaware statutory trust on June 21, 2011. The Trust is registered with
the Commission as an open-end investment company and has filed a
registration statement on behalf of the Fund on Form N-1A
(``Registration Statement'') with the Commission.\4\
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\3\ The Commission approved BATS Rule 14.11(i) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\4\ See Registration Statement on Form N-1A for the Trust, dated
April 21, 2014 (File Nos. 333-179904 and 811-22649). The
descriptions of the Fund and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Company under the Investment Company Act of 1940 (15 U.S.C. 80a-
1) (``1940 Act'') (the ``Exemptive Order''). See Investment Company
Act Release No. 29571 (January 24, 2011) (File No. 812-13601).
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Description of the Shares and the Fund
BlackRock Fund Advisors is the investment adviser (``BFA'' or
``Adviser'') to the Fund.\5\ State Street Bank and Trust Company is the
administrator, custodian, and transfer agent for the Trust. BlackRock
Investments, LLC (``Distributor'') serves as the distributor for the
Trust.
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\5\ BlackRock Fund Advisors is an indirect wholly owned
subsidiary of BlackRock, Inc.
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BATS Rule 14.11(i)(7) provides that, if the investment adviser to
the investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect a ``fire wall''
between the investment adviser and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
investment company portfolio.\6\ In addition, Rule 14.11(i)(7) further
requires that personnel who make decisions on the investment company's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material nonpublic information regarding
the applicable investment company portfolio. Rule 14.11(i)(7) is
similar to BATS Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) in
connection with the establishment of a ``fire wall'' between the
investment adviser and the broker-dealer reflects the applicable open-
end fund's portfolio, not an underlying benchmark index, as is the case
with index-based funds. The Adviser is not a registered broker-dealer,
but is affiliated with multiple broker-dealers and has implemented
``fire walls'' with respect to such broker-dealers regarding access to
information concerning the composition and/or changes to the Fund's
portfolio. In addition, Adviser personnel who make decisions regarding
the Fund's portfolio are subject to procedures designed to prevent the
use and dissemination of material nonpublic information regarding the
Fund's portfolio. In the event that (a) the Adviser becomes a broker-
dealer or newly affiliated with a broker-dealer, or (b) any new adviser
or sub-adviser is a broker-dealer or becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to its relevant
personnel or such broker-dealer affiliate, as applicable, regarding
access to information concerning the composition and/or changes to the
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding such
portfolio.
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\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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iShares U.S. Fixed Income Balanced Risk Fund
According to the Registration Statement, the Fund will seek total
return and preservation of capital. To achieve its objective, the Fund
will invest, under normal circumstances,\7\ at least 80% of its net
assets in U.S. dollar-denominated investment-grade and high-yield
fixed-income securities, futures, and swaps, as described below. The
Fund seeks to provide exposure to a portfolio of Fixed Income
Securities, as defined below, where the expected contribution of
interest rate risk and credit spread risk are approximately equal. The
Fund will attempt to achieve an aggregate credit spread risk based on
the credit spread risk of the underlying securities (as determined by
BFA) primarily by adjusting the allocation among underlying securities.
To the extent necessary, the Fund will attempt to balance the aggregate
interest rate risk against the aggregate credit spread risk of the
underlying securities (as determined by BFA) primarily by taking short
or long positions in U.S. Treasury futures contracts and interest rate
swaps, as further described below. In the absence of normal
circumstances, the Fund may temporarily depart from its normal
investment process, provided that such departure is, in the opinion of
BFA, consistent with the Fund's investment objective and in the best
interests of the Fund. For example, the Fund may hold a higher than
normal proportion of its assets in cash in response to adverse market,
economic, or political conditions.
---------------------------------------------------------------------------
\7\ The term ``under normal circumstances'' includes, but is not
limited to, the absence of adverse market, economic, political, or
other conditions, including extreme volatility or trading halts in
the fixed income markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot, or labor disruption, or any similar intervening
circumstance.
---------------------------------------------------------------------------
The Fund is a non-diversified fund and therefore may invest a
greater portion of its assets in the securities of one or more issuers
than a diversified fund. The Fund, however, will not purchase the
securities of issuers conducting their principal business activity in
the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would
equal or exceed 25% of the current value of the Fund's total assets,
provided that this restriction does not limit the Fund's: (i)
Investments in securities of other investment companies, (ii)
investments in securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or (iii) investments in repurchase
agreements collateralized by U.S. government securities.\8\
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\8\ See Form N-1A, Item 9. The Commission has taken the position
that a fund is concentrated if it invests in more than 25% of the
value of its total assets in any one industry. See, e.g., Investment
Company Act Release No. 9011 (October 30, 1975), 40 FR 54241
(November 21, 1975).
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[[Page 587]]
The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\9\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
---------------------------------------------------------------------------
\9\ 26 U.S.C. 851.
---------------------------------------------------------------------------
Principal Holdings--Fixed Income Securities and Derivatives
The Fund intends to achieve its investment objective by investing,
under normal circumstances, at least 80% of its net assets in a
portfolio of U.S. dollar-denominated investment-grade and high-yield
fixed-income securities (``Fixed Income Securities''), futures, and
swaps, as described below. The Fund may invest, without limitation, in
high-yield securities rated CCC or higher by Moody's Investors Service,
Inc. or equivalently rated by Standard & Poor's Financial Services LLC
and/or Fitch, or, if unrated, determined by BFA to be of equivalent
quality.\10\ Under normal circumstances, the Fund will invest primarily
in fixed-rate Fixed Income Securities of varying maturities.
---------------------------------------------------------------------------
\10\ According to the Adviser, BFA may determine that unrated
Fixed Income Securities are of ``equivalent quality'' based on such
credit quality factors that it deems appropriate, which may include
among other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
---------------------------------------------------------------------------
The Fund seeks to balance interest rate and credit spread risk by
investing in a portfolio of Fixed Income Securities that in the
aggregate has approximately equal exposure to credit spread risk and
interest rate risk, which are measured by BFA as the volatility of
returns of a security associated with changes in the security's credit
spread or changes in interest rates. The Fund will adjust the
allocation among its underlying securities in an effort to achieve a
target credit spread risk and interest rate risk for the Fund's
portfolio. When necessary to balance the Fund's exposure to interest
rate risk against its exposure to credit spread risk, the Fund may take
short or long positions in U.S. Treasury futures and, through
transactions in interest rate swaps, take short positions in U.S.
Treasury securities. BFA will determine the aggregate credit spread
risk and interest rate risk of the Fund's portfolio. The Fund may also
invest in other interest rate futures contracts, including but not
limited to, Eurodollar and Federal Funds futures. The Fund's short
positions in U.S. Treasury futures and similar positions through
transaction in interest rate swaps are not intended to mitigate credit
spread risk or other factors influencing the price of non-government
bonds, which may have a greater impact than interest rates.\11\
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\11\ Derivatives held as part of the Fund's principal investment
strategy will be exchange traded and/or centrally cleared, and they
will be collateralized.
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Fixed Income Securities will include only the following
instruments: Fixed and floating rate debt securities, such as corporate
\12\ and government bonds, agency securities,\13\ instruments of non-
U.S. issuers,\14\ privately-issued securities,\15\ municipal bonds,
money market securities,\16\ and exchange traded and non-exchange
traded investment companies (including investment companies advised by
BFA or its affiliates) that invest in such Fixed Income
Securities.17 18
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\12\ While the Fund is permitted to invest without restriction
in corporate bonds, the Adviser expects that, under normal
circumstances, the Fund will generally invest in corporate bond
issuances that have at least $250 million par amount outstanding.
\13\ ``Agency securities'' for these purposes generally includes
securities issued by the following entities: Government National
Mortgage Association (Ginnie Mae), Federal National Mortgage
Association (Fannie Mae), Federal Home Loan Banks (FHLBanks),
Federal Home Loan Mortgage Corporation (Freddie Mac), Farm Credit
System (FCS) Farm Credit Banks (FCBanks), Student Loan Marketing
Association (Sallie Mae), Resolution Funding Corporation (REFCORP),
Financing Corporation (FICO), and the Farm Credit System (FCS)
Financial Assistance Corporation (FAC). Agency securities can
include, but are not limited to, mortgage-backed securities.
\14\ ``Instruments of non-U.S. issuers'' means U.S. dollar-
denominated fixed income securities issued by non-U.S. corporate or
sovereign entities.
\15\ ``Privately-issued securities'' generally includes Rule
144A securities and, in this context, may include both mortgage-
backed and non-mortgage 144A securities. To the Extent that the
Fund's holding of privately-issued securities include non-agency
mortgage-backed securities or illiquid assets, such holdings will be
subject to the limitations established in the ``Other Portfolio
Holdings'' and ``Investment Restrictions'' sections set forth below,
as applicable.
\16\ The Adviser expects that, under normal circumstances, the
Fund intends to invest in money market securities (as described
below) in a manner consistent with its investment objective in order
to help manage cash flows in and out of the Fund, such as in
connection with payment of dividends or expenses, and to satisfy
margin requirements, to provide collateral or to otherwise back
investments in derivative instruments. For these purposes, money
market securities include: Short-term, high-quality obligations
issued or guaranteed by the U.S. Treasury or the agencies or
instrumentalities of the U.S. government; short-term, high-quality
securities issued or guaranteed by non-U.S. governments, agencies
and instrumentalities; repurchase agreements; money market mutual
funds; commercial paper; and deposits and other obligations of U.S.
and non-U.S. banks and financial institutions. All money market
securities acquired by the Fund will be rated investment grade. The
Fund does not intend to invest in any unrated money market
securities. However, it may do so, to a limited extent, such as
where a rated money market security becomes unrated, if such money
market security is determined by the Adviser to be of comparable
quality. BFA may determine that unrated securities are of comparable
quality based on such credit quality factors that it deems
appropriate, which may include, among other things, performing an
analysis similar, to the extent possible, to that performed by a
nationally recognized statistical rating organization rating similar
securities and issuers.
\17\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in BATS Rule 14.11, but notes
that the Exemptive Order allows the Fund to invest in ``shares of
other ETFs, shares of money market mutual funds, or other investment
companies.''
\18\ See BATS Rule 14.11(c)(4)(B)(i) governing fixed income
based Index Fund Shares. For the purposes of this footnote, the term
``fixed income securities'' will include all holdings of the Fund.
The Fund's portfolio will meet the following requirements of Rule
14.11(c)(4)(B)(i): (1) Components that in the aggregate account for
at least 75% of the weight of the index or portfolio must have a
minimum original principal amount outstanding of $100 million or
more (Rule 14.11(c)(4)(B)(i)(b)); (2) a component may be a
convertible security, however, once the convertible security
component converts to an underlying equity security, the component
is removed from the index or portfolio (Rule 14.11(c)(4)(B)(i)(c));
and (3) no component fixed-income security (excluding Treasury
Securities) will represent more than 30% of the weight of the index
or portfolio, and the five highest weighted component fixed-income
securities do not in the aggregate account for more than 65% of the
weight of the index or portfolio (Rule 14.11(c)(4)(B)(i)(d)).
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BFA utilizes a model-based proprietary investment process to
assemble an investment portfolio comprised of (i) long positions in
U.S. dollar denominated investment-grade corporate bonds selected by
BFA based on certain criteria determined by BFA to be indicators of
creditworthiness; (ii) long positions in U.S. dollar-denominated high-
yield corporate bonds selected by BFA based on certain criteria
determined by BFA to be indicators of creditworthiness; (iii) long
positions in U.S. dollar-denominated agency mortgage backed securities;
(iv) long positions in U.S. dollar denominated agency mortgage to-be-
announced transactions; (v) long positions in U.S. Treasury securities;
(vi) short positions in U.S. Treasury futures; and (vii) short
positions in U.S. Treasury securities through transactions in interest
rate swaps. The Fund seeks to invest in a portfolio of Fixed Income
Securities that in the aggregate has approximately equal exposure to
credit spread risk and interest rate risk, which is measured by BFA as
the volatility of returns of a security associated with changes in the
security's credit spread or changes in interest rates.
In selecting corporate securities for the Fund, BFA may employ a
credit
[[Page 588]]
screening process centered on research and analysis of issuer credit
quality to reduce exposure to credit issuers that have potential for
experiencing credit deterioration. The remaining credit portfolio is
then constructed to match the key target risk characteristics which BFA
determines to be relevant in prevailing market conditions.
To adjust the exposure to interest rate risks, BFA may employ short
positions primarily in U.S. Treasury futures and interest rate swaps.
By taking these short positions, BFA seeks to mitigate, but not
eliminate, the impact of Treasury interest rates on the performance of
the underlying bonds. The short positions are not intended to mitigate
other factors influencing the price of bonds.
The Fund is an actively-managed fund that does not seek to
replicate the performance of a specified index.
Other Portfolio Holdings
In addition to the derivatives holdings described above as part of
the Fund's principal investment strategy, the Fund may also, to a
limited extent (under normal circumstances, less than 20% of the Fund's
net assets), engage in transactions in the following instruments:
Treasury futures, interest rate swaps, credit default swaps, asset-
backed Fixed Income Securities, non-Agency mortgage-backed fixed-income
securities, and structured securities \19\ in order to serve additional
investment objectives of the Fund.\20\ Asset-backed securities are
fixed-income securities that are backed by a pool of assets, usually
loans such as installment sale contracts or credit card receivables.
Mortgage-backed securities are asset-backed securities based on a
particular type of asset, a mortgage. There are a wide variety of
mortgage-backed securities involving commercial or residential, fixed-
rate or adjustable rate mortgages and mortgages issued by banks or
government agencies.
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\19\ ``Structured securities'' generally includes privately-
issued and publicly-issued structured securities, including certain
publicly-issued structured securities that are not agency
securities, excluding agency mortgage backed securities. Examples
include, but are not limited to: Asset-backed securities backed by
assets such as consumer receivables, credit cards, student loans,
and equipment leases; asset-backed commercial paper; credit linked
notes; and secured funding notes. Structured securities do not
include agency mortgage-backed securities.
\20\ In addition to the uses described above, derivatives might
be included in the Fund's investments to serve additional investment
objectives of the Fund. Such uses are limited to the following:
Using a combination of treasury futures, interest rate swaps, and
credit default swaps to equitize coupon income and cash holdings.
The derivatives will be exchange traded and/or centrally cleared,
and they will be collateralized.
---------------------------------------------------------------------------
Investment Restrictions
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser \21\
under the 1940 Act.\22\ The Fund will monitor its portfolio liquidity
on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of the Fund's net assets are held in
illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
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\21\ In reaching liquidity decisions, the Adviser may consider
factors including: 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; 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); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
\22\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------
The Fund's investments will be consistent with the Fund's
investment objective and will not be used to achieve leveraged or
inverse leveraged returns (i.e. two times or three times the Fund's
benchmark).
Net Asset Value
According to the Registration Statement, the net asset value
(``NAV'') of the Fund's Shares generally will be calculated once daily
Monday through Friday as of the close of regular trading on the
Exchange, generally 4:00 p.m. Eastern Time (the ``NAV Calculation
Time'') on each day that the Exchange is open for trading, based on
prices at the NAV Calculation Time. NAV per Share is calculated by
dividing the Fund's net assets by the number of Fund Shares
outstanding. The Fund's net assets are valued primarily on the basis of
market quotations.
According to the Registration Statement, the Fund values non-
exchange traded Fixed Income Securities using prices provided directly
from one or more broker-dealers, market makers, independent third-party
pricing services which may use matrix pricing and valuation models to
derive values, or, for investment companies, NAV. Exchange traded
instruments, including exchange traded Fixed Income Securities and
futures, will be valued at market closing price or, if no sale has
occurred, at the last quoted bid price on the primary exchange on which
they are traded. Price information for exchange traded instruments,
including exchange traded derivatives, will be taken from the exchange
where the security is primarily traded. Over-the-counter derivatives
are valued based upon quotations from market makers or by a pricing
service in accordance with valuation procedures approved by the Fund's
board of directors. Certain short-term debt securities will be valued
on the basis of amortized cost.
According to the Registration Statement, generally, trading in
certain Fixed Income Securities is substantially completed each day at
various times prior to the close of business on the Exchange.
Additionally, trading in certain derivatives is substantially completed
each day at various times prior to the close of business on the
Exchange. The values of such securities and derivatives used in
computing the NAV of the Fund are determined at such times.
According to the Registration Statement, when market quotations are
not readily available or are believed by BFA to be unreliable, the
Fund's investments are valued at fair value. Fair value determinations
are made by BFA in accordance with policies and procedures approved by
the Fund's board of directors and in accordance with the 1940 Act. BFA
may conclude that a market quotation is not readily available or is
unreliable if a security or other asset or liability is thinly traded,
[[Page 589]]
or where there is a significant event \23\ subsequent to the most
recent market quotation.
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\23\ A ``significant event'' is an event that, in the judgment
of BFA, is likely to cause a material change to the closing market
price of the asset or liability held by the Fund.
---------------------------------------------------------------------------
According to the Registration Statement, fair value represents a
good faith approximation of the value of an asset or liability. The
fair value of an asset or liability held by the Fund is the amount the
Fund might reasonably expect to receive from the current sale of that
asset or the cost to extinguish that liability in an arm's-length
transaction. Valuing the Fund's investments using fair value pricing
will result in prices that may differ from current valuations and that
may not be the prices at which those investments could have been sold
during the period in which the particular fair values were used.
The Shares
The Fund will issue and redeem Shares on a continuous basis at the
NAV per Share only in large blocks of a specified number of Shares or
multiples thereof (``Creation Units'') in transactions with authorized
participants who have entered into agreements with the Distributor. The
Fund currently anticipates that a Creation Unit will consist of 50,000
Shares, though this number may change from time to time, including
prior to listing of the Fund. The exact number of Shares that will
constitute a Creation Unit will be disclosed in the Registration
Statement of the Fund. Once created, Shares of the Fund trade on the
secondary market in amounts less than a Creation Unit.
The consideration for purchase of Creation Units of the Fund
generally will consist of the in-kind deposit of a designated portfolio
of securities (including any portion of such securities for which cash
may be substituted) (i.e., the ``Deposit Securities''), and the ``Cash
Component'' computed as described below. Together, the Deposit
Securities and the Cash Component constitute the ``Fund Deposit,''
which represents the minimum initial and subsequent investment amount
for a Creation Unit of the Fund.
The portfolio of securities required for purchase of a Creation
Unit may not be identical to the portfolio of securities the Fund will
deliver upon redemption of Fund Shares. The Deposit Securities and Fund
Securities (as defined below), as the case may be, in connection with a
purchase or redemption of a Creation Unit, generally will correspond
pro rata to the securities held by the Fund.
The Cash Component will be an amount equal to the difference
between the NAV of the Shares (per Creation Unit) and the ``Deposit
Amount,'' which will be an amount equal to the market value of the
Deposit Securities, and serve to compensate for any differences between
the NAV per Creation Unit and the Deposit Amount. The Fund generally
offers Creation Units partially for cash. BFA will make available
through the National Securities Clearing Corporation (``NSCC'') on each
business day, prior to the opening of business on the Exchange, the
list of names and the required number or par value of each Deposit
Security and the amount of the Cash Component to be included in the
current Fund Deposit (based on information as of the end of the
previous business day) for the Fund.
The identity and number or par value of the Deposit Securities may
change pursuant to changes in the composition of the Fund's portfolio
as rebalancing adjustments and corporate action events occur from time
to time. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the holdings
of the Fund.
The Fund reserves the right to permit or require the substitution
of a ``cash in lieu'' amount to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient
quantity for delivery or that may not be eligible for transfer through
the Depository Trust Company (``DTC'') or the clearing process through
the NSCC.\24\
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\24\ The Adviser represents that, to the extent the Trust
permits or requires a ``cash in lieu'' amount, such transactions
will be effected in the same or equitable manner for all authorized
participants.
---------------------------------------------------------------------------
Except as noted below, all creation orders must be placed for one
or more Creation Units and must be received by the Distributor in
proper form no later than 4:00 p.m., Eastern Time, in each case on the
date such order is placed in order for creation of Creation Units to be
effected based on the NAV of Shares of the Fund as next determined on
such date after receipt of the order in proper form. Orders requesting
substitution of a ``cash in lieu'' amount generally must be received by
the Distributor no later than 2:00 p.m., Eastern Time on the Settlement
Date. The ``Settlement Date'' is generally the third business day after
the transmittal date. On days when the Exchange or the bond markets
close earlier than normal, the Fund may require orders to create or to
redeem Creation Units to be placed earlier in the day.
Fund Deposits must be delivered through the Federal Reserve System
(for cash and government securities), through DTC (for corporate and
municipal securities), or through a central depository account, such as
with Euroclear or DTC, maintained by State Street or a sub-custodian (a
``Central Depository Account'') by an authorized participant. Any
portion of a Fund Deposit that may not be delivered through the Federal
Reserve System or DTC must be delivered through a Central Depository
Account. The Fund Deposit transfer must be ordered by the authorized
participant in a timely fashion so as to ensure the delivery of the
requisite number of Deposit Securities to the account of the Fund by no
later than 3:00 p.m., Eastern Time, on the Settlement Date.
A standard creation transaction fee will be imposed to offset the
transfer and other transaction costs associated with the issuance of
Creation Units.
Shares of the Fund may be redeemed only in Creation Units at their
NAV next determined after receipt of a redemption request in proper
form by the Distributor and only on a business day. BFA will make
available through the NSCC, prior to the opening of business on the
Exchange on each business day, the designated portfolio of securities
(including any portion of such securities for which cash may be
substituted) that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form on that day
(``Fund Securities''). Fund Securities received on redemption may not
be identical to Deposit Securities that are applicable to creations of
Creation Units.
Unless cash redemptions are available or specified for the Fund,
the redemption proceeds for a Creation Unit generally will consist of a
specified amount of cash, Fund Securities, plus additional cash in an
amount equal to the difference between the NAV of the Shares being
redeemed, as next determined after the receipt of a request in proper
form, and the value of the specified amount of cash and Fund
Securities, less a redemption transaction fee. The Fund generally
redeems Creation Units partially for cash.
A standard redemption transaction fee will be imposed to offset
transfer and other transaction costs that may be incurred by the Fund.
Redemption requests for Creation Units of the Fund must be
submitted to the Distributor by or through an authorized participant no
later than 4:00 p.m. Eastern Time on any business day, in order to
receive that day's NAV. The authorized participant must transmit the
[[Page 590]]
request for redemption in the form required by the Fund to the
Distributor in accordance with procedures set forth in the authorized
participant agreement.
Additional information regarding the Shares and the Fund, including
investment strategies, risks, creation and redemption procedures, fees
and expenses, portfolio holdings disclosure policies, distributions,
taxes and reports to be distributed to beneficial owners of the Shares
can be found in the Registration Statement or on the Web site for the
Fund (www.iShares.com), as applicable.
Availability of Information
The Fund's Web site, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Fund that may be downloaded. The Web site will include additional
quantitative information updated on a daily basis, including, for the
Fund: (1) The prior business day's reported NAV, mid-point of the bid/
ask spread at the time of calculation of such NAV (the ``Bid/Ask
Price''),\25\ daily trading volume, and a calculation of the premium
and discount of the Bid/Ask Price against the NAV; and (2) data in
chart format displaying the frequency distribution of discounts and
premiums of the daily Bid/Ask Price against the NAV, within appropriate
ranges, for each of the four previous calendar quarters. Daily trading
volume information for the Fund will also be available in the financial
section of newspapers, through subscription services such as Bloomberg,
Thomson Reuters, and International Data Corporation, which can be
accessed by authorized participants and other investors, as well as
through other electronic services, including major public Web sites. On
each business day, before commencement of trading in Shares during
Regular Trading Hours \26\ on the Exchange, the Fund will disclose on
its Web site the identities and quantities of the portfolio of
securities and other assets (the ``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.\27\
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\25\ The Bid/Ask Price of the Fund will be determined using the
midpoint of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
\26\ Regular Trading Hours are 9:30 a.m. to 4:00 p.m. Eastern
Time.
\27\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T + 1'').
Accordingly, the Fund will be able to disclose at the beginning of
the business day the portfolio that will form the basis for the NAV
calculation at the end of the business day.
---------------------------------------------------------------------------
On a daily basis, the Disclosed Portfolio displayed on the Fund's
Web site will include the following information regarding each
portfolio holding, as applicable to the type of holding: Ticker symbol,
if any, CUSIP number or other identifier, if any; a description of the
holding (including the type of holding, such as the type of swap); the
identity of the security or other asset or instrument underlying the
holding,\28\ if any; quantity held (as measured by, for example, par
value, notional value or number of shares, contracts or units);
maturity date, if any; coupon rate, if any; market value of the
holding; and the percentage weighting of the holding in the Fund's
portfolio. The Web site information will be publicly available at no
charge.
---------------------------------------------------------------------------
\28\ Derivatives that reference or allow delivery of more than
one asset, such as U.S. Treasury futures, will identify the
underlying asset generically.
---------------------------------------------------------------------------
In addition, for the Fund, an estimated value, defined in BATS Rule
14.11(i)(3)(C) as the ``Intraday Indicative Value,'' that reflects an
estimated intraday value of the Fund's portfolio, will be disseminated.
Moreover, the Intraday Indicative Value will be based upon the current
value for the components of the Disclosed Portfolio and will be updated
and widely disseminated by one or more major market data vendors at
least every 15 seconds during the Exchange's Regular Trading Hours.\29\
In addition, the quotations of certain of the Fund's holdings may not
be updated during U.S. trading hours if such holdings do not trade in
the United States or if updated prices cannot be ascertained.
---------------------------------------------------------------------------
\29\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values published via the Consolidated Tape
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------
The dissemination of the Intraday Indicative Value, together with
the Disclosed Portfolio, will allow investors to determine the value of
the underlying portfolio of the Fund on a daily basis and provide a
close estimate of that value throughout the trading day.
Intraday, executable price quotations on Fixed Income Securities
and non-exchange traded derivatives, including non-exchange listed
investment companies, are available from major broker-dealer firms and
for exchange-traded assets, including exchange listed investment
companies and futures, such intraday information is available directly
from the applicable listing exchange. All such intraday price
information is available through subscription services, such as
Bloomberg, Thomson Reuters and International Data Corporation, which
can be accessed by authorized participants and other investors.
Information regarding market price and trading volume will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The previous
day's closing price and trading volume information for the Shares will
be published daily in the financial section of newspapers. Quotation
and last sale information for the Shares will be available on the
facilities of the CTA.
Initial and Continued Listing
The Shares will be subject to BATS Rule 14.11(i), which sets forth
the initial and continued listing criteria applicable to Managed Fund
Shares. The Exchange represents that, for initial and/or continued
listing, the Fund must be in compliance with Rule 10A-3 under the
Act.\30\ A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time.
---------------------------------------------------------------------------
\30\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund. The Exchange will halt trading in
the Shares under the conditions specified in BATS Rule 11.18. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which trading is not occurring in the
securities and/or the financial instruments 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. Trading in the Shares also will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
of the Fund may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BATS will allow
trading in the Shares from 8:00 a.m.
[[Page 591]]
until 5:00 p.m. Eastern Time. The Exchange has appropriate rules to
facilitate transactions in the Shares during all trading sessions. As
provided in BATS Rule 11.11(a), the minimum price variation for quoting
and entry of orders in Managed Fund Shares traded on the Exchange is
$0.01, with the exception of securities that are priced less than
$1.00, for which the minimum price variation for order entry is
$0.0001.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Managed Fund Shares. The
Exchange may obtain information regarding trading in the Shares and the
underlying shares in exchange traded investment companies and futures
via the Intermarket Surveillance Group (``ISG''), from other exchanges
who are members or affiliates of the ISG, or with which the Exchange
has entered into a comprehensive surveillance sharing agreement.\31\ In
addition, the Exchange is able to access, as needed, trade information
for certain fixed income instruments reported to FINRA's Trade
Reporting and Compliance Engine (``TRACE''). The Exchange prohibits the
distribution of material non-public information by its employees.
---------------------------------------------------------------------------
\31\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement. The Exchange
also notes that all of the investment company securities and futures
will trade on markets that are a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing
agreement.
---------------------------------------------------------------------------
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (1) The procedures for purchases
and redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) BATS Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (3) how information regarding
the Intraday Indicative Value and the Disclosed Portfolio is
disseminated; (4) the risks involved in trading the Shares during the
Pre-Opening \32\ and After Hours Trading Sessions \33\ when an updated
Intraday Indicative Value will not be calculated or publicly
disseminated; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information.
---------------------------------------------------------------------------
\32\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\33\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------
In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Fund. Members purchasing Shares from the Fund for
resale to investors will deliver a prospectus to such investors. The
Information Circular will also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from any rules under the
Act.
In addition, the Information Circular will reference that the Fund
is subject to various fees and expenses described in the Registration
Statement. The Information Circular will also disclose the trading
hours of the Shares of the Fund and the applicable NAV Calculation Time
for the Shares. The Information Circular will disclose that information
about the Shares of the Fund will be publicly available on the Fund's
Web site. In addition, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the Fund's
Registration Statement.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \34\ in general and Section 6(b)(5) of the Act \35\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, 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.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78f.
\35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in BATS Rule 14.11(i). The
Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of the Shares on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws. If the investment adviser
to the investment company issuing Managed Fund Shares is affiliated
with a broker-dealer, such investment adviser to the investment company
shall erect a ``fire wall'' between the investment adviser and the
broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio. The
Adviser is not a registered broker-dealer, but is affiliated with
multiple broker-dealers and has implemented ``fire walls'' with respect
to such broker-dealers regarding access to information concerning the
composition and/or changes to the Fund's portfolio. The Exchange may
obtain information regarding trading in the Shares and the underlying
shares in investment companies and futures via the ISG, from other
exchanges who are members or affiliates of the ISG, or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement.\36\
---------------------------------------------------------------------------
\36\ See supra note 31.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund expects that it
will have at least 80% of its assets invested in U.S. dollar-
denominated investment grade Fixed Income Securities, futures, and
swaps. The Fund's exposure to any single industry will generally be
limited to 25% of the Fund's assets. The Fund's investments will be
consistent with the Fund's investment objective and will not be used to
achieve leveraged or inverse leveraged returns (i.e. two times or three
times the Fund's benchmark). The Fund also may invest its net assets in
money market instruments at the discretion of the Adviser. While the
Fund is permitted to invest without restriction in corporate bonds, the
Adviser expects that, under normal circumstances, the Fund will
generally invest in corporate bond issuances that have at least $250
million par amount outstanding. The Fund will not invest in non-U.S.
equity securities.
The Fund may employ short positions primarily in U.S. Treasury
futures and interest rate swaps in order to mitigate the impact of
Treasury interest rates on the performance of the underlying bonds. The
short positions are not
[[Page 592]]
intended to mitigate other factors influencing the price of bonds.
Additionally, the Fund may hold up to an aggregate amount of 15% of
its net assets in illiquid assets (calculated at the time of
investment), including Rule 144A securities. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
In addition to the derivatives holdings described above as part of
the Fund's principal investment strategy, the Fund may also, to a
limited extent (under normal circumstances, less than 20% of the Fund's
net assets), engage in transactions in the following instruments:
Treasury futures, interest rate swaps, credit default swaps, asset-
backed Fixed Income Securities, non-Agency mortgage-backed fixed-income
securities, and structured securities in order to serve additional
investment objectives of the Fund, as described above.\37\
---------------------------------------------------------------------------
\37\ See supra note 20.
---------------------------------------------------------------------------
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the Intraday
Indicative Value will be disseminated by one or more major market data
vendors at least every 15 seconds during Regular Trading Hours. On each
business day, before commencement of trading in Shares during Regular
Trading Hours, the Fund will disclose on its Web site the Disclosed
Portfolio that will form the basis for the Fund's calculation of NAV at
the end of the business day. Pricing information will be available on
the Fund's Web site including: (1) The prior business day's reported
NAV, the Bid/Ask Price of the Fund, and a calculation of the premium
and discount of the Bid/Ask Price against the NAV; and (2) data in
chart format displaying the frequency distribution of discounts and
premiums of the daily Bid/Ask Price against the NAV, within appropriate
ranges, for each of the four previous calendar quarters. Additionally,
information regarding market price and trading of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services, and quotation
and last sale information for the Shares will be available on the
facilities of the CTA. The Web site for the Fund will include a form of
the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information. Trading in Shares of the
Fund will be halted under the conditions specified in BATS Rule 11.18.
Trading may also be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. Finally, trading in the Shares will be subject to BATS
Rule 14.11(i)(4)(B)(iv), which sets forth circumstances under which
Shares of the Fund may be halted. In addition, the Exchange is able to
access, as needed, trade information for certain fixed income
instruments reported to FINRA's TRACE. As noted above, investors will
also have ready access to information regarding the Fund's holdings,
the Intraday Indicative Value, the Disclosed Portfolio, and quotation
and last sale information for the Shares.
Intraday, executable price quotations on Fixed Income Securities
and non-exchange traded derivatives are available from major broker-
dealer firms and for exchange-traded assets, including investment
companies and futures, such intraday information is available directly
from the applicable listing exchange. All such intraday price
information is available through subscription services, such as
Bloomberg, Thomson Reuters and International Data Corporation, which
can be accessed by authorized participants and other investors.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding the Fund's holdings,
the Intraday Indicative Value, the Disclosed Portfolio, and quotation
and last sale information for the Shares.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional actively-managed exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
[[Page 593]]
Send an email to rule-comments@sec.gov. Please include
File Number SR-BATS-2014-056 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BATS-2014-056. 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 at 100 F Street NE.,
Washington, DC 20549-1090 on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
BATS-2014-056, and should be submitted on or before January 27, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30901 Filed 1-5-15; 8:45 am]
BILLING CODE 8011-01-P
