Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the AdvisorShares Pacific Asset Enhanced Floating Rate ETF Under NYSE Arca Equities Rule 8.600, 4015-4021 [2015-01246]
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Federal Register / Vol. 80, No. 16 / Monday, January 26, 2015 / Notices
investors, or otherwise in furtherance of
the purposes of the Act.
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:
• 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–
MIAX–2015–02 on the subject line.
Paper Comments
emcdonald on DSK67QTVN1PROD with NOTICES
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2015–02. 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 the
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–MIAX–2015–02 and should
be submitted on or before February 17,
2015.
19:34 Jan 23, 2015
[FR Doc. 2015–01248 Filed 1–23–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74093: File No. SR–
NYSEArca-2014–126]
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Brent J. Fields,
Secretary.
Jkt 235001
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, Relating to the
Listing and Trading of Shares of the
AdvisorShares Pacific Asset Enhanced
Floating Rate ETF Under NYSE Arca
Equities Rule 8.600
January 20, 2015.
I. Introduction
On November 19, 2014, NYSE Arca,
Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b-4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the AdvisorShares Pacific
Asset Enhanced Floating Rate ETF
(‘‘Fund’’) under NYSE Arca Equities
Rule 8.600. On November 26, 2014, the
Exchange filed Amendment No. 1 to the
proposal.3 The proposed rule change, as
modified by Amendment No. 1 thereto,
was published for comment in the
Federal Register on December 8, 2014.4
The Commission received no comments
on the proposal. This order approves the
proposed rule change, as modified by
Amendment No. 1.
II. Description of the Proposal
The Exchange proposes to list and
trade Shares of the Fund under NYSE
Arca Equities Rule 8.600 (‘‘Managed
Fund Shares’’), which governs the
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 amended the proposed rule
change in the following ways: (1) Specified that the
floating rate high yield corporate bonds in which
the Fund invests generally must have a $100
million par amount outstanding at the time of
investment; (2) clarified that senior loans in which
the Fund may invest includes leveraged loans; and
(3) specified that the U.S. exchange-traded futures
contracts, U.S. exchange-traded options on futures
contracts, and U.S. exchange-traded put and call
options in which the Fund invests will trade on
exchanges that are members of the Intermarket
Surveillance Group (‘‘ISG’’).
4 See Securities Exchange Act Release No. 73717
(December 2, 2014), 79 FR 72730 (‘‘Notice’’).
1 15
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
4015
listing and trading of Managed Fund
Shares on the Exchange. The Shares will
be offered by AdvisorShares Trust
(‘‘Trust’’), a statutory trust organized
under the laws of the State of Delaware
and registered with the Commission as
an open-end management investment
company.5 AdvisorShares Investments,
LLC (‘‘Adviser’’) will be the investment
adviser to the Fund, and Pacific Asset
Management (‘‘Sub-Adviser’’), will be
the sub-adviser to the Fund.6 The Bank
of New York Mellon (‘‘Administrator’’)
will serve as the administrator,
custodian, transfer agent and fund
accounting agent for the Fund. Foreside
Fund Services, LLC will be the principal
underwriter and distributor of the
Fund’s Shares.
The Exchange has made the following
representations and statements in
describing the Fund and its investment
strategy, including other portfolio
holdings and investment restrictions.7
5 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). The Exchange
states that on June 25, 2014, the Trust filed with the
Commission an amendment to its registration
statement on Form N–1A under the Securities Act
of 1933 (15 U.S.C. 77a) and under the 1940 Act
relating to the Fund (File Nos. 333–157876 and
811–22110) (‘‘Registration Statement’’). In addition,
according to the Exchange, the Commission has
issued an order granting certain exemptive relief to
the Trust under the 1940 Act. See Investment
Company Act Release No. 29291 (May 28, 2010)
(File No. 812–13677).
6 The Exchange represents that the Adviser is not
registered as a broker-dealer or affiliated with a
broker-dealer. The Sub-Adviser is not registered as
a broker-dealer but is affiliated with Pacific Select
Disteributors, Inc., a registered broker-dealer. The
Exchange states that the Sub-Adviser represetnts
that Pacific Select Distributors, Inc. is a limited
purpose broker-dealer with a primary business
purpose of serving as distributor for mutual funds
and variable annuity products, and that Pacific
Select Distributors, Inc. does not engage in any
borkerage or trading activity. The Exchange states
that in the event (a) the Adviser or the Sub-Adviser
becomes a registered broker-dealer or becomes
newly affilitated with a broker-dealer, or (b) any
new adviser or sub-adviser is a registered brokerdealer or becomes affiliated with a broker-dealer,
such adviser or sub-adviser will implement a fire
wall with respect to its relevant personnel or its
broker-dealer affiliate regarding access to
information concerning the composition of or
changes to the portfolio, and the adviser or subadviser will be subject to procedures designed to
prevent the use and dissemination of material nonpublic information regarding the portfolio.
7 The Commission notes that additional
information regarding the Fund, the Trust, and the
Shares, including investment strategies, risks,
creation and redemption procedures, fees, portfolio
holdings disclosure policies, distributions, and
taxes, among other things, can be found in the
Notice and the Registration Statement, as
applicable. See Notice, supra note 4, and
Registration Statement, supra note 5, respectively.
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emcdonald on DSK67QTVN1PROD with NOTICES
A. Principal Investments (under normal
circumstances) 8
According to the Exchange, the
Fund’s investment objective will seek to
provide a high level of current income.
The Fund will invest at least 80% of its
net assets (plus any borrowings for
investment purposes) in floating rate
loans and other floating rate debt
securities, derivatives or other
instruments that have economic
interests similar to such securities (each
as described further below). The
Exchange states that the Fund will seek
to outperform the Credit Suisse
Institutional Leveraged Loan Index. The
portfolio will be diversified by industry
and issuer, with no individual issuer
representing more than 5% of the
portfolio. The typical duration
positioning will be between 0.25 years
to 0.75 years as determined by the SubAdviser.9
The Fund will attempt to achieve its
investment objective through
investments in a focused portfolio
comprised primarily of senior secured
floating rate loans (‘‘Senior Loans’’),
floating rate high yield corporate
bonds,10 index credit default swaps,
single name credit default swaps, total
return swaps,11 interest rate swaps and
cash.
8 The Exchange states that the term ‘‘under
normal circumstances’’ means, without limitation,
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.
9 Duration is a measure used to determine the
sensitivity of a security’s price to changes in
interest rates. The longer a security’s duration, the
more sensitive it will be to changes in interest rates.
10 According to the Exchange, Senior Loans and
floating rate high yield corporate bonds are
instruments with interest rates which float, adjust,
or vary periodically based upon a benchmark
indicator, a specified adjustment schedule, or
prevailing interest rates. Senior Loans, and some
floating rate high yield corporate bonds, are debt
instruments that may have a right to payment that
is senior to most other debts of the borrowers.
Borrowers may include corporations, partnerships
and other entities that operate in a variety of
industries and geographic regions.
11 According to the Exchange, index credit default
swaps (CDX) can be used to gain exposure to a
basket of credit risk by selling protection against
default or other credit events or by buying
protection in order to hedge broad market credit
risk. Single name credit default swaps (CDS) can be
used to allow the Fund to increase or decrease
exposure to specific issuers through lower trading
costs. Total return swaps (TRS) are contracts to
obtain the total return of a reference asset or index
in exchange for paying a financing cost. Interest rate
swaps (IRS) are agreements between two parties to
exchange one stream of interest payments for
another. Each of these swaps is a type of derivative
instrument, a financial contract whose value
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18:48 Jan 23, 2015
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According to the Exchange, Senior
Loans and floating rate high yield
corporate bonds in which the Fund
intends to invest are expected to be
rated below investment grade (i.e., high
yield/high risk securities, sometimes
called non-investment grade
securities)12 or, may not be rated by any
nationally recognized rating service, and
if unrated, of comparable quality as
determined by the Sub-Adviser.
According to the Exchange, the Fund
generally will invest in Senior Loans
(including leveraged loans) that may be
in the form of participations and
assignments.13 Senior Loans in which
the Fund will invest consist of domestic
issuers and U.S. dollar denominated
foreign issuers. The Fund will invest in
Senior Loans that the Adviser or the
Sub-Adviser deems to be highly liquid
with readily available prices. The Fund
will invest in Senior Loans rated C or
higher by a credit rating agency
registered as a nationally recognized
statistical rating organization
(‘‘NRSRO’’) with the Commission, or is
unrated but considered to be of
comparable quality by the Adviser or
Sub-Adviser. The Fund will not invest
in Senior Loans that are in default at the
time of purchase. In addition, for
investment purposes, the Senior Loan
must have a par amount outstanding of
$150 million or greater at the time the
loan is originally issued.
According to the Exchange, floating
rate high yield corporate bonds in
depends upon, or is derived from, the value of an
underlying asset, reference rate or index, and may
relate to bonds, loans, interest rates and related
indexes. CDX, CDS, TRS and IRS are collectively
referred to as ‘‘swaps.’’ The Exchange states that the
Fund will typically use exchange-traded and overthe-counter (‘‘OTC’’) swaps as (i) a method to
enhance returns; (ii) a substitute for taking a
position in the underlying asset; and, (iii) as a part
of a strategy designed to reduce exposure to other
risks. To limit potential risks associated with such
transactions, the Fund will segregate assets
determined to be liquid by the Sub-Adviser in
accordance with the 1940 Act to cover its
obligations under derivative instruments. The Fund
will include appropriate risk disclosure in its
offering documents, including leveraging risk. The
use of swaps will increase the Fund’s net exposure
to a particular issue, fixed income markets, or the
financial markets generally.
12 According to the Exchange, non-investmentgrade securities, also referred to as ‘‘high yield
securities’’ or ‘‘junk bonds,’’ are debt securities that
are rated lower than the four highest rating
categories by a nationally recognized statistical
rating organization (for example, lower than Baa3
by Moody’s Investors Service, Inc. (‘‘Moody’s’’) or
lower than BBB- by Standard & Poor’s (‘‘S&P’’)) or
are determined to be of comparable quality by the
Fund’s Sub-Adviser.
13 According to the Exchange, a direct interest in
a Senior Loan may be acquired directly from the
agent of the lender or another lender by assignment
or an indirect interest may be acquired as a
participation in another lender’s portion of a Senior
Loan. Generally, secured Senior Loans are secured
by specific assets of the borrower.
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
which the Fund invests generally must
have $100 million or more par amount
outstanding at the time of investment.
To seek an increase in yield, the Fund
expects to employ leverage to enhance
potential return. The Fund may use
leverage by (i) borrowing money, up to
the maximum amount permitted under
the 1940 Act, for investment purposes
normally on a floating rate basis or (ii)
through swaps. The Fund’s investments
in swaps will be made in accordance
with the 1940 Act and consistent with
the Fund’s investment objective and
policies.14
The Fund’s assets that are not
invested directly in Senior Loans,
floating rate high yield corporate bonds,
or swaps will be held in cash or cash
equivalents, including money market
instruments and exchange traded
products (‘‘ETPs’’) 15 that invest in these
and other highly liquid instruments, in
order to cover its obligations under
certain swaps. The larger the value of
the Fund’s derivative positions, the
more the Fund will be required to
maintain cash or cash equivalents as
collateral for such derivatives.
B. Other (Non-Principal) Investments
The Exchange states that the Fund
may invest up to 20% of its net assets
14 The Fund will seek, where possible, to use
counterparties whose financial status is such that
the risk of default is reduced; however, the risk of
losses resulting from default is still possible. The
Sub-Adviser will evaluate the creditworthiness of
counterparties on an ongoing basis. In addition to
information provided by credit agencies, the SubAdviser evaluates each approved counterparty
using various methods of analysis, including
earning updates, a broker-dealer’s reputation, the
Sub-Adviser’s past experience with the brokerdealer, a counterparty’s liquidity and its share of
market participation.
15 According to the Exchange, ETPs include
Investment Company Units (as described in NYSE
Arca Equities Rule 5.2(j)(3)); Index-Linked
Securities (as described in NYSE Arca Equities Rule
5.2(j)(6)); Portfolio Depositary Receipts (as
described in NYSE Arca Equities Rule 8.100); Trust
Issued Receipts (as described in NYSE Arca
Equities Rule 8.200); Commodity-Based Trust
Shares (as described in NYSE Arca Equities Rule
8.201); Currency Trust Shares (as described in
NYSE Arca Equities Rule 8.202); Commodity Index
Trust Shares (as described in NYSE Arca Equities
Rule 8.203); Trust Units (as described in NYSE Arca
Equities Rule 8.500); and Managed Fund Shares (as
described in NYSE Arca Equities Rule 8.600). The
Exchange states that the ETPs all will be listed and
traded in the U.S. on registered exchanges and that
the Fund will invest in the securities of ETFs
registered under the 1940 Act consistent with the
requirements of Section 12(d)(1) of the 1940 Act, or
any rule, regulation or order of the Commission or
interpretation thereof and the Fund will only make
such ETF investments in conformity with the
requirements of Regulation M of the Internal
Revenue Code of 1986, as amended. While the Fund
may invest in inverse ETPs, the Fund will not
invest in leveraged or inverse leveraged ETPs (e.g.,
2X or 3X).
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in the securities and financial
instruments described below.16
The Fund may invest in debt
securities (other than those described in
the Principal Investments section),
including investment-grade, noninvestment-grade, and unrated
securities. Debt securities in which the
Fund may invest consist of the
following: (i) Bank obligations of
domestic and foreign banks, which may
include certificates of deposit,
commercial paper,17 bankers’
acceptances, and fixed time deposits;18
(ii) corporate debt; 19 (ii) asset-backed
securities (‘‘ABS’’); 20 mortgage-backed
securities (‘‘MBS’’) and mortgage-related
securities; 21 inflation-indexed bonds;22
floating rate loans (other than those
described in the Principal Investments
emcdonald on DSK67QTVN1PROD with NOTICES
16 Unless
otherwise indicated, the Fund may
invest up to 20% of its net assets in the types of
investments referenced below in this section,
subject to the limitations imposed by the Fund’s
investment objective, policies, and restrictions
described in the Fund’s Registration Statement, as
well as the federal securities laws.
17 According to the Exchange, commercial paper
is a short-term obligation with a maturity ranging
from one to 270 days issued by banks, corporations
and other borrowers. The Fund may invest in
commercial paper rated A–1 or A–2 by S&P or
Prime-1 or Prime-2 by Moody’s.
18 According to the Exchange, the Fund will not
invest in fixed time deposits which (i) are not
subject to prepayment; or (ii) provide for
withdrawal penalties upon prepayment, if in the
aggregate, more than 15% of its net assets would be
invested in such deposits, repurchase agreements
with remaining maturities of more than seven days,
or other illiquid assets.
19 According to the Exchange, corporate debt are
debt securities issued by businesses to finance their
operations and consist of notes, corporate bonds,
high yield bonds, debentures and commercial
paper. The Fund may invest in corporate debt
issued by domestic or foreign companies of all
kinds, including those with small-, mid-, and largecapitalizations. The Fund may also invest in
corporate debt securities which are representative
of one or more high-yield bond or credit derivative
indices, which may change from time to time.
20 According to the Exchange, ABS are
instruments created from many types of assets,
including auto loans, credit card receivables, home
equity loans, and student loans. ABS are issued
through special purpose vehicles that are
bankruptcy remote from the issuer of the collateral.
The Fund may invest in ABS provided such
securities are consistent with the Fund’s investment
objectives and policies. The Fund will not invest
more than 5% of its net assets in non-agency ABS.
21 According to the Exchange, MBS and mortgagerelated securities are interests in pools of residential
or commercial mortgage loans, including mortgage
loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others.
Pools of mortgage loans are assembled as securities
for sale to investors by various governmental,
government-related and private organizations. The
Fund also may invest in debt instruments which are
secured with collateral consisting of mortgagerelated securities. The Fund will not invest,
however, more than 5% of its net assets in MBS and
mortgage-related securities.
22 According to the Exchange, inflation-indexed
bonds are debt securities whose principal value is
periodically adjusted according to the rate of
inflation.
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18:48 Jan 23, 2015
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section) consisting of (a) unsecured
senior loans and (b) secured and
unsecured subordinated loans, second
lien loans, and subordinated bridge
loans (‘‘Junior Loans’’); 23 and U.S.
government securities.24
The Fund may invest in issuers
located outside the United States
directly, or in financial instruments,
ETFs, or other ETPs25 that are indirectly
linked to the performance of foreign
issuers. Such financial instruments
consist of American Depositary Receipts
(‘‘ADRs’’), Global Depositary Receipts
(‘‘GDRs’’), European Depositary Receipts
(‘‘EDRs’’), International Depository
Receipts (‘‘IDRs’’), ‘‘ordinary shares,’’
and ‘‘New York shares’’ issued and
traded in the U.S.26
23 According to the Exchange, unsecured senior
loans and Junior Loans are subject to the same
general risks of Senior Loans; however, due to their
lower place in the borrower’s capital structure and
possible unsecured status, unsecured senior loans
and Junior Loans involve a higher degree of overall
risk than Senior Loans of the same borrower. The
Fund will invest in Junior Loans the Adviser or
Sub-Adviser deems to be highly liquid with readily
available prices. The Fund will invest in Junior
Loans rated C or higher by a NRSRO, or unrated but
considered to be of comparable quality by the
Adviser or Sub-Adviser. The Fund will not invest
in Junior Loans that are in default at time of
purchase. In addition, for investment purposes,
each Junior Loan must have a par amount
outstanding of $150 million or greater at the time
the loan is originally issued.
24 According to the Exchange, U.S. government
securities are securities issued or guaranteed by the
U.S. government or its agencies or
instrumentalities, and consist of U.S. Treasury bills;
U.S. Treasury notes; U.S. Treasury bonds;
obligations issued by U.S. government agencies and
instrumentalities which are supported by (a) the
full faith and credit of the U.S. Treasury, (b) the
discretionary authority of the U.S. government, or
(c) the right of the issuer to borrow from the U.S.
Treasury; separately traded principal and interest
components of securities guaranteed or issued by
the U.S. government or its agencies,
instrumentalities, or sponsored enterprises if such
components trade independently under the
Separate Trading of Registered Interest and
Principal of Securities program (‘‘STRIPS’’) or any
similar program sponsored by the U.S. government;
or U.S. Treasury zero-coupon bonds (which include
U.S. Treasury bonds which have been stripped of
their unmatured interest coupons, the coupons
themselves, and receipts or certificates representing
interests in such stripped debt obligations and
coupons).
25 See supra note 15.
26 According to the Exchange, ADRs are U.S.
dollar denominated receipts typically issued by
U.S. banks and trust companies that evidence
ownership of underlying securities issued by a
foreign issuer. The underlying securities may not
necessarily be denominated in the same currency as
the securities into which they may be converted.
The underlying securities are held in trust by a
custodian bank or similar financial institution in
the issuer’s home country. The depositary bank may
not have physical custody of the underlying
securities at all times and may charge fees for
various services, including forwarding dividends
and interest and corporate actions. Generally, ADRs
in registered form are designed for use in domestic
securities markets and are traded on exchanges or
OTC in the U.S. GDRs, EDRs, and IDRs are similar
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4017
The Fund may trade U.S. exchangetraded futures contracts, U.S. exchangetraded or OTC options on futures
contracts, and U.S. exchange-traded or
OTC put and call options on securities
and securities indices, as the SubAdviser determines is appropriate in
seeking the Fund’s investment objective,
and except as restricted by the Fund’s
investment limitations. U.S. exchangetraded futures contracts, U.S. exchangetraded options on futures contracts, and
U.S. exchange-traded put and call
options in which the Fund invests will
trade on exchanges that are members of
ISG.
The Fund may invest in structured
notes.27
The Fund may invest in exchangetraded equity securities that represent
ownership interests in a company or
partnership and that consist of common
stocks, preferred stocks, warrants to
acquire common stock, securities
convertible into common stock,
investments in master limited
partnerships, and rights.
The Fund may invest in the securities
of other investment companies
(including index-based and actively
managed) to the extent that such an
investment would be consistent with
the requirements of Section 12(d)(1) of
the 1940 Act, or any rule, regulation or
order of the Commission or
interpretation thereof. Consistent with
the restrictions discussed above, the
Fund may invest in several different
types of investment companies from
to ADRs in that they are certificates evidencing
ownership of shares of a foreign issuer; however,
GDRs, EDRs, and IDRs may be issued in bearer form
and denominated in other currencies, and are
generally designed for use in specific or multiple
securities markets outside the U.S. EDRs, for
example, are designed for use in European
securities markets while GDRs are designed for use
throughout the world. Ordinary shares are shares of
foreign issuers that are traded abroad and on a U.S.
exchange. New York shares are shares that a foreign
issuer has allocated for trading in the U.S. ADRs,
ordinary shares, and New York shares all may be
purchased with and sold for U.S. dollars. ADRs may
be sponsored or unsponsored, but the Exchange
states that unsponsored ADRs will not exceed 10%
of the Fund’s net assets. In addition, the Exchange
states that not more than 10% of the net assets of
the Fund in the aggregate invested in equity
securities (other than non-exchange-traded
investment company securities) shall consist of
equity securities whose principal market is not a
member of the ISG or is a market with which the
Exchange does not have a comprehensive
surveillance sharing agreement.
27 According to the Exchange, structured notes
are debt obligations that also contain an embedded
derivative component with characteristics that
adjust the obligation’s risk/return profile. Generally,
the performance of a structured note will track that
of the underlying debt obligation and the derivative
embedded within it. The Fund has the right to
receive periodic interest payments from the issuer
of the structured notes at an agreed-upon interest
rate and a return of the principal at the maturity
date.
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time to time, including mutual funds,
ETFs, exchange- and OTC-traded
closed-end funds, and exchange- and
OTC-traded business development
companies (‘‘BDCs’’).28
The Fund may invest in the securities
of exchange and OTC-traded pooled
investment vehicles that are not
investment companies and, thus, not
required to comply with the provisions
of the 1940 Act. These pooled vehicles
typically hold commodities, such as
gold or oil, currency, or other property
that is itself not a security.29
The Fund may enter into repurchase
agreements with financial institutions,
which may be deemed to be loans.30
The Fund may engage in short sales
transactions in which the Fund sells a
security it does not own.
The Fund may utilize swaps (other
than those referenced in the Principal
Investments section) in an attempt to
gain exposure to the securities in a
market without actually purchasing
those securities, or to hedge a position.
Such swaps consist of interest rate caps
(under which, in return for a premium,
one party agrees to make payments to
the other to the extent that interest rates
exceed a specified rate or ‘‘cap’’),
interest rate floors (under which, in
return for a premium, one party agrees
to make payments to the other to the
extent that interest rates fall below a
specified level or ‘‘floor’’), and interest
rate collars (under which a party sells a
cap and purchases a floor or vice versa
in an attempt to protect itself against
interest rate movements exceeding given
minimum or maximum levels).
To respond to adverse market,
economic, political, or other conditions,
the Fund may invest up to 100% of its
total assets, without limitation, in debt
securities and money market
instruments, either directly or through
ETPs.31 The Fund may be invested in
28 According to the Exchange, a BDC is a less
common type of closed-end investment company
that more closely resembles an operating company
than a typical investment company.
29 According to the Exchange, exchange-traded
pooled investment vehicles include Trust Issued
Receipts (as described in NYSE Arca Equities Rule
8.200); Commodity-Based Trust Shares (as
described in NYSE Arca Equities Rule 8.201);
Currency Trust Shares (as described in NYSE Arca
Equities Rule 8.202); Commodity Index Trust
Shares (as described in NYSE Arca Equities Rule
8.203); and Trust Units (as described in NYSE Arca
Equities Rule 8.500).
30 According to the Exchange, it is the current
policy of the Fund not to invest in repurchase
agreements that do not mature within seven days
if any such investment, together with any other
illiquid assets held by the Fund, amounts to more
than 15% of the Fund’s net assets. The investments
of the Fund in repurchase agreements, at times, may
be substantial when, in the view of the SubAdviser, liquidity or other considerations so
warrant.
31 See supra note 15.
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Jkt 235001
this manner for extended periods,
depending on the Sub-Adviser’s
assessment of market conditions. For
purposes of this paragraph, debt
securities and money market
instruments include shares of mutual
funds, commercial paper, certificates of
deposit, bankers’ acceptances, U.S.
government securities, repurchase
agreements, and bonds that are rated
BBB or higher.
C. Fund 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 or Sub-Adviser,32 in accordance
with Commission guidance. The Fund
will monitor its portfolio liquidity on an
ongoing basis to determine whether, in
light of current circumstances, an
adequate level of liquidity is being
maintained, and will consider taking
appropriate steps in order to maintain
adequate liquidity if, through a change
in values, net assets, or other
circumstances, more than 15% of the
Fund’s net assets are held in illiquid
assets. Illiquid assets include securities
subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund may not, with respect to
75% of its total assets, purchase
securities of any issuer (except
securities issued or guaranteed by the
U.S. government, its agencies or
instrumentalities or shares of
investment companies) if, as a result,
more than 5% of its total assets would
be invested in the securities of such
issuer; or acquire more than 10% of the
outstanding voting securities of any one
issuer. For purposes of this policy, the
issuer of the underlying security will be
deemed to be the issuer of any
respective depositary receipt.
The Fund may not invest 25% or
more of its total assets in the securities
of one or more issuers conducting their
principal business activities in the same
industry or group of industries. This
limitation does not apply to investments
in securities issued or guaranteed by the
U.S. government, its agencies or
32 In reaching liquidity decisions, the Adviser or
Sub-Adviser may consider the following factors: the
frequency of trades and quotes for the security; The
number of dealers wishing to purchase or sell the
security and the number of other potential
purchasers; dealer undertakings to make a market
in the security; and the nature of the security and
the nature of the marketplace in which it trades
(e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of
transfer).
PO 00000
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Sfmt 4703
instrumentalities, or shares of
investment companies. The Fund will
not invest 25% or more of its total assets
in any investment company that so
concentrates.
The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns. The Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).33
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the Exchange’s proposal to list
and trade the Shares is consistent with
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.34 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,35 which requires, among
other things, that the Exchange’s rules
be designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission notes
that the Fund and the Shares must
comply with the requirements of NYSE
Arca Equities Rule 8.600 to be listed and
traded on the Exchange.
The Commission finds that the
proposal to list and trade the Shares on
the Exchange is consistent with Section
11A(a)(1)(C)(iii) of the Act,36 which sets
forth Congress’ finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last sale information for the Shares
will be available via the Consolidated
Tape Association (‘‘CTA’’) high-speed
line. In addition, the Portfolio Indicative
33 The Exchange represents that the Fund’s broadbased securities benchmark index will be identified
in a future amendment to the Registration
Statement following the Fund’s first full calendar
year of performance.
34 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
35 15 U.S.C. 78f(b)(5).
36 15 U.S.C. 78k–1(a)(1)(C)(iii).
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Value of the Fund,37 as defined in NYSE
Arca Equities Rule 8.600(c)(3), will be
widely disseminated by one or more
major market data vendors at least every
15 seconds during the Core Trading
Session.38 On each business day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Fund’s Web site will
disclose the Disclosed Portfolio (as
defined in NYSE Arca Equities Rule
8.600(c)(2)) that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.39 In addition,
a basket composition file, which
includes the security names and share
quantities (as applicable) required to be
delivered in exchange for the Fund’s
Shares, together with estimates and
actual cash components, will be
publicly disseminated daily prior to the
opening of the Exchange via the
National Securities Clearing
Corporation. The Administrator will
calculate the NAV per Share of the Fund
as of the close of the regular trading
session on the NYSE (ordinarily 4:00
p.m., Eastern Time) on each day such
exchange is open.40 Information
37 According to the Exchange, the Portfolio
Indicative Value calculation will be an estimate of
the value of the Fund’s Net Asset Value (‘‘NAV’’)
per Share using market data converted into U.S.
dollars at the current currency rates. The Portfolio
Indicative Value will be based on quotes and
closing prices from the securities’ local market and
may not reflect events that occur subsequent to the
local market’s close. Premiums and discounts
between the Portfolio Indicative Value and the
market price of the Shares may occur, and the
Portfolio Indicative Value should not be viewed as
a ‘‘real-time’’ update of the NAV per Share of the
Fund, which will be calculated only once per day.
38 The Exchange states that several major market
data vendors display or make widely available
Portfolio Indicative Values taken from the CTA or
other data feeds.
39 The Fund will disclose on the Fund’s Web site
the following information regarding each portfolio
holding, as applicable to the type of holding: Ticker
symbol; CUSIP number or other identifier, if any;
a description of the holding (including the type of
holding, such as the type of swap); the identity of
the security, commodity, index, or other asset or
instrument underlying the holding, if any; for
options, the option strike price; quantity held (as
measured by, for example, par value, notional value
or number of shares, contracts, or units); maturity
date, if any; coupon rate, if any; effective date, if
any; market value of the holding; and the
percentage weighting of the holding in the Fund’s
portfolio. The Web site information will be publicly
available at no charge.
40 The NAV per Share of the Fund will be
computed by dividing the value of the net assets of
the Fund (i.e., the value of its total assets less total
liabilities) by the total number of Shares of the
Fund outstanding, rounded to the nearest cent.
Expenses and fees are accrued daily and taken into
account for purposes of determining NAV per
Share. According to the Exchange, in computing the
Fund’s NAV, the Fund’s securities holdings will be
valued based on their last readily available market
price. Price information on listed securities,
including ETPs in which the Fund invests, will be
taken from the exchange where the security is
primarily traded. Other portfolio securities and
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Jkt 235001
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. Quotation and last sale
information for the underlying U.S.
Exchange-traded Equity will be
available via the CTA high-speed line
assets for which market quotations are not readily
available or determined to not represent the current
fair value will be valued based on fair value as
determined in good faith by the Fund’s Sub-Adviser
in accordance with procedures adopted by the
Trust’s Board of Directors (‘‘Board’’). U.S. exchangetraded options, exchange-traded swaps, and
exchange-traded closed end funds will be valued at
the closing settlement price determined by the
applicable exchange. Exchange-traded equity
securities, including common stocks, preferred
stocks, warrants, convertible securities, rights,
pooled investment vehicles, exchange-traded
BDC’s, master limited partnerships, ETPs,
sponsored ADRs, GDRs, EDRs, IDRs, ordinary
shares, and New York shares (collectively,
‘‘Exchange-traded Equity’’) will be valued at market
value, which will generally be determined using the
last reported official closing or last trading price on
the exchange or market on which the security is
primarily traded at the time of valuation or, if no
sale has occurred, at the last quoted bid price on
the primary market or exchange on which they are
traded. If market prices are unavailable or the Fund
believes that they are unreliable, or when the value
of a security has been materially affected by events
occurring after the relevant market closes, the Fund
will price those securities at fair value as
determined in good faith using methods approved
by the Trust’s Board. Unsponsored ADRs, which are
traded OTC, will be valued on the basis of the
market closing price on the exchange where the
stock of the foreign issuer that underlies the ADR
is listed. Investment company securities (other than
ETFs, exchange-traded closed-end funds and
exchange-traded BDCs), including mutual funds,
OTC-traded closed-end funds, and OTC-traded
BDCs, will be valued at net asset value. Nonexchange-traded derivatives, including swaps,
options traded OTC, options on futures traded OTC,
and certain structured notes, will normally be
valued on the basis of quotes obtained from brokers
and dealers or pricing services using data reflecting
the earlier closing of the principal markets for those
assets. Futures contracts will be valued at the
settlement or closing price determined by the
applicable exchange. Debt securities, floating rate
loans, other floating rate debt securities, Senior
Loans, Junior Loans, U.S. Treasury securities, OTCtraded pooled investment vehicles, other
obligations issued or guaranteed by U.S.
government agencies and instrumentalities, STRIPs,
zero-coupon bonds, bank obligations, corporate
debt securities, ABS, MBS, mortgage-related
securities, commercial paper, repurchase
agreements, inflation-indexed bonds, certificates of
deposits, bankers’ acceptances, and certain
structured notes (collectively, ‘‘OTC-traded
Securities’’) generally trade in the OTC market
rather than on a securities exchange, and the Fund
will generally value OTC-traded Securities by
relying on independent pricing services. The
Fund’s debt securities will generally be valued at
bid prices. In certain cases, some of the Fund’s debt
securities may be valued at the mean between the
last available bid and ask prices. Foreign exchange
rates will be priced using 4:00 p.m. (Eastern Time)
mean prices from major market data vendors.
PO 00000
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4019
and from the national securities
exchange on which they are listed.
Quotation and last sale information for
exchange-listed options cleared via the
Options Clearing Corporation will be
available via the Options Price
Reporting Authority. Price information
regarding exchange-traded options,
exchange-traded swaps, exchangetraded closed end funds, futures, and
Exchange-traded Equity held by the
Fund will be available from the U.S. and
non-U.S. exchanges trading such assets.
Quotation information from brokers and
dealers or pricing services will be
available for unsponsored ADRs, nonexchange-traded derivatives (including
swaps, options traded OTC, options on
futures traded OTC, and certain
structured notes), and OTC-traded
Securities. Price information for
investment company securities (other
than ETFs, exchange-traded closed end
funds, and exchange-traded BDCs) is
available from the applicable
investment company’s Web site and
from market data vendors. Pricing
information regarding each asset class in
which the Fund will invest will
generally be available through
nationally recognized data service
providers through subscription
agreements. Foreign exchange prices are
available from major market data
vendors. The Fund’s Web site will
include a form of the prospectus for the
Fund that may be downloaded and
additional data relating to NAV and
other applicable quantitative
information.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Exchange will obtain a representation
from the issuer of the Shares that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. Trading in
the Shares of the Fund will be halted if
the circuit breaker parameters in NYSE
Arca Equities Rule 7.12 have been
reached. Trading in the Shares of the
Fund also may be halted because of
other market conditions or for reasons
that, in the view of the Exchange, make
trading in the Shares inadvisable,41 and
41 These reasons may include: (1) The extent to
which trading is not occurring in the securities and/
or the financial instruments comprising the
Disclosed Portfolio of the Fund; or (2) whether
other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly
market are present. With respect to trading halts,
E:\FR\FM\26JAN1.SGM
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26JAN1
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trading in the Shares will be subject to
NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth additional
circumstances under which trading in
Shares of the Fund may be halted. The
Exchange represents that it has a general
policy prohibiting the distribution of
material, non-public information by its
employees. Consistent with NYSE Arca
Equities Rule 8.600(d)(2)(B)(ii), the
Reporting Authority must implement
and maintain, or be subject to,
procedures designed to prevent the use
and dissemination of material, nonpublic information regarding the actual
components of the Fund’s portfolio. In
addition, the Exchange represents that
the Adviser is not registered as a brokerdealer or affiliated with a broker-dealer,
and that the Sub-Adviser is not
registered as a broker-dealer but is
affiliated with Pacific Select
Distributors, Inc., a limited purpose
registered broker-dealer that does not
engage in any brokerage or trading
activity.42
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by the Financial Industry
Regulatory Authority (‘‘FINRA’’) on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws. The Exchange further
represents that these procedures are
adequate to properly monitor Exchangetrading of the Shares in all trading
sessions and to deter and detect
violations of Exchange rules and federal
the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading
in the Shares of the Fund.
42 See supra note 6. The Exchange states that an
investment adviser to an open-end fund is required
to be registered under the Investment Advisers Act
of 1940 (‘‘Advisers Act’’). As a result, the Adviser
and Sub-Adviser and their related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
VerDate Sep<11>2014
18:48 Jan 23, 2015
Jkt 235001
securities laws applicable to trading on
the Exchange.43
The Exchange represents that 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. In support of this
proposal, the Exchange has made
representations, including:
(1) The Shares will conform to the
initial and continued listing criteria
under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares and underlying
exchange-traded equity securities,
futures contracts, and exchange-traded
options contracts with other markets
and other entities that are members of
the ISG, and FINRA, on behalf of the
Exchange, may obtain trading
information regarding trading in the
Shares and underlying exchange-traded
equity securities, futures contracts, and
exchange-traded options contracts from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares and underlying exchange-traded
equity securities, futures contracts, and
exchange-traded options contracts from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. FINRA,
on behalf of the Exchange, is able to
access, as needed, trade information for
certain fixed income securities held by
the Fund that is reported to FINRA’s
Trade Reporting and Compliance
Engine.
(4) Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Specifically, the
Information Bulletin will discuss the
following: (a) The procedures for
purchases and redemptions of Shares in
creation unit aggregations (and that
Shares are not individually redeemable);
(b) NYSE Arca Equities Rule 9.2(a),
which imposes a duty of due diligence
on its Equity Trading Permit Holders to
learn the essential facts relating to every
customer prior to trading the Shares; (c)
the risks involved in trading the Shares
during the Opening and Late Trading
Sessions when an updated Portfolio
43 The Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement and that the Exchange is
responsible for FINRA’s performance under this
regulatory services agreement.
PO 00000
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Sfmt 4703
Indicative Value will not be calculated
or publicly disseminated; (d) how
information regarding the Portfolio
Indicative Value and the Disclosed
Portfolio is disseminated; (e) the
requirement that Equity Trading Permit
Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information.
(5) For initial and continued listing,
the Fund will be in compliance with
Rule 10A–3 under the Act,44 as
provided by NYSE Arca Equities Rule
5.3.
(6) The Fund’s investments will be
consistent with its investment objective
and will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns. The Fund’s
investments will not be used to seek
performance that is the multiple or
inverse multiple (i.e., 2Xs and 3Xs) of
the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).
(7) 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 or Sub-Adviser, in accordance
with Commission guidance. The Fund
will monitor its portfolio liquidity on an
ongoing basis to determine whether, in
light of current circumstances, an
adequate level of liquidity is being
maintained, and will consider taking
appropriate steps in order to maintain
adequate liquidity if, through a change
in values, net assets, or other
circumstances, more than 15% of the
Fund’s net assets are held in illiquid
assets.
(8) Floating rate high yield corporate
bonds in which the Fund invests
generally must have $100 million or
more par amount outstanding at the
time of investment.
(9) The Fund will invest in Senior
Loans that the Adviser or the SubAdviser deems to be highly liquid with
readily available prices. The Fund will
not invest in Senior Loans that are in
default at the time of purchase. In
addition, for investment purposes, the
Senior Loan must have a par amount
outstanding of $150 million or greater at
the time the loan is originally issued.
(10) The Fund’s investments in swaps
will be made in accordance with the
1940 Act and consistent with the Fund’s
investment objective and policies. The
Fund will seek, where possible, to use
counterparties whose financial status is
such that the risk of default is reduced.
44 17
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The Sub-Adviser will evaluate the
creditworthiness of counterparties on an
ongoing basis. The Fund will segregate
assets determined to be liquid by the
Sub-Adviser in accordance with the
1940 Act to cover its obligations under
derivative instruments. The Fund will
include appropriate risk disclosure in
its offering documents, including
leveraging risk.
(11) The Fund’s portfolio will be
diversified by industry and issuer, with
no individual issuer representing more
than 5% of the portfolio.
(12) Not more than 10% of the net
assets of the Fund in the aggregate
invested in equity securities (other than
non-exchange-traded investment
company securities) shall consist of
equity securities whose principal
market is not a member of the ISG or is
a market with which the Exchange does
not have a comprehensive surveillance
sharing agreement. Not more than 10%
of the net assets of the Fund in the
aggregate invested in exchange-traded
options contracts shall consist of
options contracts whose principal
market is not a member of the ISG or is
a market with which the Exchange does
not have a comprehensive surveillance
sharing agreement. U.S. exchangetraded futures contracts, U.S. exchangetraded options on futures contracts, and
U.S. exchange-traded put and call
options in which the Fund invests will
trade on exchanges that are members of
ISG.
(13) Unsponsored ADRs will not
exceed 10% of the Fund’s net assets.
(14) The Fund may invest up to 5%
of its net assets in non-agency ABS.
(15) The Fund may invest up to 5%
of its net assets in MBS and mortgagerelated securities.
(16) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Fund.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act 45 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,46 that the
proposed rule change (SR–NYSEArca–
45 15
46 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
VerDate Sep<11>2014
18:48 Jan 23, 2015
Jkt 235001
2014–126), as modified by Amendment
No. 1, be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Brent J. Fields,
Secretary.
[FR Doc. 2015–01246 Filed 1–23–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74099; File No. SR–Phlx–
2015–07]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
SPY Pilot Program
January 20, 2015.
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 January
13, 2015, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) 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 proposes to extend the
pilot program that eliminates position
limits for options on the SPDR® S&P
500® exchange-traded fund (‘‘SPY ETF’’
or ‘‘SPY’’),3 which list and trade under
the symbol SPY (‘‘SPY Pilot Program’’).
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
47 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 ‘‘SPDR®,’’ ‘‘Standard & Poor’s®,’’ ‘‘S&P®,’’ ‘‘S&P
500®,’’ and ‘‘Standard & Poor’s 500’’ are registered
trademarks of Standard & Poor’s Financial Services
LLC. The SPY ETF represents ownership in the
SPDR S&P 500 Trust, a unit investment trust that
generally corresponds to the price and yield
performance of the SPDR S&P 500 Index.
1 15
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Fmt 4703
Sfmt 4703
4021
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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend Rule 1001, entitled
‘‘Position Limits,’’ to extend the current
pilot, which expires on February 4,
2015, to July 12, 2015 (‘‘Extended
Pilot’’). This filing does not propose any
substantive changes to the SPY Pilot
Program. In proposing to extend the
SPY Pilot Program, the Exchange
reaffirms its consideration of several
factors that supported the original
proposal of the SPY Pilot Program,
including (1) the availability of
economically equivalent products and
their respective position limits; (2) the
liquidity of the option and the
underlying security; (3) the market
capitalization of the underlying security
and the related index; (4) the reporting
of large positions and requirements
surrounding margin; and (5) the
potential for market on close volatility.
The Exchange submitted a report to
the Commission on January 2, 2015,
which report reflected, during the time
period from December 1, 2013 through
November 30, 2014, the trading of
standardized SPY options with no
position limits consistent with option
exchange provisions.4 The report was
prepared in the manner specified in
Phlx’s filing extending the SPY Pilot
Program.5 The Exchange notes that it is
unaware of any problems created by the
SPY Pilot Program and does not foresee
any as a result of the proposed
extension.
As with the original proposal, related
to the SPY Pilot Program, the Exchange
represents that a Pilot Report will be
submitted at least thirty (30) days before
4 The
report is attached as Exhibit 3.
Securities Exchange Act Release No. 70879
(November 14, 2013), 78 FR 69731 (November 20,
2013) (SR–Phlx–2013–108).
5 See
E:\FR\FM\26JAN1.SGM
26JAN1
]]>Agencies
[Federal Register Volume 80, Number 16 (Monday, January 26, 2015)]
[Notices]
[Pages 4015-4021]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01246]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74093: File No. SR-NYSEArca-2014-126]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the AdvisorShares Pacific Asset
Enhanced Floating Rate ETF Under NYSE Arca Equities Rule 8.600
January 20, 2015.
I. Introduction
On November 19, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
AdvisorShares Pacific Asset Enhanced Floating Rate ETF (``Fund'') under
NYSE Arca Equities Rule 8.600. On November 26, 2014, the Exchange filed
Amendment No. 1 to the proposal.\3\ The proposed rule change, as
modified by Amendment No. 1 thereto, was published for comment in the
Federal Register on December 8, 2014.\4\ The Commission received no
comments on the proposal. This order approves the proposed rule change,
as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 amended the proposed rule change in the
following ways: (1) Specified that the floating rate high yield
corporate bonds in which the Fund invests generally must have a $100
million par amount outstanding at the time of investment; (2)
clarified that senior loans in which the Fund may invest includes
leveraged loans; and (3) specified that the U.S. exchange-traded
futures contracts, U.S. exchange-traded options on futures
contracts, and U.S. exchange-traded put and call options in which
the Fund invests will trade on exchanges that are members of the
Intermarket Surveillance Group (``ISG'').
\4\ See Securities Exchange Act Release No. 73717 (December 2,
2014), 79 FR 72730 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''), which governs
the listing and trading of Managed Fund Shares on the Exchange. The
Shares will be offered by AdvisorShares Trust (``Trust''), a statutory
trust organized under the laws of the State of Delaware and registered
with the Commission as an open-end management investment company.\5\
AdvisorShares Investments, LLC (``Adviser'') will be the investment
adviser to the Fund, and Pacific Asset Management (``Sub-Adviser''),
will be the sub-adviser to the Fund.\6\ The Bank of New York Mellon
(``Administrator'') will serve as the administrator, custodian,
transfer agent and fund accounting agent for the Fund. Foreside Fund
Services, LLC will be the principal underwriter and distributor of the
Fund's Shares.
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\5\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). The Exchange states that on June 25, 2014, the
Trust filed with the Commission an amendment to its registration
statement on Form N-1A under the Securities Act of 1933 (15 U.S.C.
77a) and under the 1940 Act relating to the Fund (File Nos. 333-
157876 and 811-22110) (``Registration Statement''). In addition,
according to the Exchange, the Commission has issued an order
granting certain exemptive relief to the Trust under the 1940 Act.
See Investment Company Act Release No. 29291 (May 28, 2010) (File
No. 812-13677).
\6\ The Exchange represents that the Adviser is not registered
as a broker-dealer or affiliated with a broker-dealer. The Sub-
Adviser is not registered as a broker-dealer but is affiliated with
Pacific Select Disteributors, Inc., a registered broker-dealer. The
Exchange states that the Sub-Adviser represetnts that Pacific Select
Distributors, Inc. is a limited purpose broker-dealer with a primary
business purpose of serving as distributor for mutual funds and
variable annuity products, and that Pacific Select Distributors,
Inc. does not engage in any borkerage or trading activity. The
Exchange states that in the event (a) the Adviser or the Sub-Adviser
becomes a registered broker-dealer or becomes newly affilitated with
a broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer,
such adviser or sub-adviser will implement a fire wall with respect
to its relevant personnel or its broker-dealer affiliate regarding
access to information concerning the composition of or changes to
the portfolio, and the adviser or sub-adviser will be subject to
procedures designed to prevent the use and dissemination of material
non-public information regarding the portfolio.
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The Exchange has made the following representations and statements
in describing the Fund and its investment strategy, including other
portfolio holdings and investment restrictions.\7\
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\7\ The Commission notes that additional information regarding
the Fund, the Trust, and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, distributions, and taxes,
among other things, can be found in the Notice and the Registration
Statement, as applicable. See Notice, supra note 4, and Registration
Statement, supra note 5, respectively.
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[[Page 4016]]
A. Principal Investments (under normal circumstances) \8\
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\8\ The Exchange states that the term ``under normal
circumstances'' means, without limitation, 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.
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According to the Exchange, the Fund's investment objective will
seek to provide a high level of current income. The Fund will invest at
least 80% of its net assets (plus any borrowings for investment
purposes) in floating rate loans and other floating rate debt
securities, derivatives or other instruments that have economic
interests similar to such securities (each as described further below).
The Exchange states that the Fund will seek to outperform the Credit
Suisse Institutional Leveraged Loan Index. The portfolio will be
diversified by industry and issuer, with no individual issuer
representing more than 5% of the portfolio. The typical duration
positioning will be between 0.25 years to 0.75 years as determined by
the Sub-Adviser.\9\
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\9\ Duration is a measure used to determine the sensitivity of a
security's price to changes in interest rates. The longer a
security's duration, the more sensitive it will be to changes in
interest rates.
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The Fund will attempt to achieve its investment objective through
investments in a focused portfolio comprised primarily of senior
secured floating rate loans (``Senior Loans''), floating rate high
yield corporate bonds,\10\ index credit default swaps, single name
credit default swaps, total return swaps,\11\ interest rate swaps and
cash.
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\10\ According to the Exchange, Senior Loans and floating rate
high yield corporate bonds are instruments with interest rates which
float, adjust, or vary periodically based upon a benchmark
indicator, a specified adjustment schedule, or prevailing interest
rates. Senior Loans, and some floating rate high yield corporate
bonds, are debt instruments that may have a right to payment that is
senior to most other debts of the borrowers. Borrowers may include
corporations, partnerships and other entities that operate in a
variety of industries and geographic regions.
\11\ According to the Exchange, index credit default swaps (CDX)
can be used to gain exposure to a basket of credit risk by selling
protection against default or other credit events or by buying
protection in order to hedge broad market credit risk. Single name
credit default swaps (CDS) can be used to allow the Fund to increase
or decrease exposure to specific issuers through lower trading
costs. Total return swaps (TRS) are contracts to obtain the total
return of a reference asset or index in exchange for paying a
financing cost. Interest rate swaps (IRS) are agreements between two
parties to exchange one stream of interest payments for another.
Each of these swaps is a type of derivative instrument, a financial
contract whose value depends upon, or is derived from, the value of
an underlying asset, reference rate or index, and may relate to
bonds, loans, interest rates and related indexes. CDX, CDS, TRS and
IRS are collectively referred to as ``swaps.'' The Exchange states
that the Fund will typically use exchange-traded and over-the-
counter (``OTC'') swaps as (i) a method to enhance returns; (ii) a
substitute for taking a position in the underlying asset; and, (iii)
as a part of a strategy designed to reduce exposure to other risks.
To limit potential risks associated with such transactions, the Fund
will segregate assets determined to be liquid by the Sub-Adviser in
accordance with the 1940 Act to cover its obligations under
derivative instruments. The Fund will include appropriate risk
disclosure in its offering documents, including leveraging risk. The
use of swaps will increase the Fund's net exposure to a particular
issue, fixed income markets, or the financial markets generally.
---------------------------------------------------------------------------
According to the Exchange, Senior Loans and floating rate high
yield corporate bonds in which the Fund intends to invest are expected
to be rated below investment grade (i.e., high yield/high risk
securities, sometimes called non-investment grade securities)\12\ or,
may not be rated by any nationally recognized rating service, and if
unrated, of comparable quality as determined by the Sub-Adviser.
---------------------------------------------------------------------------
\12\ According to the Exchange, non-investment-grade securities,
also referred to as ``high yield securities'' or ``junk bonds,'' are
debt securities that are rated lower than the four highest rating
categories by a nationally recognized statistical rating
organization (for example, lower than Baa3 by Moody's Investors
Service, Inc. (``Moody's'') or lower than BBB- by Standard & Poor's
(``S&P'')) or are determined to be of comparable quality by the
Fund's Sub-Adviser.
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According to the Exchange, the Fund generally will invest in Senior
Loans (including leveraged loans) that may be in the form of
participations and assignments.\13\ Senior Loans in which the Fund will
invest consist of domestic issuers and U.S. dollar denominated foreign
issuers. The Fund will invest in Senior Loans that the Adviser or the
Sub-Adviser deems to be highly liquid with readily available prices.
The Fund will invest in Senior Loans rated C or higher by a credit
rating agency registered as a nationally recognized statistical rating
organization (``NRSRO'') with the Commission, or is unrated but
considered to be of comparable quality by the Adviser or Sub-Adviser.
The Fund will not invest in Senior Loans that are in default at the
time of purchase. In addition, for investment purposes, the Senior Loan
must have a par amount outstanding of $150 million or greater at the
time the loan is originally issued.
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\13\ According to the Exchange, a direct interest in a Senior
Loan may be acquired directly from the agent of the lender or
another lender by assignment or an indirect interest may be acquired
as a participation in another lender's portion of a Senior Loan.
Generally, secured Senior Loans are secured by specific assets of
the borrower.
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According to the Exchange, floating rate high yield corporate bonds
in which the Fund invests generally must have $100 million or more par
amount outstanding at the time of investment.
To seek an increase in yield, the Fund expects to employ leverage
to enhance potential return. The Fund may use leverage by (i) borrowing
money, up to the maximum amount permitted under the 1940 Act, for
investment purposes normally on a floating rate basis or (ii) through
swaps. The Fund's investments in swaps will be made in accordance with
the 1940 Act and consistent with the Fund's investment objective and
policies.\14\
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\14\ The Fund will seek, where possible, to use counterparties
whose financial status is such that the risk of default is reduced;
however, the risk of losses resulting from default is still
possible. The Sub-Adviser will evaluate the creditworthiness of
counterparties on an ongoing basis. In addition to information
provided by credit agencies, the Sub-Adviser evaluates each approved
counterparty using various methods of analysis, including earning
updates, a broker-dealer's reputation, the Sub-Adviser's past
experience with the broker-dealer, a counterparty's liquidity and
its share of market participation.
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The Fund's assets that are not invested directly in Senior Loans,
floating rate high yield corporate bonds, or swaps will be held in cash
or cash equivalents, including money market instruments and exchange
traded products (``ETPs'') \15\ that invest in these and other highly
liquid instruments, in order to cover its obligations under certain
swaps. The larger the value of the Fund's derivative positions, the
more the Fund will be required to maintain cash or cash equivalents as
collateral for such derivatives.
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\15\ According to the Exchange, ETPs include Investment Company
Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Index-
Linked Securities (as described in NYSE Arca Equities Rule
5.2(j)(6)); Portfolio Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); Trust Issued Receipts (as described in NYSE
Arca Equities Rule 8.200); Commodity-Based Trust Shares (as
described in NYSE Arca Equities Rule 8.201); Currency Trust Shares
(as described in NYSE Arca Equities Rule 8.202); Commodity Index
Trust Shares (as described in NYSE Arca Equities Rule 8.203); Trust
Units (as described in NYSE Arca Equities Rule 8.500); and Managed
Fund Shares (as described in NYSE Arca Equities Rule 8.600). The
Exchange states that the ETPs all will be listed and traded in the
U.S. on registered exchanges and that the Fund will invest in the
securities of ETFs registered under the 1940 Act consistent with the
requirements of Section 12(d)(1) of the 1940 Act, or any rule,
regulation or order of the Commission or interpretation thereof and
the Fund will only make such ETF investments in conformity with the
requirements of Regulation M of the Internal Revenue Code of 1986,
as amended. While the Fund may invest in inverse ETPs, the Fund will
not invest in leveraged or inverse leveraged ETPs (e.g., 2X or 3X).
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B. Other (Non-Principal) Investments
The Exchange states that the Fund may invest up to 20% of its net
assets
[[Page 4017]]
in the securities and financial instruments described below.\16\
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\16\ Unless otherwise indicated, the Fund may invest up to 20%
of its net assets in the types of investments referenced below in
this section, subject to the limitations imposed by the Fund's
investment objective, policies, and restrictions described in the
Fund's Registration Statement, as well as the federal securities
laws.
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The Fund may invest in debt securities (other than those described
in the Principal Investments section), including investment-grade, non-
investment-grade, and unrated securities. Debt securities in which the
Fund may invest consist of the following: (i) Bank obligations of
domestic and foreign banks, which may include certificates of deposit,
commercial paper,\17\ bankers' acceptances, and fixed time
deposits;\18\ (ii) corporate debt; \19\ (ii) asset-backed securities
(``ABS''); \20\ mortgage-backed securities (``MBS'') and mortgage-
related securities; \21\ inflation-indexed bonds;\22\ floating rate
loans (other than those described in the Principal Investments section)
consisting of (a) unsecured senior loans and (b) secured and unsecured
subordinated loans, second lien loans, and subordinated bridge loans
(``Junior Loans''); \23\ and U.S. government securities.\24\
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\17\ According to the Exchange, commercial paper is a short-term
obligation with a maturity ranging from one to 270 days issued by
banks, corporations and other borrowers. The Fund may invest in
commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's.
\18\ According to the Exchange, the Fund will not invest in
fixed time deposits which (i) are not subject to prepayment; or (ii)
provide for withdrawal penalties upon prepayment, if in the
aggregate, more than 15% of its net assets would be invested in such
deposits, repurchase agreements with remaining maturities of more
than seven days, or other illiquid assets.
\19\ According to the Exchange, corporate debt are debt
securities issued by businesses to finance their operations and
consist of notes, corporate bonds, high yield bonds, debentures and
commercial paper. The Fund may invest in corporate debt issued by
domestic or foreign companies of all kinds, including those with
small-, mid-, and large-capitalizations. The Fund may also invest in
corporate debt securities which are representative of one or more
high-yield bond or credit derivative indices, which may change from
time to time.
\20\ According to the Exchange, ABS are instruments created from
many types of assets, including auto loans, credit card receivables,
home equity loans, and student loans. ABS are issued through special
purpose vehicles that are bankruptcy remote from the issuer of the
collateral. The Fund may invest in ABS provided such securities are
consistent with the Fund's investment objectives and policies. The
Fund will not invest more than 5% of its net assets in non-agency
ABS.
\21\ According to the Exchange, MBS and mortgage-related
securities are interests in pools of residential or commercial
mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks, and others. Pools
of mortgage loans are assembled as securities for sale to investors
by various governmental, government-related and private
organizations. The Fund also may invest in debt instruments which
are secured with collateral consisting of mortgage-related
securities. The Fund will not invest, however, more than 5% of its
net assets in MBS and mortgage-related securities.
\22\ According to the Exchange, inflation-indexed bonds are debt
securities whose principal value is periodically adjusted according
to the rate of inflation.
\23\ According to the Exchange, unsecured senior loans and
Junior Loans are subject to the same general risks of Senior Loans;
however, due to their lower place in the borrower's capital
structure and possible unsecured status, unsecured senior loans and
Junior Loans involve a higher degree of overall risk than Senior
Loans of the same borrower. The Fund will invest in Junior Loans the
Adviser or Sub-Adviser deems to be highly liquid with readily
available prices. The Fund will invest in Junior Loans rated C or
higher by a NRSRO, or unrated but considered to be of comparable
quality by the Adviser or Sub-Adviser. The Fund will not invest in
Junior Loans that are in default at time of purchase. In addition,
for investment purposes, each Junior Loan must have a par amount
outstanding of $150 million or greater at the time the loan is
originally issued.
\24\ According to the Exchange, U.S. government securities are
securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities, and consist of U.S. Treasury bills;
U.S. Treasury notes; U.S. Treasury bonds; obligations issued by U.S.
government agencies and instrumentalities which are supported by (a)
the full faith and credit of the U.S. Treasury, (b) the
discretionary authority of the U.S. government, or (c) the right of
the issuer to borrow from the U.S. Treasury; separately traded
principal and interest components of securities guaranteed or issued
by the U.S. government or its agencies, instrumentalities, or
sponsored enterprises if such components trade independently under
the Separate Trading of Registered Interest and Principal of
Securities program (``STRIPS'') or any similar program sponsored by
the U.S. government; or U.S. Treasury zero-coupon bonds (which
include U.S. Treasury bonds which have been stripped of their
unmatured interest coupons, the coupons themselves, and receipts or
certificates representing interests in such stripped debt
obligations and coupons).
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The Fund may invest in issuers located outside the United States
directly, or in financial instruments, ETFs, or other ETPs\25\ that are
indirectly linked to the performance of foreign issuers. Such financial
instruments consist of American Depositary Receipts (``ADRs''), Global
Depositary Receipts (``GDRs''), European Depositary Receipts
(``EDRs''), International Depository Receipts (``IDRs''), ``ordinary
shares,'' and ``New York shares'' issued and traded in the U.S.\26\
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\25\ See supra note 15.
\26\ According to the Exchange, ADRs are U.S. dollar denominated
receipts typically issued by U.S. banks and trust companies that
evidence ownership of underlying securities issued by a foreign
issuer. The underlying securities may not necessarily be denominated
in the same currency as the securities into which they may be
converted. The underlying securities are held in trust by a
custodian bank or similar financial institution in the issuer's home
country. The depositary bank may not have physical custody of the
underlying securities at all times and may charge fees for various
services, including forwarding dividends and interest and corporate
actions. Generally, ADRs in registered form are designed for use in
domestic securities markets and are traded on exchanges or OTC in
the U.S. GDRs, EDRs, and IDRs are similar to ADRs in that they are
certificates evidencing ownership of shares of a foreign issuer;
however, GDRs, EDRs, and IDRs may be issued in bearer form and
denominated in other currencies, and are generally designed for use
in specific or multiple securities markets outside the U.S. EDRs,
for example, are designed for use in European securities markets
while GDRs are designed for use throughout the world. Ordinary
shares are shares of foreign issuers that are traded abroad and on a
U.S. exchange. New York shares are shares that a foreign issuer has
allocated for trading in the U.S. ADRs, ordinary shares, and New
York shares all may be purchased with and sold for U.S. dollars.
ADRs may be sponsored or unsponsored, but the Exchange states that
unsponsored ADRs will not exceed 10% of the Fund's net assets. In
addition, the Exchange states that not more than 10% of the net
assets of the Fund in the aggregate invested in equity securities
(other than non-exchange-traded investment company securities) shall
consist of equity securities whose principal market is not a member
of the ISG or is a market with which the Exchange does not have a
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
The Fund may trade U.S. exchange-traded futures contracts, U.S.
exchange-traded or OTC options on futures contracts, and U.S. exchange-
traded or OTC put and call options on securities and securities
indices, as the Sub-Adviser determines is appropriate in seeking the
Fund's investment objective, and except as restricted by the Fund's
investment limitations. U.S. exchange-traded futures contracts, U.S.
exchange-traded options on futures contracts, and U.S. exchange-traded
put and call options in which the Fund invests will trade on exchanges
that are members of ISG.
The Fund may invest in structured notes.\27\
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\27\ According to the Exchange, structured notes are debt
obligations that also contain an embedded derivative component with
characteristics that adjust the obligation's risk/return profile.
Generally, the performance of a structured note will track that of
the underlying debt obligation and the derivative embedded within
it. The Fund has the right to receive periodic interest payments
from the issuer of the structured notes at an agreed-upon interest
rate and a return of the principal at the maturity date.
---------------------------------------------------------------------------
The Fund may invest in exchange-traded equity securities that
represent ownership interests in a company or partnership and that
consist of common stocks, preferred stocks, warrants to acquire common
stock, securities convertible into common stock, investments in master
limited partnerships, and rights.
The Fund may invest in the securities of other investment companies
(including index-based and actively managed) to the extent that such an
investment would be consistent with the requirements of Section
12(d)(1) of the 1940 Act, or any rule, regulation or order of the
Commission or interpretation thereof. Consistent with the restrictions
discussed above, the Fund may invest in several different types of
investment companies from
[[Page 4018]]
time to time, including mutual funds, ETFs, exchange- and OTC-traded
closed-end funds, and exchange- and OTC-traded business development
companies (``BDCs'').\28\
---------------------------------------------------------------------------
\28\ According to the Exchange, a BDC is a less common type of
closed-end investment company that more closely resembles an
operating company than a typical investment company.
---------------------------------------------------------------------------
The Fund may invest in the securities of exchange and OTC-traded
pooled investment vehicles that are not investment companies and, thus,
not required to comply with the provisions of the 1940 Act. These
pooled vehicles typically hold commodities, such as gold or oil,
currency, or other property that is itself not a security.\29\
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\29\ According to the Exchange, exchange-traded pooled
investment vehicles include Trust Issued Receipts (as described in
NYSE Arca Equities Rule 8.200); Commodity-Based Trust Shares (as
described in NYSE Arca Equities Rule 8.201); Currency Trust Shares
(as described in NYSE Arca Equities Rule 8.202); Commodity Index
Trust Shares (as described in NYSE Arca Equities Rule 8.203); and
Trust Units (as described in NYSE Arca Equities Rule 8.500).
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The Fund may enter into repurchase agreements with financial
institutions, which may be deemed to be loans.\30\
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\30\ According to the Exchange, it is the current policy of the
Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 15% of the
Fund's net assets. The investments of the Fund in repurchase
agreements, at times, may be substantial when, in the view of the
Sub-Adviser, liquidity or other considerations so warrant.
---------------------------------------------------------------------------
The Fund may engage in short sales transactions in which the Fund
sells a security it does not own.
The Fund may utilize swaps (other than those referenced in the
Principal Investments section) in an attempt to gain exposure to the
securities in a market without actually purchasing those securities, or
to hedge a position. Such swaps consist of interest rate caps (under
which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates exceed a specified rate or
``cap''), interest rate floors (under which, in return for a premium,
one party agrees to make payments to the other to the extent that
interest rates fall below a specified level or ``floor''), and interest
rate collars (under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate
movements exceeding given minimum or maximum levels).
To respond to adverse market, economic, political, or other
conditions, the Fund may invest up to 100% of its total assets, without
limitation, in debt securities and money market instruments, either
directly or through ETPs.\31\ The Fund may be invested in this manner
for extended periods, depending on the Sub-Adviser's assessment of
market conditions. For purposes of this paragraph, debt securities and
money market instruments include shares of mutual funds, commercial
paper, certificates of deposit, bankers' acceptances, U.S. government
securities, repurchase agreements, and bonds that are rated BBB or
higher.
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\31\ See supra note 15.
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C. Fund 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 or Sub-
Adviser,\32\ in accordance with Commission guidance. The Fund will
monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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\32\ In reaching liquidity decisions, the Adviser or Sub-Adviser
may consider the following factors: the frequency of trades and
quotes for the security; The number of dealers wishing to purchase
or sell the security and the number of other potential purchasers;
dealer undertakings to make a market in the security; and the nature
of the security and the nature of the marketplace in which it trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
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The Fund may not, with respect to 75% of its total assets, purchase
securities of any issuer (except securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities or shares of
investment companies) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer; or acquire more
than 10% of the outstanding voting securities of any one issuer. For
purposes of this policy, the issuer of the underlying security will be
deemed to be the issuer of any respective depositary receipt.
The Fund may not invest 25% or more of its total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This limitation
does not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or shares of
investment companies. The Fund will not invest 25% or more of its total
assets in any investment company that so concentrates.
The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).\33\
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\33\ The Exchange represents that the Fund's broad-based
securities benchmark index will be identified in a future amendment
to the Registration Statement following the Fund's first full
calendar year of performance.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\34\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\35\ which requires, among other
things, that the Exchange's rules be designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The
Commission notes that the Fund and the Shares must comply with the
requirements of NYSE Arca Equities Rule 8.600 to be listed and traded
on the Exchange.
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\34\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\35\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\36\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last
sale information for the Shares will be available via the Consolidated
Tape Association (``CTA'') high-speed line. In addition, the Portfolio
Indicative
[[Page 4019]]
Value of the Fund,\37\ as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the Core Trading
Session.\38\ On each business day, before commencement of trading in
Shares in the Core Trading Session on the Exchange, the Fund's Web site
will disclose the Disclosed Portfolio (as defined in NYSE Arca Equities
Rule 8.600(c)(2)) that will form the basis for the Fund's calculation
of NAV at the end of the business day.\39\ In addition, a basket
composition file, which includes the security names and share
quantities (as applicable) required to be delivered in exchange for the
Fund's Shares, together with estimates and actual cash components, will
be publicly disseminated daily prior to the opening of the Exchange via
the National Securities Clearing Corporation. The Administrator will
calculate the NAV per Share of the Fund as of the close of the regular
trading session on the NYSE (ordinarily 4:00 p.m., Eastern Time) on
each day such exchange is open.\40\ Information regarding market price
and trading volume of the Shares will be continually available on a
real-time basis throughout the day on brokers' computer screens and
other electronic services. Information regarding the previous day's
closing price and trading volume information for the Shares will be
published daily in the financial section of newspapers. Quotation and
last sale information for the underlying U.S. Exchange-traded Equity
will be available via the CTA high-speed line and from the national
securities exchange on which they are listed. Quotation and last sale
information for exchange-listed options cleared via the Options
Clearing Corporation will be available via the Options Price Reporting
Authority. Price information regarding exchange-traded options,
exchange-traded swaps, exchange-traded closed end funds, futures, and
Exchange-traded Equity held by the Fund will be available from the U.S.
and non-U.S. exchanges trading such assets. Quotation information from
brokers and dealers or pricing services will be available for
unsponsored ADRs, non-exchange-traded derivatives (including swaps,
options traded OTC, options on futures traded OTC, and certain
structured notes), and OTC-traded Securities. Price information for
investment company securities (other than ETFs, exchange-traded closed
end funds, and exchange-traded BDCs) is available from the applicable
investment company's Web site and from market data vendors. Pricing
information regarding each asset class in which the Fund will invest
will generally be available through nationally recognized data service
providers through subscription agreements. Foreign exchange prices are
available from major market data vendors. The Fund's Web site will
include a form of the prospectus for the Fund that may be downloaded
and additional data relating to NAV and other applicable quantitative
information.
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\36\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\37\ According to the Exchange, the Portfolio Indicative Value
calculation will be an estimate of the value of the Fund's Net Asset
Value (``NAV'') per Share using market data converted into U.S.
dollars at the current currency rates. The Portfolio Indicative
Value will be based on quotes and closing prices from the
securities' local market and may not reflect events that occur
subsequent to the local market's close. Premiums and discounts
between the Portfolio Indicative Value and the market price of the
Shares may occur, and the Portfolio Indicative Value should not be
viewed as a ``real-time'' update of the NAV per Share of the Fund,
which will be calculated only once per day.
\38\ The Exchange states that several major market data vendors
display or make widely available Portfolio Indicative Values taken
from the CTA or other data feeds.
\39\ The Fund will disclose on the Fund's Web site the following
information regarding each portfolio holding, as applicable to the
type of holding: Ticker symbol; CUSIP number or other identifier, if
any; a description of the holding (including the type of holding,
such as the type of swap); the identity of the security, commodity,
index, or other asset or instrument underlying the holding, if any;
for options, the option strike price; quantity held (as measured by,
for example, par value, notional value or number of shares,
contracts, or units); maturity date, if any; coupon rate, if any;
effective date, if any; market value of the holding; and the
percentage weighting of the holding in the Fund's portfolio. The Web
site information will be publicly available at no charge.
\40\ The NAV per Share of the Fund will be computed by dividing
the value of the net assets of the Fund (i.e., the value of its
total assets less total liabilities) by the total number of Shares
of the Fund outstanding, rounded to the nearest cent. Expenses and
fees are accrued daily and taken into account for purposes of
determining NAV per Share. According to the Exchange, in computing
the Fund's NAV, the Fund's securities holdings will be valued based
on their last readily available market price. Price information on
listed securities, including ETPs in which the Fund invests, will be
taken from the exchange where the security is primarily traded.
Other portfolio securities and assets for which market quotations
are not readily available or determined to not represent the current
fair value will be valued based on fair value as determined in good
faith by the Fund's Sub-Adviser in accordance with procedures
adopted by the Trust's Board of Directors (``Board''). U.S.
exchange-traded options, exchange-traded swaps, and exchange-traded
closed end funds will be valued at the closing settlement price
determined by the applicable exchange. Exchange-traded equity
securities, including common stocks, preferred stocks, warrants,
convertible securities, rights, pooled investment vehicles,
exchange-traded BDC's, master limited partnerships, ETPs, sponsored
ADRs, GDRs, EDRs, IDRs, ordinary shares, and New York shares
(collectively, ``Exchange-traded Equity'') will be valued at market
value, which will generally be determined using the last reported
official closing or last trading price on the exchange or market on
which the security is primarily traded at the time of valuation or,
if no sale has occurred, at the last quoted bid price on the primary
market or exchange on which they are traded. If market prices are
unavailable or the Fund believes that they are unreliable, or when
the value of a security has been materially affected by events
occurring after the relevant market closes, the Fund will price
those securities at fair value as determined in good faith using
methods approved by the Trust's Board. Unsponsored ADRs, which are
traded OTC, will be valued on the basis of the market closing price
on the exchange where the stock of the foreign issuer that underlies
the ADR is listed. Investment company securities (other than ETFs,
exchange-traded closed-end funds and exchange-traded BDCs),
including mutual funds, OTC-traded closed-end funds, and OTC-traded
BDCs, will be valued at net asset value. Non-exchange-traded
derivatives, including swaps, options traded OTC, options on futures
traded OTC, and certain structured notes, will normally be valued on
the basis of quotes obtained from brokers and dealers or pricing
services using data reflecting the earlier closing of the principal
markets for those assets. Futures contracts will be valued at the
settlement or closing price determined by the applicable exchange.
Debt securities, floating rate loans, other floating rate debt
securities, Senior Loans, Junior Loans, U.S. Treasury securities,
OTC-traded pooled investment vehicles, other obligations issued or
guaranteed by U.S. government agencies and instrumentalities,
STRIPs, zero-coupon bonds, bank obligations, corporate debt
securities, ABS, MBS, mortgage-related securities, commercial paper,
repurchase agreements, inflation-indexed bonds, certificates of
deposits, bankers' acceptances, and certain structured notes
(collectively, ``OTC-traded Securities'') generally trade in the OTC
market rather than on a securities exchange, and the Fund will
generally value OTC-traded Securities by relying on independent
pricing services. The Fund's debt securities will generally be
valued at bid prices. In certain cases, some of the Fund's debt
securities may be valued at the mean between the last available bid
and ask prices. Foreign exchange rates will be priced using 4:00
p.m. (Eastern Time) mean prices from major market data vendors.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange will obtain a representation from the issuer of
the Shares that the NAV and the Disclosed Portfolio will be made
available to all market participants at the same time. Trading in the
Shares of the Fund will be halted if the circuit breaker parameters in
NYSE Arca Equities Rule 7.12 have been reached. Trading in the Shares
of the Fund also may be halted because of other market conditions or
for reasons that, in the view of the Exchange, make trading in the
Shares inadvisable,\41\ and
[[Page 4020]]
trading in the Shares will be subject to NYSE Arca Equities Rule
8.600(d)(2)(D), which sets forth additional circumstances under which
trading in Shares of the Fund may be halted. The Exchange represents
that it has a general policy prohibiting the distribution of material,
non-public information by its employees. Consistent with NYSE Arca
Equities Rule 8.600(d)(2)(B)(ii), the Reporting Authority must
implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the Fund's portfolio. In addition,
the Exchange represents that the Adviser is not registered as a broker-
dealer or affiliated with a broker-dealer, and that the Sub-Adviser is
not registered as a broker-dealer but is affiliated with Pacific Select
Distributors, Inc., a limited purpose registered broker-dealer that
does not engage in any brokerage or trading activity.\42\
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\41\ These reasons may include: (1) The extent to which trading
is not occurring in the securities and/or the financial instruments
comprising the Disclosed Portfolio of the Fund; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance
of a fair and orderly market are present. 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.
\42\ See supra note 6. The Exchange states that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and Sub-Adviser and their related personnel are subject to
the provisions of Rule 204A-1 under the Advisers Act relating to
codes of ethics. This Rule requires investment advisers to adopt a
code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws. The Exchange further represents
that these procedures are adequate to properly monitor Exchange-trading
of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and federal securities laws applicable to
trading on the Exchange.\43\
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\43\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
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The Exchange represents that 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.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and underlying exchange-traded equity
securities, futures contracts, and exchange-traded options contracts
with other markets and other entities that are members of the ISG, and
FINRA, on behalf of the Exchange, may obtain trading information
regarding trading in the Shares and underlying exchange-traded equity
securities, futures contracts, and exchange-traded options contracts
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares and underlying
exchange-traded equity securities, futures contracts, and exchange-
traded options contracts from markets and other entities that are
members of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. FINRA, on behalf of the Exchange, is
able to access, as needed, trade information for certain fixed income
securities held by the Fund that is reported to FINRA's Trade Reporting
and Compliance Engine.
(4) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The procedures for purchases and redemptions of Shares in creation unit
aggregations (and that Shares are not individually redeemable); (b)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (d) how information regarding the
Portfolio Indicative Value and the Disclosed Portfolio is disseminated;
(e) the requirement that Equity Trading Permit Holders deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and continued listing, the Fund will be in
compliance with Rule 10A-3 under the Act,\44\ as provided by NYSE Arca
Equities Rule 5.3.
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\44\ 17 CFR 240.10A-3.
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(6) The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).
(7) 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 or Sub-
Adviser, in accordance with Commission guidance. The Fund will monitor
its portfolio liquidity on an ongoing basis to determine whether, in
light of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets.
(8) Floating rate high yield corporate bonds in which the Fund
invests generally must have $100 million or more par amount outstanding
at the time of investment.
(9) The Fund will invest in Senior Loans that the Adviser or the
Sub-Adviser deems to be highly liquid with readily available prices.
The Fund will not invest in Senior Loans that are in default at the
time of purchase. In addition, for investment purposes, the Senior Loan
must have a par amount outstanding of $150 million or greater at the
time the loan is originally issued.
(10) The Fund's investments in swaps will be made in accordance
with the 1940 Act and consistent with the Fund's investment objective
and policies. The Fund will seek, where possible, to use counterparties
whose financial status is such that the risk of default is reduced.
[[Page 4021]]
The Sub-Adviser will evaluate the creditworthiness of counterparties on
an ongoing basis. The Fund will segregate assets determined to be
liquid by the Sub-Adviser in accordance with the 1940 Act to cover its
obligations under derivative instruments. The Fund will include
appropriate risk disclosure in its offering documents, including
leveraging risk.
(11) The Fund's portfolio will be diversified by industry and
issuer, with no individual issuer representing more than 5% of the
portfolio.
(12) Not more than 10% of the net assets of the Fund in the
aggregate invested in equity securities (other than non-exchange-traded
investment company securities) shall consist of equity securities whose
principal market is not a member of the ISG or is a market with which
the Exchange does not have a comprehensive surveillance sharing
agreement. Not more than 10% of the net assets of the Fund in the
aggregate invested in exchange-traded options contracts shall consist
of options contracts whose principal market is not a member of the ISG
or is a market with which the Exchange does not have a comprehensive
surveillance sharing agreement. U.S. exchange-traded futures contracts,
U.S. exchange-traded options on futures contracts, and U.S. exchange-
traded put and call options in which the Fund invests will trade on
exchanges that are members of ISG.
(13) Unsponsored ADRs will not exceed 10% of the Fund's net assets.
(14) The Fund may invest up to 5% of its net assets in non-agency
ABS.
(15) The Fund may invest up to 5% of its net assets in MBS and
mortgage-related securities.
(16) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's representations,
including those set forth above and in the Notice, and the Exchange's
description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act \45\ and the rules and regulations thereunder
applicable to a national securities exchange.
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\45\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-NYSEArca-2014-126), as
modified by Amendment No. 1, be, and it hereby is, approved.
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\46\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01246 Filed 1-23-15; 8:45 am]
BILLING CODE 8011-01-P
