Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 7 Thereto, Amending NYSE Arca Equities Rule 8.600 To Adopt Generic Listing Standards for Managed Fund Shares, 49320-49327 [2016-17825]

Download as PDF 49320 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78397; File No. SR– NYSEArca–2015–110] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 7 Thereto, Amending NYSE Arca Equities Rule 8.600 To Adopt Generic Listing Standards for Managed Fund Shares July 22, 2016. I. Introduction On November 6, 2015, NYSE Arca, Inc. (‘‘Exchange’’) 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 amend NYSE Arca Equities Rule 8.600 and to adopt generic listing standards for Managed Fund Shares. The proposed rule change was published for comment in the Federal Register on November 27, 2015.3 On November 23, 2015, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the original proposal in its entirety.4 On January 4, 2016, pursuant to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 On January 21, 2016, the Exchange filed Amendment No. 2 to the proposed rule change.7 The proposed rule change, as modified by Amendment No. 2 thereto, was published for comment in the Federal Register on February 1, 2016.8 On February 11, 2016, the Exchange filed Amendment No. 3 to the proposed rule change.9 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 76486 (Nov. 20, 2015), 80 FR 74169 (‘‘Notice’’). 4 On January 21, 2016, the Exchange withdrew Amendment No. 1 to the proposed rule change. 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 76819, 81 FR 987 (Jan. 8, 2016). 7 In Amendment No. 2 to the proposed rule change, the Exchange added provisions to the generic listing criteria relating to non-U.S. Component Stocks, convertible securities, and listed swaps, among other changes. Amendment No. 2, which amended and replaced the Notice in its entirety, is available on the Commission’s Web site at: https://www.sec.gov/comments/sr-nysearca2015-110/nysearca2015110-3.pdf. 8 See Securities Exchange Act Release No. 76974 (Jan. 26, 2016), 81 FR 5149. 9 In Amendment No. 3 to the proposed rule change, the Exchange (a) revised the provisions sradovich on DSK3GMQ082PROD with NOTICES 2 17 VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 On February 12, 2016, the Exchange filed Amendment No. 4 to the proposed rule change.10 On February 22, 2016, the Commission issued notice of Amendment No. 4 to the proposed rule change and instituted proceedings under Section 19(b)(2)(B) of the Act 11 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 4 thereto.12 In the Order Instituting Proceedings, the Commission solicited comments to specified matters related to the proposal.13 On May 20, 2016, the Commission issued a notice of designation of a longer period for Commission action on proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 4 thereto.14 On June 3, 2016, the Exchange filed Amendment No. 5 to the proposed rule change.15 On June 7, 2016, the Exchange relating to convertible securities, (b) clarified the limitations on non-exchange-traded American Depositary Receipts, (c) eliminated redundant provisions relating to limitations on leveraged and inverse-leveraged Derivative Securities Products, (d) revised the provision relating to limitations on listed derivatives, (e) clarified that, for purposes of the limitations relating to listed and over-thecounter derivatives, a portfolio’s investment in listed and over-the-counter derivatives will be calculated as the total absolute notional value of these derivatives, and (f) provided additional information regarding the statutory basis of the proposal. Amendment No. 3, which amended and replaced the proposed rule change, as modified by Amendment No. 2 thereto, in its entirety, is available on the Commission’s Web site at: https:// www.sec.gov/comments/sr-nysearca-2015-110/ nysearca2015110-4.pdf. 10 In Amendment No. 4 to the proposed rule change, the Exchange (a) modified the generic listing rules to require compliance of the standards applicable to underlying equity securities, fixed income securities, and over-the-counter derivatives on an initial and continuing basis; and (b) clarified that the limitations on listed derivatives would apply to all listed derivatives, including listed swaps. Amendment No. 4, which amended and replaced the proposed rule change, as modified by Amendment No. 3 thereto, in its entirety, is available on the Commission’s Web site at: https:// www.sec.gov/comments/sr-nysearca-2015-110/ nysearca2015110-5.pdf. 11 15 U.S.C. 78s(b)(2)(B). 12 See Securities Exchange Act Release No. 77203, 81 FR 9900 (Feb. 26, 2016) (‘‘Order Instituting Proceedings’’). Specifically, the Commission instituted proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’’ and ‘‘to protect investors and the public interest.’’ See id., 81 FR at 9908. 13 See id., 81 FR at 9908–09. 14 See Securities Exchange Act Release No. 77872, 81 FR 33570 (May 26, 2016). The Commission designated July 22, 2016 as the date by which it should approve or disapprove the proposed rule change. 15 In Amendment No. 5 to the proposed rule change, the Exchange (a) modified the definition of PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 filed Amendment No. 6 to the proposed rule change.16 The proposed rule change, as modified by Amendment No. 6 thereto, was published for comment in the Federal Register on June 14, 2016.17 On July 20, 2016, the Exchange filed Amendment No. 7 to the proposed rule change.18 The Commission has received ‘‘normal market conditions’’ to reflect ‘‘systems failures’’ as an example of an operational issue that causes dissemination of inaccurate market information; (b) clarified that, with respect to the scope of equity securities components in Commentary .01(a) to NYSE Arca Equities Rule 8.600, the securities described in NYSE Arca Equities Rule 5.2(j)(3), NYSE Arca Equities Rule 5.2(j)(6), and Section 2 of NYSE Arca Equities Rule 8 also include securities listed on a different national securities exchange pursuant to substantially equivalent listing rules; (c) with respect to the provisions applicable to fixed income securities components, modified the concentration limitations by excluding U.S. Department of Treasury securities and government-sponsored entity securities, and clarified that the special purpose vehicle (‘‘SPV’’) that issues the fixed income security (e.g., an asset-backed or mortgagebacked security) would itself be required to satisfy the $700 million and $1 billion thresholds set forth in Commentary .01(b)(4) to NYSE Arca Equities Rule 8.600, and not the entity that controls, owns, or is affiliated with the SPV; (d) clarified that the limitations imposed on derivatives holdings will be calculated as the total absolute notional value of the derivatives; (e) added a concentration limitation with respect to listed derivatives by requiring the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets to not exceed 65% of the weight of the portfolio (including notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset to not exceed 30% of the weight of the portfolio (including notional exposures); and (f) provided examples illustrating the application of certain of the generic listing standard requirements criteria of NYSE Arca Equities Rule 8.600. Amendment No. 5, which amended and replaced the proposed rule change, as modified by Amendment No. 4 thereto, in its entirety, is available on the Commission’s Web site at: https://www.sec.gov/comments/srnysearca-2015-110/nysearca2015110-6.pdf. 16 In Amendment No. 6 to the proposed rule change, the Exchange clarified that the limitations on derivatives as set forth in Commentaries .01(d), (e), and (f) to NYSE Arca Equities Rule 8.600 will be calculated as, and will be based on, the aggregate gross notional value of the derivatives. Amendment No. 6, which amended and replaced the proposed rule change, as modified by Amendment No. 5 thereto, in its entirety, is available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-nysearca-2015-110/nysearca20151107.pdf. 17 See Securities Exchange Act Release No. 78016 (Jun. 8, 2016), 81 FR 38759 (‘‘Amendment No. 6 Notice’’). 18 In Amendment No. 7 to the proposed rule change, the Exchange added the following representations: (a) On a periodic basis and no less than annually, the Exchange will review issues of Managed Fund Shares listed pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600 for compliance with NYSE Arca Equities Rule 8.600, and will provide a report to the Regulatory Oversight Committee of the Exchange’s Board of Directors regarding the Exchange’s findings; (b) the Exchange will provide the Commission staff with a report each calendar quarter that includes the following information for issues of Managed Fund Shares listed during such calendar quarter under Commentary .01 to NYSE Arca Equities Rule 8.600: E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices two comment letters on the proposal.19 This order grants approval of the proposed rule change, as modified by Amendment No. 7 thereto. II. Exchange’s Description of the Proposed Rule Change sradovich on DSK3GMQ082PROD with NOTICES The Exchange proposes to amend NYSE Arca Equities Rule 8.600 and to adopt generic listing standards for Managed Fund Shares, which are securities issued by an open-end investment company. Unlike exchangetraded funds (‘‘ETFs’’) whose performance is based on the performance of an underlying index of securities,20 Managed Fund Shares generally use an active investment (1) Trading symbol and date of listing on the Exchange; (2) the number of active authorized participants and a description of any failure of an issue of Managed Fund Shares listed pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600 or of an authorized participant to deliver shares, cash, or cash and financial instruments in connection with creation or redemption orders; and (3) a description of any failure of an issue of Managed Fund Shares to comply with NYSE Arca Equities Rule 8.600; (c) prior to listing pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600, an issuer will be required to represent to the Exchange that it will advise the Exchange of any failure by a series of Managed Fund Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements; and (d) if a series of Managed Fund Shares is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Equities Rule 5.5(m). Because Amendment No. 7 does not materially alter the substance of the proposed rule change or raise unique or novel regulatory issues, Amendment No. 7 is not subject to notice and comment. Amendment No. 7, which amended and replaced the proposed rule change, as modified by Amendment No. 6 thereto, in its entirety, is available on the Commission’s Web site at: https:// www.sec.gov/comments/sr-nysearca-2015-110/ nysearca2015110-9.pdf. 19 See Letter from Kermit Kubitz to the Commission dated Jun. 30, 2016 (emphasizing the importance of the Exchange’s monitoring program to determine continued compliance of series of Managed Fund Shares with the generic listing standards, supported by, for example, continued affirmation by issuers of Managed Fund Shares on a periodic basis that they are in compliance with the generic listing standards or if any deviations from the standards have occurred); and Letter from Rob Ivanoff to the Commission dated Nov. 22, 2015 (commenting that the format of the Exchange’s proposed rule change was unclear and difficult to read, and suggesting a new format that would be easier to understand). All comments on the proposed rule change are available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-nysearca-2015-110/ nysearca2015110.shtml. 20 For example, Investment Company Units listed and traded on the Exchange pursuant to NYSE Arca Equities Rule 5.2(j)(3) are securities of index-based ETFs that seek to provide investment results that generally correspond to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index, or combination thereof. VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 strategy to achieve their specific investment objectives. According to the Exchange, all Managed Fund Shares listed and traded pursuant to NYSE Arca Equities Rule 8.600 (including trading pursuant to unlisted trading privileges) are subject to the full panoply of Exchange rules and procedures that currently govern the trading of equity securities on the Exchange. In addition, NYSE Arca Equities Rule 8.600 currently requires that the Exchange submit a proposed rule change with the Commission to list and trade each new series of Managed Fund Shares on the Exchange.21 The Exchange proposes to adopt ‘‘generic’’ listing standards that would allow the Exchange to approve the listing and trading of Managed Fund Shares that satisfy those generic listing standards pursuant to Rule 19b–4(e) under the Act.22 A. Generic Listing Standards for Managed Fund Shares The Exchange proposes to amend Commentary .01 to NYSE Arca Equities Rule 8.600 and adopt generic listing standards that would permit the listing and trading (including trading pursuant to unlisted trading privileges) of Managed Fund Shares pursuant to Rule 19b–4(e) under the Act, which pertains to new derivative securities products.23 These generic listing standards are grouped according to underlying security or asset type. The Exchange 21 See Commentary .01 to NYSE Arca Equities Rule 8.600 (requiring the Exchange to file separate proposals under Section 19(b) of the Act before the listing and trading of shares of an issue of Managed Fund Shares). 22 See 17 CFR 240.19b–4(e). Rule 19b–4(e) under the Act permits self-regulatory organizations (‘‘SROs’’) to list and trade new derivative securities products that comply with existing SRO trading rules, procedures, surveillance programs, and listing standards, without submitting a proposed rule change under Section 19(b). See also Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952 (Dec. 22, 1998) (S7–13–98) (adopting Rule 19b–4(e) under the Act). 23 Under Rule 19b–4(e), the term ‘‘new derivative securities product’’ means any type of option, warrant, hybrid securities product, or any other security, other than a single equity option or a security futures product, whose value is based, in whole or in part, upon the performance of, or interest in, an underlying instrument. See 17 CFR 240.19b–4(e). Rule 19b–4(e)(1) under the Act provides that the listing and trading of a new derivative securities product by an SRO is not deemed a proposed rule change, pursuant to paragraph (c)(1) of Rule 19b–4, if the Commission has approved, pursuant to section 19(b) of the Act, the SRO’s trading rules, procedures and listing standards for the product class that would include the new derivative securities product and the SRO has a surveillance program for the product class. See 17 CFR 240.19b–4(c)(1). Under Rule 19b– 4(c)(1), a stated policy, practice, or interpretation of the SRO shall be deemed to be a proposed rule change, unless it is reasonably and fairly implied by an existing rule of the SRO. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 49321 also seeks to specify in Commentary .01 to NYSE Arca Equities Rule 8.600 that components of Managed Fund Shares listed pursuant to Rule 19b–4(e) under the Act must satisfy, on an initial and continued basis, certain specific criteria (as described below), and that the Exchange would continue to file separate proposed rule changes with the Commission before the listing and trading of Managed Fund Shares that do not satisfy the prescribed generic listing standards.24 1. Requirements Applicable to Equity Securities Components of the Portfolio Commentary .01(a) to NYSE Arca Equities Rule 8.600 sets forth the standards for a Managed Fund Share portfolio holding equity securities, which are defined to be U.S. Component Stocks,25 Non-U.S. Component Stocks,26 Derivative Securities Products,27 and Index-Linked Securities 28 listed on a national securities exchange.29 For Derivative Securities Products and Index-Linked Securities, leveraged and inverse leveraged Derivative Securities Products or Index-Linked Securities can 24 For example, according to the Exchange, if the portfolio components of a series of Managed Fund Shares exceeded one of the applicable thresholds, the Exchange would file a separate proposed rule change before listing and trading the Managed Fund Shares. Similarly, if the portfolio components of a series of Managed Fund Shares included a security or asset that is not specified in the generic listing criteria, the Exchange would file a separate proposed rule change. 25 See Commentary .01(a) to NYSE Arca Equities Rule 8.600. The term ‘‘U.S. Component Stocks’’ is defined in NYSE Arca Equities Rule 5.2(j)(3) (defining U.S. Component Stock as an equity security that is registered under Sections 12(b) or 12(g) of the Act or an American Depositary Receipt, the underlying equity security of which is registered under Sections 12(b) or 12(g) of the Act). See NYSE Arca Equities Rule 5.2(j)(3). 26 The term ‘‘Non-U.S. Component Stocks’’ is defined in NYSE Arca Equities Rule 5.2(j)(3) (defining Non-U.S. Component Stock as an equity security that is not registered under Sections 12(b) or 12(g) of the Act and that is issued by an entity that (a) is not organized, domiciled, or incorporated in the United States, and (b) is an operating company (including Real Estate Investment Trusts and income trusts, but excluding investment trusts, unit trusts, mutual funds, and derivatives)). See id. 27 For the purposes of Commentary .01, the term ‘‘Derivative Securities Products’’ would mean Investment Company Units and securities described in Section 2 of NYSE Arca Equities Rule 8 (i.e., securities described in NYSE Arca Equities Rules 5.2(j)(3), 8.100, 8.200, 8.201, 8.202, 8.203, 8.204, 8.300, 8.400, 8.500, 8.600, and 8.700). 28 Index-Linked Securities are securities that qualify for Exchange listing and trading under NYSE Arca Equities Rule 5.2(j)(6). 29 Commentary .01(a) clarifies that, with respect to the scope of securities included in the term ‘‘equity securities,’’ the securities described in NYSE Arca Equities Rule 5.2(j)(3), NYSE Arca Equities Rule 5.2(j)(6), and Section 2 of NYSE Arca Equities Rule 8, as referenced above, include securities listed on a different national securities exchange pursuant to substantially equivalent listing rules. E:\FR\FM\27JYN1.SGM 27JYN1 sradovich on DSK3GMQ082PROD with NOTICES 49322 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices constitute no more than 25% of the equity weight of the portfolio. In addition, Commentary .01(a) provides that, to the extent that a portfolio includes convertible securities, the equity security into which any such security is converted would be required to meet the criteria of Commentary .01(a) after converting. As set forth in Commentary .01(a)(1) to NYSE Arca Equities Rule 8.600,30 the component stocks of the equity portion of a portfolio that are U.S. Component Stocks must meet the following criteria initially and on a continuing basis: 31 (a) Component stocks (excluding Derivative Securities Products and Index-Linked Securities) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Derivative Securities Products and Index-Linked Securities) each must have a minimum market value of at least $75 million; (b) Component stocks (excluding Derivative Securities Products and Index-Linked Securities) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Derivative Securities Products and Index-Linked Securities) each must have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the previous six months; (c) The most heavily weighted component stock (excluding Derivative Securities Products and Index-Linked Securities) must not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Derivative Securities Products and Index-Linked Securities) must not exceed 65% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio does not include Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Derivative Securities Products or Index-Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Derivative Securities Products or Index-Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; 30 See Commentary .01(a)(1) to NYSE Arca Equities Rule 8.600. 31 See Commentary .01(a)(1)(A)–(F) to NYSE Arca Equities Rule 8.600. VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 (e) Except as provided in Commentary .01(a), equity securities in the portfolio must be U.S. Component Stocks listed on a national securities exchange and must be NMS Stocks as defined in Rule 600 of Regulation NMS; 32 and (f) American Depositary Receipts (‘‘ADRs’’) may be exchange-traded or non-exchange-traded; however, no more than 10% of the equity weight of the portfolio shall consist of non-exchangetraded ADRs. As set forth in Commentary .01(a)(2) to NYSE Arca Equities Rule 8.600,33 the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks must meet the following criteria initially and on a continuing basis: 34 (a) Non-U.S. Component Stocks each shall have a minimum market value of at least $100 million; (b) Non-U.S. Component Stocks each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted NonU.S. Component Stock shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio includes Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Derivative Securities Products or Index-Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Derivative Securities Products or Index-Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting. 2. Requirements Applicable to Fixed Income Securities Components of the Portfolio Commentary .01(b) to NYSE Arca Equities Rule 8.600 35 sets forth standards for a Managed Fund Share 17 CFR 240.600. Commentary .01(a)(2) to NYSE Arca Equities Rule 8.600. 34 See Commentary .01(a)(2)(A)–(E) to NYSE Arca Equities Rule 8.600. 35 See Commentary .01(b) to NYSE Arca Equities Rule 8.600. PO 00000 32 See 33 See Frm 00115 Fmt 4703 Sfmt 4703 portfolio that holds fixed income securities, which are defined to be debt securities 36 that are notes, bonds, debentures, or evidence of indebtedness that include, but are not limited to, U.S. Department of Treasury securities (‘‘Treasury Securities’’), governmentsponsored entity securities (‘‘GSE Securities’’), municipal securities, trust preferred securities, supranational debt and debt of a foreign country or a subdivision thereof, investment grade and high yield corporate debt, bank loans, mortgage and asset backed securities, and commercial paper. To the extent that a portfolio includes convertible securities, the fixed income security into which such security is converted would be required to meet the criteria of Commentary .01(b) after converting. The components of the fixed income portion of a portfolio must meet the following criteria initially and on a continuing basis: 37 (a) Components that in the aggregate account for at least 75% of the fixed income weight of the portfolio each shall have a minimum original principal amount outstanding of $100 million or more; (b) No component fixed-income security (excluding Treasury Securities and GSE Securities) could represent more than 30% of the fixed income weight of the portfolio, and the five most heavily weighted component fixed income securities in the portfolio (excluding Treasury Securities and GSE Securities) must not in the aggregate account for more than 65% of the fixed income weight of the portfolio; (c) An underlying portfolio (excluding exempted securities) that includes fixed income securities must include a minimum of 13 non-affiliated issuers; provided, however, that there shall be no minimum number of non-affiliated issuers required for fixed income securities if at least 70% of the weight of the portfolio consists of equity securities as described in Commentary .01(a). (d) Component securities that in aggregate account for at least 90% of the fixed income weight of the portfolio must be: (i) From issuers that are 36 According to the Exchange, debt securities include a variety of fixed income obligations, including, but not limited to, corporate debt securities, government securities, municipal securities, convertible securities, and mortgagebacked securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities also include variable and floating rate securities. See Order Instituting Proceedings, supra note 12, 81 FR at 9903 n.41. 37 See Commentary .01(b)(1)–(5) to NYSE Arca Equities Rule 8.600. E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices required to file reports pursuant to Sections 13 and 15(d) of the Act; (ii) from issuers each of which has a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (iii) from issuers each of which has outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; 38 (iv) exempted securities as defined in Section 3(a)(12) of the Act; or (v) from issuers that are a government of a foreign country or a political subdivision of a foreign country; and (e) Non-agency, non-GSE, and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio. 3. Requirements Relating to Cash and Cash Equivalents Components of the Portfolio sradovich on DSK3GMQ082PROD with NOTICES Commentary .01(c) to NYSE Arca Equities Rule 8.600 39 sets forth standards for a Managed Fund Share portfolio holding cash and cash equivalents. Specifically, the portfolio may hold short-term instruments with maturities of less than 3 months and cash, and there would be no limitation to the percentage of the portfolio invested in such holdings. Short-term instruments include the following: 40 (a) U.S. Government securities, including bills, notes, and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities; (b) Certificates of deposit issued against funds deposited in a bank or savings and loan association; (c) Bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (d) Repurchase agreements and reverse repurchase agreements; (e) Bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a 38 The Exchange represents that, with respect to subparagraphs (ii) and (iii) of this provision in paragraph (d), the SPV that issues the fixed income security (e.g., an asset-backed or mortgage-backed security) would itself be required to satisfy the $700 million and $1 billion criteria, respectively, and not the entity that controls, owns, or is affiliated with the SPV. See Amendment No. 5 to the proposed rule change, supra note 15. 39 See Commentary .01(c) to NYSE Arca Equities Rule 8.600. 40 See Commentary .01(c)(2)(i)–(vii) to NYSE Arca Equities Rule 8.600. VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 stated period of time at a fixed rate of interest; (f) Commercial paper, which are short-term unsecured promissory notes; and (g) Money market funds. 4. Requirements Applicable to Listed Derivatives Components of the Portfolio Commentary .01(d) to NYSE Arca Equities Rule 8.600 41 sets forth standards for a Managed Fund Share portfolio that holds listed derivatives, including futures, options, and swaps on commodities, currencies, and financial instruments (e.g., stocks, fixed income securities, interest rates, and volatility) or a basket or index of any of the foregoing. There would be no limitation to the percentage of the portfolio invested in such holdings, but portfolio holdings would be subject to the following requirements: (a) In the aggregate, at least 90% of the weight of holdings invested in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the Intermarket Surveillance Group (‘‘ISG’’) from other members or affiliates of the ISG or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement; 42 and (b) The aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). 5. Requirements Applicable to Over-theCounter (‘‘OTC’’) Derivatives Components of the Portfolio Commentary .01(e) to NYSE Arca Equities Rule 8.600 43 sets forth standards for a Managed Fund Share portfolio that holds OTC derivatives, including forwards, options, and swaps on commodities, currencies, and financial instruments (e.g., stocks, fixed income securities, interest rates, and volatility) or a basket or index of any of Commentary .01(d) to NYSE Arca Equities Rule 8.600. 42 Commentary .01(d)(1) specifies that, for purposes of calculating the percentage limitations, a portfolio’s investment in listed derivatives will be calculated as the aggregate gross notional value of the listed derivatives. 43 See Commentary .01(e) to NYSE Arca Equities Rule 8.600. PO 00000 41 See Frm 00116 Fmt 4703 Sfmt 4703 49323 the foregoing. Commentary .01(e) requires that, on an initial and continuing basis, no more than 20% of the assets in the portfolio may be invested in OTC derivatives. The Exchange notes that, for purposes of calculating this limitation, a portfolio’s investment in OTC derivatives will be calculated as the aggregate gross notional value of the OTC derivatives. 6. Requirements Applicable to Securities Underlying Derivatives Components Commentary .01(f) to NYSE Arca Equities Rule 8.600 44 provides that, to the extent that listed or OTC derivatives are used to gain exposure to individual equities or fixed income securities, or to indexes of equities or fixed income securities, the aggregate gross notional value of this exposure must meet the applicable criteria set forth in Commentaries .01(a) and .01(b) to NYSE Arca Equities Rule 8.600, respectively.45 B. Other Aspects of the Proposal In addition to the generic listing standards applicable to Managed Fund Shares that satisfy those specific generic criteria, the Exchange also proposes to amend certain other aspects of NYSE Arca Equities Rule 8.600, which governs the listing and trading of all Managed Fund Shares. 1. Disclosed Portfolio As part of the proposed rule change, the Exchange also proposes to amend NYSE Arca Equities Rule 8.600(c) to require that the Web site for all series of Managed Fund Shares, including Managed Fund Shares listed and traded on the Exchange pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600, disclose certain additional information regarding the Disclosed Portfolio. The required information includes the following, to the extent applicable: Ticker symbol; CUSIP or other identifier; a description of the holding; with respect to holdings in derivatives, the identity of the security, commodity, index, or other asset upon which the derivative is based; the strike price for any options; the quantity of each security or other asset held as measured by select metrics (par value, notional value, number of shares, 44 See Commentary .01(f) to NYSE Arca Equities Rule 8.600. 45 The Exchange provides examples illustrating the application of certain of the generic listing standard requirements criteria of NYSE Arca Equities Rule 8.600. See Amendment No. 6 Notice, supra note 17, 81 FR at 38764–65 (describing several portfolio scenarios and the method of calculating the holdings percentage limitations with respect to OTC derivatives and listed derivatives, among other securities). E:\FR\FM\27JYN1.SGM 27JYN1 49324 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices number of contracts, and number of units); maturity date; coupon rate; effective date; market value; and percentage weighting of the holding in the portfolio.46 2. Investment Objective In addition, the Exchange proposes to amend NYSE Arca Equities Rule 8.600(d) to specify that all Managed Fund Shares must have a stated investment objective, which must be adhered to under normal market conditions.47 NYSE Arca Equities Rule 8.600(c)(5) would specify that the term ‘‘normal market conditions’’ includes, but is not limited to, the absence of trading halts in the applicable financial markets generally; operational issues (e.g., systems failure) causing dissemination of inaccurate market information; or force majeure type events such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance.48 sradovich on DSK3GMQ082PROD with NOTICES 3. Portfolio Indicative Value The Exchange seeks to amend the continued listing requirement in NYSE Arca Equities Rule 8.600(d)(2)(A) by changing the requirement that a Portfolio Indicative Value for Managed Fund Shares be widely disseminated by one or more major market data vendors at least every 15 seconds during the time when the Managed Fund Shares trade on the Exchange to a requirement that the Portfolio Indicative Value be widely disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session (as defined in NYSE Arca Equities Rule 7.34).49 C. Additional Representations of the Exchange Applicable to the Listing and Trading of Managed Fund Shares In support of the proposed rule change, the Exchange represents that: (1) The Managed Fund Shares will continue to conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600. (2) The Exchange’s surveillance procedures are adequate to continue to properly monitor the trading of the Managed Fund Shares in all trading sessions and to deter and detect violations of Exchange rules. Specifically, the Exchange intends to utilize its existing surveillance procedures applicable to derivative products, which will include Managed 46 See NYSE Arca Equities Rule 8.600(c)(2)(A)– (K). 47 See NYSE Arca Equities Rule 8.600(d)(1)(C). NYSE Arca Equities Rule 8.600(c)(5). 49 See NYSE Arca Equities Rule 8.600(d)(2)(A). 48 See VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 Fund Shares, to monitor trading in the Managed Fund Shares. (3) Prior to the commencement of trading of a particular series of Managed Fund Shares, the Exchange will inform its Equity Trading Permit (‘‘ETP’’) Holders in a Bulletin of the special characteristics and risks associated with trading the Managed Fund Shares, including procedures for purchases and redemptions of Managed Fund Shares, suitability requirements under NYSE Arca Equities Rule 9.2(a), the risks involved in trading the Managed Fund Shares during the Opening and Late Trading Sessions when an updated Portfolio Indicative Value will not be calculated or publicly disseminated, information regarding the Portfolio Indicative Value and the Disclosed Portfolio, prospectus delivery requirements, and other trading information. In addition, the Bulletin will disclose that the Managed Fund Shares are subject to various fees and expenses, as described in the applicable registration statement, and will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. Finally, the Bulletin will disclose that the net asset value for the Managed Fund Shares will be calculated after 4:00 p.m. Eastern Time each trading day. (4) The issuer of a series of Managed Fund Shares will be required to comply with Rule 10A–3 under the Act for the initial and continued listing of Managed Fund Shares, as provided under NYSE Arca Equities Rule 5.3. (5) The Exchange, on a periodic basis and no less than annually, will review issues of Managed Fund Shares listed pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600 for compliance with NYSE Arca Equities Rule 8.600, and will provide a report to the Regulatory Oversight Committee of the Exchange’s Board of Directors regarding the Exchange’s findings. In addition, the Exchange will provide the Commission staff with a report each calendar quarter that includes the following information for issues of Managed Fund Shares listed during such calendar quarter under Commentary .01 to NYSE Arca Equities Rule 8.600: (1) Trading symbol and date of listing on the Exchange; (2) the number of active authorized participants and a description of any failure of an issue of Managed Fund Shares listed pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600 or of an authorized participant to deliver shares, cash, or cash and financial instruments in connection with creation or redemption orders; and (3) a description of any failure of an issue of PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 Managed Fund Shares to comply with NYSE Arca Equities Rule 8.600. (6) Prior to listing pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600, an issuer would be required to represent to the Exchange that it will advise the Exchange of any failure by a series of Managed Fund Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If a series of Managed Fund Shares is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Equities Rule 5.5(m). III. Discussion and Commission’s Findings After careful review, the Commission finds that the Exchange’s proposal to amend Commentary .01 to NYSE Arca Equities Rule 8.600 to adopt generic listing standards for Managed Fund Shares and to amend certain other provisions in NYSE Arca Equities Rule 8.600 applicable to the listing and trading of all Managed Fund Shares on the Exchange is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.50 In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 7 thereto, is consistent with Section 6(b)(5) of the Act,51 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. In support of its proposal, the Exchange states that its proposed requirements for Managed Fund Shares are based in large part on the generic listing criteria currently applicable to Investment Company Units.52 As a general matter, the Commission believes that this is an appropriate approach with respect to underlying asset classes covered by the existing generic standards, because the mere addition of active management to an ETF portfolio that would qualify for generic listing as an index-based ETF should not affect the portfolio’s susceptibility to 50 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). 51 15 U.S.C. 78f(b)(5). 52 See id. at 7–14. See also supra note 20. E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices manipulation or the availability of arbitrage between the ETF and its underlying portfolio. Below, the Commission addresses the proposed criteria for each of the asset classes encompassed within the generic listing standards. Equity Holdings. With respect to the equity securities holdings of the underlying portfolio, the criteria closely track the existing standards for Investment Company Units with four relevant differences. First, while the generic listing criteria for Investment Company Units do not permit the inclusion of any non-exchange-traded ADRs in the underlying index,53 the generic criteria for Managed Fund Shares permit an ETF to hold up to 10% of the equity weight of the portfolio in non-exchange-traded ADRs. This provision, however, is consistent with standards that the Commission has approved for specific ETFs listed and traded as Managed Fund Shares.54 Moreover, the Commission believes that the requirement that at least 90% of the equity portion of a portfolio consist of domestic equity securities (a category that includes ADRs) for which the Exchange may obtain transaction data should both deter manipulation of generically listed Managed Fund Shares and permit the Exchange to investigate any instances of manipulation. Second, the generic listing standards differ slightly from the existing generic standards for Investment Company Units with respect to Non-U.S. Component Stocks. The standards provide that all Non-U.S. Component Stocks in a Portfolio must have a minimum market value of at least $100 million. By contrast, the generic listing criterion for Investment Company Units requires only 90% of the Non-U.S. Component Stocks (excluding Derivative Securities Products) included in an index to meet the same minimum market-value threshold.55 Additionally, under the proposal, all Non-U.S. Component Stocks included in a portfolio must have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of sradovich on DSK3GMQ082PROD with NOTICES 53 The Commission notes, however, that a portfolio of a series of Investment Company Units nevertheless may contain non-exchange-listed ADRs because the Investment Company Unit portfolio need not consist only of components of the index underlying the series of Investment Company Units. 54 See, e.g., Securities Exchange Act Release No. 72679 (July 28, 2014), 79 FR 44878 (Aug. 1, 2014) (SR–NYSEArca–2014–71); Securities Exchange Act Release No. 67277 (June 27, 2012), 77 FR 39554 (July 3, 2012) (SR–NYSEArca–2012–39). 55 See Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3)(a)(B)(1). VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 $25,000,000, averaged over the previous six months.56 By contrast, only 70% of the weight of an index (excluding Derivative Securities Products) underlying generically listed Investment Company Units must satisfy the same monthly volume thresholds.57 The Commission believes that these provisions should reduce the extent to which Managed Fund Shares holding Non-U.S. Component Stocks may be susceptible to manipulation. Third, while the Exchange’s existing generic listing standards for index-based ETFs do not apply concentration limits to an index’s exposure to specified exchange-traded products (called ‘‘Derivative Securities Products’’), which have concentration limits or price transparency requirements within their own listing standards, proposed Commentary .01(a) to NYSE Arca Rule 8.600 would also deem portfolio concentration limits not to apply to holdings of specified exchange-traded notes (called ‘‘Index-Linked Securities’’). The Commission believes that this change should not increase the susceptibility of Managed Fund Shares to manipulation because Index-Linked Securities, like Derivative Securities Products, have asset-exposure concentration limits and requirements promoting price transparency within their own listing standards, and both Derivative Securities Products and Index-Linked Securities are listed and traded on national securities exchanges (which are all members of ISG), publicly provide information about listed Derivative Securities Products and Index-Linked Securities, including price and other information relating to the underlying index or reference asset, as the case may be, and provide trading and price information and other quantitative date for investors and other market participants. And fourth, under current generic listing standards, index-based ETFs cannot seek inverse returns greater than 300% of the performance of their reference index, and there is no limit on positive leverage versus an index. By contrast, the proposed standards would impose an absolute cap—25%—on the amount of an ETF’s portfolio that could be invested in leveraged or inverseleveraged exchange-traded products. The Commission believes that a limitation on the overall use of 56 The Commission approved a listing rule that contained these heightened market capitalization and trading volume requirements. See Securities Exchange Act Release No. 75023 (May 21, 2015), 80 FR 30519 (May 28, 2015) (SR–NYSEArca–2014– 100). 57 See Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3)(a)(B)(2). PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 49325 leveraged exchange-traded products is consistent with Section 6(b)(5) of the Act because it will limit the extent to which the performance of a generically listed, actively managed ETF can be tied to a product whose performance over periods of longer than one day can differ significantly from its stated daily performance objective.58 Fixed Income Holdings. With respect to the fixed income securities components of a portfolio, the generic listing standards for Managed Fund Shares are based in large part on the existing generic listing standards of Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) applicable to components of fixed income securities indexes underlying Investment Company Units,59 with three relevant differences. First, Commentary .01(b)(3) to NYSE Arca Equities Rule 8.600 does not require a minimum number of nonaffiliated issuers for fixed income securities in the portfolio if at least 70% of the weight of the portfolio consists of equity securities as set forth in Commentary .01(a) to NYSE Arca Equities Rule 8.600. Second, Commentary .01(b)(5) to NYSE Arca Equities Rule 8.600 prohibits nonagency, non-GSE, and privately issued mortgage-related and other asset-backed securities components of a portfolio from constituting, in the aggregate, more than 20% of the weight of the fixed income portion of the portfolio.60 And third, the standards make explicit that convertible bonds both (a) have to meet the criteria for fixed-income holdings and (b) be convertible into equities that would meet the criteria for equity holdings. The Commission believes that, taken together, the requirements for the fixed income portion of the portfolio are reasonably designed to ensure that a substantial portion of the portfolio consists of fixed income securities for which information is publicly available, and, when applied in conjunction with the other applicable listing requirements, will permit the listing and trading only of Managed Fund Shares that are sufficiently broad-based to 58 Cf. SEC Invester Alert, Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, available at https:// www.sec.gov/investor/pubs/leveragedetfs-alert.htm. 59 See Amendment No. 7, supra note 18, at 12– 14. 60 The Commission notes that it has approved listing and trading rules for specific ETFs listed as Managed Fund Shares that limit holdings of nonagency asset-backed securities to 20% of the value of the fund’s portfolio. See, e.g., Securities Exchange Act Release No. 74297 (Feb. 18, 2015), 80 FR 9788 (Feb. 24, 2015) (SR–BATS–2014–056); Securities Exchange Act Release No. 75566 (July 30, 2015), 80 FR 46612 (Aug. 5, 2015) (SR–NYSEArca– 2015–42). E:\FR\FM\27JYN1.SGM 27JYN1 49326 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices sradovich on DSK3GMQ082PROD with NOTICES minimize the potential for manipulation. The Commission also believes that these provisions should help to ensure that the fixed income securities portion of a portfolio consists of assets for which available intra-day values allow market participants to identify and capitalize upon arbitrage opportunities, which in turn should help keep the intra-day prices of generically listed Managed Fund Shares reasonably aligned with the intra-day values of their underlying assets. Cash and Cash Equivalents. With respect to cash and cash equivalents to be held in a portfolio, the Commission believes that the proposed standards appropriately define the type of shortterm instruments that would qualify as such holdings. Derivatives Holdings. With respect to derivatives of any type included in the portfolio, Commentary .01(f) to NYSE Arca Equities Rule 8.600 provides that, to the extent they are used to gain exposure to individual equities or fixed income securities, or to indexes of equities or fixed income securities, the total notional exposure to the underlying instruments—whether achieved through cash instruments or derivative instruments—must meet the numerical and other criteria set forth in Commentaries .01(a) and .01(b) to NYSE Arca Equities Rule 8.600, as applicable. The Commission believes that this provision should make the portfolios less susceptible to manipulation by preventing circumvention of the quantitative and other requirements applicable to equity and fixed income security components of a portfolio. With respect to listed derivatives under Commentary .01(d) to NYSE Arca Equities Rule 8.600, the generic criterion allows a generically listed ETF to use listed derivatives to achieve 100% of its portfolio exposure, provided that, in the aggregate, at least 90% of the weight of the holdings in futures, exchange-traded options, and listed swaps consists of futures, options, and swaps for which (1) the Exchange may obtain information from other ISG members or affiliate members, or (2) the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement.61 61 See Amendment No. 7, supra note 18, at 23– 24. The Exchange also states that: (1) A fund’s investments in derivatives, including listed derivatives, would be subject to limits on leverage imposed by the Investment Company Act of 1940 (‘‘1940 Act’’); (2) to limit the potential risk associated with a fund’s use of derivatives, a fund will segregate or ‘‘earmark’’ assets determined to be liquid by a fund in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its obligations under derivative instruments; and (3) a fund’s VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 Additionally, the Exchange represents that it (or the Financial Industry Regulatory Authority, Inc. on its behalf) will communicate regarding and obtain trade information as needed for the underlying exchange-listed instruments whose principal market is either an ISG member or a market with which the Exchange has a comprehensive surveillance sharing agreement in place.62 The Commission believes that these provisions should both deter potential manipulation and permit the Exchange to investigate suspected manipulation of generically listed Managed Fund Shares that use listed derivatives. Moreover, the Commission believes that the price transparency of listed derivatives should enable market participants to identify and execute arbitrage strategies that will tend to equalize the market price of generically listed Managed Fund Shares with the value of the underlying portfolios. The Commission also notes that Commentary .01(d)(2) to NYSE Arca Equities Rule 8.600 imposes concentration limits on the use of listed derivatives. The Commission believes that this limitation should make Portfolios that contain listed derivatives less susceptible to manipulation.63 With respect to OTC derivatives, Commentary .01(e) to NYSE Arca Equities Rule 8.600 permits the portfolio to include OTC derivatives, but would limit the amount of these derivatives to 20% of the fund’s assets in the portfolio, thereby ensuring that the preponderance of a fund’s investments would not be in derivatives that are not listed and centrally cleared. The Commission believes that this limitation is sufficient to mitigate the risks associated with price manipulation because at least 80% of a Managed Fund Shares portfolio would consist of: Cash and cash equivalents; listed derivatives, of which 90% by portfolio weight would be traded on a principal market that is a member of ISG; and equity securities or fixed income instruments subject to numerous restrictions designed to prevent manipulation and ensure pricing transparency. The Commission notes that, for purposes of calculating investments would be consistent with its investment objective and would not be used to enhance leverage. See id. at 24. 62 See id. at 27. 63 Commentary .01(d)(2) to NYSE Arca Equities Rule 8.600 requires that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 this 20% limitation on OTC derivatives holdings, a portfolio’s investment in OTC derivatives will be calculated as the aggregate gross notional value of the OTC derivatives.64 The Commission further notes that, in addition to the listing criteria described above for specific underlying asset classes, the Exchange has committed to conduct an ongoing compliance review of the ETFs that are generically listed as Managed Fund Shares. Specifically, the Exchange has represented that, no less than annually, it will review the Managed Fund Shares generically listed and traded on the Exchange under NYSE Arca Equities Rule 8.600 for compliance with that rule and will provide a report to its Regulatory Oversight Committee presenting the findings of its review. The Exchange has also committed to provide, on a quarterly basis, a report to the Commission staff that contains, for each ETF whose shares are generically listed and traded under Commentary .01 to NYSE Arca Equities Rule 8.600: (a) The symbol and date of listing; (b) the number of active authorized participants and a description of any failure by either a fund or an authorized participant to deliver promised baskets of shares, cash, or cash and instruments in connection with creation or redemption orders; and (c) a description of any failure by an ETF to comply with NYSE Arca Equities Rule 8.600.65 The Commission believes that the quarterly report provided by the Exchange will assist the Commission in using public data to review the trading characteristics of ETFs listed under these generic standards.66 The Commission also notes that, prior to listing pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600, an issuer would be required to represent to the Exchange that it will advise the Exchange of any failure by a series of Managed Fund Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements.67 If a 64 See Commentary .01(e) to NYSE Arca Equities Rule 8.600. 65 See Amendment No. 7, supra note 18, at 19. 66 The Commission also notes that all Managed Fund Shares listed pursuant to NYSE Arca Equities Rule 8.600, including generically listed Managed Fund Shares, are included within the definition of ‘‘security’’ or ‘‘securities’’ as those terms are used in the Exchange Rules. See NYSE Arca Equities Rule 8.600(b). Accordingly, Managed Fund Shares are subject to the full set of rules and procedures that govern the trading of securities on the Exchange. See Amendment No. 7, supra note 18, at 5 and 26. 67 The Commission notes that another proposal relating to the generic listing and trading of E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices sradovich on DSK3GMQ082PROD with NOTICES series of Managed Fund Shares is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Equities Rule 5.5(m).68 The Commission believes that the Managed Fund Shares generic listing criteria, taken together, should promote the listing only of Managed Fund Shares that are not susceptible to manipulation. Additionally, the generic listing standards as a whole should ensure that the underlying portfolios are composed predominantly of securities and instruments for which available intraday values allow market participants to identify and capitalize upon arbitrage opportunities, which in turn should help keep the intra-day prices of generically listed Managed Fund Shares reasonably aligned with the intra-day values of their underlying assets. For the reasons discussed above, the Commission finds that the generic listing standards for Managed Fund Shares are consistent with Section 6(b)(5) of the Act.69 In addition, the Exchange amends certain requirements of NYSE Arca Equities Rule 8.600 that apply to all Managed Fund Shares (i.e., both fund shares listed generically under the proposed standards and fund shares listed pursuant to filings by the Exchange under Section 19(b)(1) of the Act and Rule 19b–4 thereunder). Specifically, the Exchange specifies the information that must be included in the Disclosed Portfolio disseminated by each actively managed ETF. Previously approved listing rules for specific ETFs listed as Managed Fund Shares have included identical disclosure requirements.70 The mandatory disclosures include information that market participants can use to value an actively managed ETF’s holdings intraday, which should facilitate arbitrage opportunities that should help keep the intra-day prices of Managed Fund Shares reasonably aligned with the Managed Fund Shares includes a representation that the exchange will ‘‘surveil’’ for compliance with the continued listing requirements. See, e.g., Securities Exchange Act Release No. 78005 (Jun. 7, 2016), 81 FR 38247 (Jun. 13, 2016) (SR–BATS– 2015–100). In the context of this representation, it is the Commission’s view that ‘‘monitor’’ and ‘‘surveil’’ both mean ongoing oversight of a fund’s compliance with the continued listing requirements. Therefore, the Commission does not view ‘‘monitor’’ as a more or less stringent obligation than ‘‘surveil’’ with respect to the continued listing requirements. 68 See Amendment No. 7, supra note 18, at 19. 69 15 U.S.C. 78f(b)(5). 70 See, e.g., Securities Exchange Act Release No. 72666 (July 3, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122). VerDate Sep<11>2014 17:01 Jul 26, 2016 Jkt 238001 intra-day values of their underlying assets. The Exchange also amends the continued listing requirement in NYSE Arca Equities Rule 8.600(d)(2)(A), which is applicable to all Managed Fund Shares, to require dissemination of the Portfolio Indicative Value at least every 15 seconds during the Core Trading Session, as defined in NYSE Arca Equities Rule 7.34. The Commission believes that this requirement is consistent with the intraday indicative value dissemination requirement for Investment Company Units,71 as well as with the representations made in support of approved proposals to list and trade shares of other series of Managed Fund Shares.72 Finally, the Exchange adds as an initial listing criterion applicable to all Managed Fund Shares (including those that are generically listed) the requirement that Managed Fund Shares must have a stated investment objective, which shall be adhered to under ‘‘Normal Market Conditions,’’ defined as circumstances including, but not limited to, the absence of: Trading halts in the applicable financial markets generally; operational issues causing dissemination of inaccurate market information or systems failure; or force majeure type events, such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance.73 The Commission believes that this proposed change is consistent with previous Commission approvals of specific ETFs listed as Managed Fund Shares. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 7 thereto, is consistent with Section 6(b)(5) of the Act 74 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,75 that the proposed rule change (SR–NYSEArca– 2015–110), as modified by Amendment 71 See, e.g., Commentary .01(c) and Commentary .02(c) to NYSE Arca Equities Rule 5.2(j)(3) (currently requiring the index-based ETF’s intraday indicative value to be disseminated at least every 15 seconds only during the Core Trading Session of the Exchange). 72 See Amendment No. 7, supra note 18, at 20– 21. 73 See NYSE Arca Equities Rule 8.600(c)(5). See also NYSE Arca Equities Rule 8.600(d)(1)(C). 74 15 U.S.C. 78f(b)(5). 75 15 U.S.C. 78s(b)(2). PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 49327 No. 7 thereto, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.76 Brent J. Fields, Secretary. [FR Doc. 2016–17825 Filed 7–26–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78377; File No. SR– NYSEArca–2016–99] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the NYSE Arca Options Fee Schedule the NYSE Arca Equities Schedule of Fees and Charges for Exchange Services July 21, 2016. Pursuant to Section 19(b)(1)1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 11, 2016, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend the NYSE Arca Options Fee Schedule (the ‘‘Options Fee Schedule’’) and, through its wholly owned subsidiary NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’), the NYSE Arca Equities Schedule of Fees and Charges for Exchange Services (the ‘‘Equities Fee Schedule’’ and, together with the Options Fee Schedule, the ‘‘Fee Schedules’’) to add additional wireless connections and update or remove obsolete text. The proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 76 17 CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 E:\FR\FM\27JYN1.SGM 27JYN1

Agencies

[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Notices]
[Pages 49320-49327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17825]



[[Page 49320]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78397; File No. SR-NYSEArca-2015-110]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 7 
Thereto, Amending NYSE Arca Equities Rule 8.600 To Adopt Generic 
Listing Standards for Managed Fund Shares

July 22, 2016.

I. Introduction

    On November 6, 2015, NYSE Arca, Inc. (``Exchange'') 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 amend NYSE Arca 
Equities Rule 8.600 and to adopt generic listing standards for Managed 
Fund Shares. The proposed rule change was published for comment in the 
Federal Register on November 27, 2015.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76486 (Nov. 20, 
2015), 80 FR 74169 (``Notice'').
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    On November 23, 2015, the Exchange filed Amendment No. 1 to the 
proposed rule change, which amended and replaced the original proposal 
in its entirety.\4\ On January 4, 2016, pursuant to Section 19(b)(2) of 
the Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ On January 21, 2016, the Exchange filed 
Amendment No. 2 to the proposed rule change.\7\ The proposed rule 
change, as modified by Amendment No. 2 thereto, was published for 
comment in the Federal Register on February 1, 2016.\8\ On February 11, 
2016, the Exchange filed Amendment No. 3 to the proposed rule 
change.\9\
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    \4\ On January 21, 2016, the Exchange withdrew Amendment No. 1 
to the proposed rule change.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 76819, 81 FR 987 
(Jan. 8, 2016).
    \7\ In Amendment No. 2 to the proposed rule change, the Exchange 
added provisions to the generic listing criteria relating to non-
U.S. Component Stocks, convertible securities, and listed swaps, 
among other changes. Amendment No. 2, which amended and replaced the 
Notice in its entirety, is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-3.pdf.
    \8\ See Securities Exchange Act Release No. 76974 (Jan. 26, 
2016), 81 FR 5149.
    \9\ In Amendment No. 3 to the proposed rule change, the Exchange 
(a) revised the provisions relating to convertible securities, (b) 
clarified the limitations on non-exchange-traded American Depositary 
Receipts, (c) eliminated redundant provisions relating to 
limitations on leveraged and inverse-leveraged Derivative Securities 
Products, (d) revised the provision relating to limitations on 
listed derivatives, (e) clarified that, for purposes of the 
limitations relating to listed and over-the-counter derivatives, a 
portfolio's investment in listed and over-the-counter derivatives 
will be calculated as the total absolute notional value of these 
derivatives, and (f) provided additional information regarding the 
statutory basis of the proposal. Amendment No. 3, which amended and 
replaced the proposed rule change, as modified by Amendment No. 2 
thereto, in its entirety, is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-4.pdf.
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    On February 12, 2016, the Exchange filed Amendment No. 4 to the 
proposed rule change.\10\ On February 22, 2016, the Commission issued 
notice of Amendment No. 4 to the proposed rule change and instituted 
proceedings under Section 19(b)(2)(B) of the Act \11\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 4 thereto.\12\ In the Order Instituting Proceedings, 
the Commission solicited comments to specified matters related to the 
proposal.\13\ On May 20, 2016, the Commission issued a notice of 
designation of a longer period for Commission action on proceedings to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 4 thereto.\14\
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    \10\ In Amendment No. 4 to the proposed rule change, the 
Exchange (a) modified the generic listing rules to require 
compliance of the standards applicable to underlying equity 
securities, fixed income securities, and over-the-counter 
derivatives on an initial and continuing basis; and (b) clarified 
that the limitations on listed derivatives would apply to all listed 
derivatives, including listed swaps. Amendment No. 4, which amended 
and replaced the proposed rule change, as modified by Amendment No. 
3 thereto, in its entirety, is available on the Commission's Web 
site at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-5.pdf.
    \11\ 15 U.S.C. 78s(b)(2)(B).
    \12\ See Securities Exchange Act Release No. 77203, 81 FR 9900 
(Feb. 26, 2016) (``Order Instituting Proceedings''). Specifically, 
the Commission instituted proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 
6(b)(5) of the Act, which requires, among other things, that the 
rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' See id., 81 FR at 9908.
    \13\ See id., 81 FR at 9908-09.
    \14\ See Securities Exchange Act Release No. 77872, 81 FR 33570 
(May 26, 2016). The Commission designated July 22, 2016 as the date 
by which it should approve or disapprove the proposed rule change.
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    On June 3, 2016, the Exchange filed Amendment No. 5 to the proposed 
rule change.\15\ On June 7, 2016, the Exchange filed Amendment No. 6 to 
the proposed rule change.\16\ The proposed rule change, as modified by 
Amendment No. 6 thereto, was published for comment in the Federal 
Register on June 14, 2016.\17\ On July 20, 2016, the Exchange filed 
Amendment No. 7 to the proposed rule change.\18\ The Commission has 
received

[[Page 49321]]

two comment letters on the proposal.\19\ This order grants approval of 
the proposed rule change, as modified by Amendment No. 7 thereto.
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    \15\ In Amendment No. 5 to the proposed rule change, the 
Exchange (a) modified the definition of ``normal market conditions'' 
to reflect ``systems failures'' as an example of an operational 
issue that causes dissemination of inaccurate market information; 
(b) clarified that, with respect to the scope of equity securities 
components in Commentary .01(a) to NYSE Arca Equities Rule 8.600, 
the securities described in NYSE Arca Equities Rule 5.2(j)(3), NYSE 
Arca Equities Rule 5.2(j)(6), and Section 2 of NYSE Arca Equities 
Rule 8 also include securities listed on a different national 
securities exchange pursuant to substantially equivalent listing 
rules; (c) with respect to the provisions applicable to fixed income 
securities components, modified the concentration limitations by 
excluding U.S. Department of Treasury securities and government-
sponsored entity securities, and clarified that the special purpose 
vehicle (``SPV'') that issues the fixed income security (e.g., an 
asset-backed or mortgage-backed security) would itself be required 
to satisfy the $700 million and $1 billion thresholds set forth in 
Commentary .01(b)(4) to NYSE Arca Equities Rule 8.600, and not the 
entity that controls, owns, or is affiliated with the SPV; (d) 
clarified that the limitations imposed on derivatives holdings will 
be calculated as the total absolute notional value of the 
derivatives; (e) added a concentration limitation with respect to 
listed derivatives by requiring the aggregate gross notional value 
of listed derivatives based on any five or fewer underlying 
reference assets to not exceed 65% of the weight of the portfolio 
(including notional exposures), and the aggregate gross notional 
value of listed derivatives based on any single underlying reference 
asset to not exceed 30% of the weight of the portfolio (including 
notional exposures); and (f) provided examples illustrating the 
application of certain of the generic listing standard requirements 
criteria of NYSE Arca Equities Rule 8.600. Amendment No. 5, which 
amended and replaced the proposed rule change, as modified by 
Amendment No. 4 thereto, in its entirety, is available on the 
Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-6.pdf.
    \16\ In Amendment No. 6 to the proposed rule change, the 
Exchange clarified that the limitations on derivatives as set forth 
in Commentaries .01(d), (e), and (f) to NYSE Arca Equities Rule 
8.600 will be calculated as, and will be based on, the aggregate 
gross notional value of the derivatives. Amendment No. 6, which 
amended and replaced the proposed rule change, as modified by 
Amendment No. 5 thereto, in its entirety, is available on the 
Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-7.pdf.
    \17\ See Securities Exchange Act Release No. 78016 (Jun. 8, 
2016), 81 FR 38759 (``Amendment No. 6 Notice'').
    \18\ In Amendment No. 7 to the proposed rule change, the 
Exchange added the following representations: (a) On a periodic 
basis and no less than annually, the Exchange will review issues of 
Managed Fund Shares listed pursuant to Commentary .01 to NYSE Arca 
Equities Rule 8.600 for compliance with NYSE Arca Equities Rule 
8.600, and will provide a report to the Regulatory Oversight 
Committee of the Exchange's Board of Directors regarding the 
Exchange's findings; (b) the Exchange will provide the Commission 
staff with a report each calendar quarter that includes the 
following information for issues of Managed Fund Shares listed 
during such calendar quarter under Commentary .01 to NYSE Arca 
Equities Rule 8.600: (1) Trading symbol and date of listing on the 
Exchange; (2) the number of active authorized participants and a 
description of any failure of an issue of Managed Fund Shares listed 
pursuant to Commentary .01 to NYSE Arca Equities Rule 8.600 or of an 
authorized participant to deliver shares, cash, or cash and 
financial instruments in connection with creation or redemption 
orders; and (3) a description of any failure of an issue of Managed 
Fund Shares to comply with NYSE Arca Equities Rule 8.600; (c) prior 
to listing pursuant to Commentary .01 to NYSE Arca Equities Rule 
8.600, an issuer will be required to represent to the Exchange that 
it will advise the Exchange of any failure by a series of Managed 
Fund Shares to comply with the continued listing requirements, and, 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements; and (d) if a series of Managed Fund Shares is not in 
compliance with the applicable listing requirements, the Exchange 
will commence delisting procedures under NYSE Arca Equities Rule 
5.5(m). Because Amendment No. 7 does not materially alter the 
substance of the proposed rule change or raise unique or novel 
regulatory issues, Amendment No. 7 is not subject to notice and 
comment. Amendment No. 7, which amended and replaced the proposed 
rule change, as modified by Amendment No. 6 thereto, in its 
entirety, is available on the Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-9.pdf.
    \19\ See Letter from Kermit Kubitz to the Commission dated Jun. 
30, 2016 (emphasizing the importance of the Exchange's monitoring 
program to determine continued compliance of series of Managed Fund 
Shares with the generic listing standards, supported by, for 
example, continued affirmation by issuers of Managed Fund Shares on 
a periodic basis that they are in compliance with the generic 
listing standards or if any deviations from the standards have 
occurred); and Letter from Rob Ivanoff to the Commission dated Nov. 
22, 2015 (commenting that the format of the Exchange's proposed rule 
change was unclear and difficult to read, and suggesting a new 
format that would be easier to understand). All comments on the 
proposed rule change are available on the Commission's Web site at: 
https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110.shtml.
---------------------------------------------------------------------------

II. Exchange's Description of the Proposed Rule Change

    The Exchange proposes to amend NYSE Arca Equities Rule 8.600 and to 
adopt generic listing standards for Managed Fund Shares, which are 
securities issued by an open-end investment company. Unlike exchange-
traded funds (``ETFs'') whose performance is based on the performance 
of an underlying index of securities,\20\ Managed Fund Shares generally 
use an active investment strategy to achieve their specific investment 
objectives.
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    \20\ For example, Investment Company Units listed and traded on 
the Exchange pursuant to NYSE Arca Equities Rule 5.2(j)(3) are 
securities of index-based ETFs that seek to provide investment 
results that generally correspond to the price and yield performance 
of a specific foreign or domestic stock index, fixed income 
securities index, or combination thereof.
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    According to the Exchange, all Managed Fund Shares listed and 
traded pursuant to NYSE Arca Equities Rule 8.600 (including trading 
pursuant to unlisted trading privileges) are subject to the full 
panoply of Exchange rules and procedures that currently govern the 
trading of equity securities on the Exchange. In addition, NYSE Arca 
Equities Rule 8.600 currently requires that the Exchange submit a 
proposed rule change with the Commission to list and trade each new 
series of Managed Fund Shares on the Exchange.\21\ The Exchange 
proposes to adopt ``generic'' listing standards that would allow the 
Exchange to approve the listing and trading of Managed Fund Shares that 
satisfy those generic listing standards pursuant to Rule 19b-4(e) under 
the Act.\22\
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    \21\ See Commentary .01 to NYSE Arca Equities Rule 8.600 
(requiring the Exchange to file separate proposals under Section 
19(b) of the Act before the listing and trading of shares of an 
issue of Managed Fund Shares).
    \22\ See 17 CFR 240.19b-4(e). Rule 19b-4(e) under the Act 
permits self-regulatory organizations (``SROs'') to list and trade 
new derivative securities products that comply with existing SRO 
trading rules, procedures, surveillance programs, and listing 
standards, without submitting a proposed rule change under Section 
19(b). See also Securities Exchange Act Release No. 40761 (Dec. 8, 
1998), 63 FR 70952 (Dec. 22, 1998) (S7-13-98) (adopting Rule 19b-
4(e) under the Act).
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A. Generic Listing Standards for Managed Fund Shares

    The Exchange proposes to amend Commentary .01 to NYSE Arca Equities 
Rule 8.600 and adopt generic listing standards that would permit the 
listing and trading (including trading pursuant to unlisted trading 
privileges) of Managed Fund Shares pursuant to Rule 19b-4(e) under the 
Act, which pertains to new derivative securities products.\23\ These 
generic listing standards are grouped according to underlying security 
or asset type. The Exchange also seeks to specify in Commentary .01 to 
NYSE Arca Equities Rule 8.600 that components of Managed Fund Shares 
listed pursuant to Rule 19b-4(e) under the Act must satisfy, on an 
initial and continued basis, certain specific criteria (as described 
below), and that the Exchange would continue to file separate proposed 
rule changes with the Commission before the listing and trading of 
Managed Fund Shares that do not satisfy the prescribed generic listing 
standards.\24\
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    \23\ Under Rule 19b-4(e), the term ``new derivative securities 
product'' means any type of option, warrant, hybrid securities 
product, or any other security, other than a single equity option or 
a security futures product, whose value is based, in whole or in 
part, upon the performance of, or interest in, an underlying 
instrument. See 17 CFR 240.19b-4(e). Rule 19b-4(e)(1) under the Act 
provides that the listing and trading of a new derivative securities 
product by an SRO is not deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4, if the Commission has approved, 
pursuant to section 19(b) of the Act, the SRO's trading rules, 
procedures and listing standards for the product class that would 
include the new derivative securities product and the SRO has a 
surveillance program for the product class. See 17 CFR 240.19b-
4(c)(1). Under Rule 19b-4(c)(1), a stated policy, practice, or 
interpretation of the SRO shall be deemed to be a proposed rule 
change, unless it is reasonably and fairly implied by an existing 
rule of the SRO.
    \24\ For example, according to the Exchange, if the portfolio 
components of a series of Managed Fund Shares exceeded one of the 
applicable thresholds, the Exchange would file a separate proposed 
rule change before listing and trading the Managed Fund Shares. 
Similarly, if the portfolio components of a series of Managed Fund 
Shares included a security or asset that is not specified in the 
generic listing criteria, the Exchange would file a separate 
proposed rule change.
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1. Requirements Applicable to Equity Securities Components of the 
Portfolio
    Commentary .01(a) to NYSE Arca Equities Rule 8.600 sets forth the 
standards for a Managed Fund Share portfolio holding equity securities, 
which are defined to be U.S. Component Stocks,\25\ Non-U.S. Component 
Stocks,\26\ Derivative Securities Products,\27\ and Index-Linked 
Securities \28\ listed on a national securities exchange.\29\ For 
Derivative Securities Products and Index-Linked Securities, leveraged 
and inverse leveraged Derivative Securities Products or Index-Linked 
Securities can

[[Page 49322]]

constitute no more than 25% of the equity weight of the portfolio. In 
addition, Commentary .01(a) provides that, to the extent that a 
portfolio includes convertible securities, the equity security into 
which any such security is converted would be required to meet the 
criteria of Commentary .01(a) after converting.
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    \25\ See Commentary .01(a) to NYSE Arca Equities Rule 8.600. The 
term ``U.S. Component Stocks'' is defined in NYSE Arca Equities Rule 
5.2(j)(3) (defining U.S. Component Stock as an equity security that 
is registered under Sections 12(b) or 12(g) of the Act or an 
American Depositary Receipt, the underlying equity security of which 
is registered under Sections 12(b) or 12(g) of the Act). See NYSE 
Arca Equities Rule 5.2(j)(3).
    \26\ The term ``Non-U.S. Component Stocks'' is defined in NYSE 
Arca Equities Rule 5.2(j)(3) (defining Non-U.S. Component Stock as 
an equity security that is not registered under Sections 12(b) or 
12(g) of the Act and that is issued by an entity that (a) is not 
organized, domiciled, or incorporated in the United States, and (b) 
is an operating company (including Real Estate Investment Trusts and 
income trusts, but excluding investment trusts, unit trusts, mutual 
funds, and derivatives)). See id.
    \27\ For the purposes of Commentary .01, the term ``Derivative 
Securities Products'' would mean Investment Company Units and 
securities described in Section 2 of NYSE Arca Equities Rule 8 
(i.e., securities described in NYSE Arca Equities Rules 5.2(j)(3), 
8.100, 8.200, 8.201, 8.202, 8.203, 8.204, 8.300, 8.400, 8.500, 
8.600, and 8.700).
    \28\ Index-Linked Securities are securities that qualify for 
Exchange listing and trading under NYSE Arca Equities Rule 
5.2(j)(6).
    \29\ Commentary .01(a) clarifies that, with respect to the scope 
of securities included in the term ``equity securities,'' the 
securities described in NYSE Arca Equities Rule 5.2(j)(3), NYSE Arca 
Equities Rule 5.2(j)(6), and Section 2 of NYSE Arca Equities Rule 8, 
as referenced above, include securities listed on a different 
national securities exchange pursuant to substantially equivalent 
listing rules.
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    As set forth in Commentary .01(a)(1) to NYSE Arca Equities Rule 
8.600,\30\ the component stocks of the equity portion of a portfolio 
that are U.S. Component Stocks must meet the following criteria 
initially and on a continuing basis: \31\
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    \30\ See Commentary .01(a)(1) to NYSE Arca Equities Rule 8.600.
    \31\ See Commentary .01(a)(1)(A)-(F) to NYSE Arca Equities Rule 
8.600.
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    (a) Component stocks (excluding Derivative Securities Products and 
Index-Linked Securities) that in the aggregate account for at least 90% 
of the equity weight of the portfolio (excluding such Derivative 
Securities Products and Index-Linked Securities) each must have a 
minimum market value of at least $75 million;
    (b) Component stocks (excluding Derivative Securities Products and 
Index-Linked Securities) that in the aggregate account for at least 70% 
of the equity weight of the portfolio (excluding such Derivative 
Securities Products and Index-Linked Securities) each must have a 
minimum monthly trading volume of 250,000 shares, or minimum notional 
volume traded per month of $25,000,000, averaged over the previous six 
months;
    (c) The most heavily weighted component stock (excluding Derivative 
Securities Products and Index-Linked Securities) must not exceed 30% of 
the equity weight of the portfolio, and, to the extent applicable, the 
five most heavily weighted component stocks (excluding Derivative 
Securities Products and Index-Linked Securities) must not exceed 65% of 
the equity weight of the portfolio;
    (d) Where the equity portion of the portfolio does not include Non-
U.S. Component Stocks, the equity portion of the portfolio shall 
include a minimum of 13 component stocks; provided, however, that there 
shall be no minimum number of component stocks if (i) one or more 
series of Derivative Securities Products or Index-Linked Securities 
constitute, at least in part, components underlying a series of Managed 
Fund Shares, or (ii) one or more series of Derivative Securities 
Products or Index-Linked Securities account for 100% of the equity 
weight of the portfolio of a series of Managed Fund Shares;
    (e) Except as provided in Commentary .01(a), equity securities in 
the portfolio must be U.S. Component Stocks listed on a national 
securities exchange and must be NMS Stocks as defined in Rule 600 of 
Regulation NMS; \32\ and
---------------------------------------------------------------------------

    \32\ See 17 CFR 240.600.
---------------------------------------------------------------------------

    (f) American Depositary Receipts (``ADRs'') may be exchange-traded 
or non-exchange-traded; however, no more than 10% of the equity weight 
of the portfolio shall consist of non-exchange-traded ADRs.
    As set forth in Commentary .01(a)(2) to NYSE Arca Equities Rule 
8.600,\33\ the component stocks of the equity portion of a portfolio 
that are Non-U.S. Component Stocks must meet the following criteria 
initially and on a continuing basis: \34\
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    \33\ See Commentary .01(a)(2) to NYSE Arca Equities Rule 8.600.
    \34\ See Commentary .01(a)(2)(A)-(E) to NYSE Arca Equities Rule 
8.600.
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    (a) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million;
    (b) Non-U.S. Component Stocks each shall have a minimum global 
monthly trading volume of 250,000 shares, or minimum global notional 
volume traded per month of $25,000,000, averaged over the last six 
months;
    (c) The most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the portfolio;
    (d) Where the equity portion of the portfolio includes Non-U.S. 
Component Stocks, the equity portion of the portfolio shall include a 
minimum of 20 component stocks; provided, however, that there shall be 
no minimum number of component stocks if (i) one or more series of 
Derivative Securities Products or Index-Linked Securities constitute, 
at least in part, components underlying a series of Managed Fund 
Shares, or (ii) one or more series of Derivative Securities Products or 
Index-Linked Securities account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; and
    (e) Each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.
2. Requirements Applicable to Fixed Income Securities Components of the 
Portfolio
    Commentary .01(b) to NYSE Arca Equities Rule 8.600 \35\ sets forth 
standards for a Managed Fund Share portfolio that holds fixed income 
securities, which are defined to be debt securities \36\ that are 
notes, bonds, debentures, or evidence of indebtedness that include, but 
are not limited to, U.S. Department of Treasury securities (``Treasury 
Securities''), government-sponsored entity securities (``GSE 
Securities''), municipal securities, trust preferred securities, 
supranational debt and debt of a foreign country or a subdivision 
thereof, investment grade and high yield corporate debt, bank loans, 
mortgage and asset backed securities, and commercial paper. To the 
extent that a portfolio includes convertible securities, the fixed 
income security into which such security is converted would be required 
to meet the criteria of Commentary .01(b) after converting.
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    \35\ See Commentary .01(b) to NYSE Arca Equities Rule 8.600.
    \36\ According to the Exchange, debt securities include a 
variety of fixed income obligations, including, but not limited to, 
corporate debt securities, government securities, municipal 
securities, convertible securities, and mortgage-backed securities. 
Debt securities include investment-grade securities, non-investment-
grade securities, and unrated securities. Debt securities also 
include variable and floating rate securities. See Order Instituting 
Proceedings, supra note 12, 81 FR at 9903 n.41.
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    The components of the fixed income portion of a portfolio must meet 
the following criteria initially and on a continuing basis: \37\
---------------------------------------------------------------------------

    \37\ See Commentary .01(b)(1)-(5) to NYSE Arca Equities Rule 
8.600.
---------------------------------------------------------------------------

    (a) Components that in the aggregate account for at least 75% of 
the fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more;
    (b) No component fixed-income security (excluding Treasury 
Securities and GSE Securities) could represent more than 30% of the 
fixed income weight of the portfolio, and the five most heavily 
weighted component fixed income securities in the portfolio (excluding 
Treasury Securities and GSE Securities) must not in the aggregate 
account for more than 65% of the fixed income weight of the portfolio;
    (c) An underlying portfolio (excluding exempted securities) that 
includes fixed income securities must include a minimum of 13 non-
affiliated issuers; provided, however, that there shall be no minimum 
number of non-affiliated issuers required for fixed income securities 
if at least 70% of the weight of the portfolio consists of equity 
securities as described in Commentary .01(a).
    (d) Component securities that in aggregate account for at least 90% 
of the fixed income weight of the portfolio must be: (i) From issuers 
that are

[[Page 49323]]

required to file reports pursuant to Sections 13 and 15(d) of the Act; 
(ii) from issuers each of which has a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more; (iii) from issuers each of which has outstanding securities that 
are notes, bonds debentures, or evidence of indebtedness having a total 
remaining principal amount of at least $1 billion; \38\ (iv) exempted 
securities as defined in Section 3(a)(12) of the Act; or (v) from 
issuers that are a government of a foreign country or a political 
subdivision of a foreign country; and
---------------------------------------------------------------------------

    \38\ The Exchange represents that, with respect to subparagraphs 
(ii) and (iii) of this provision in paragraph (d), the SPV that 
issues the fixed income security (e.g., an asset-backed or mortgage-
backed security) would itself be required to satisfy the $700 
million and $1 billion criteria, respectively, and not the entity 
that controls, owns, or is affiliated with the SPV. See Amendment 
No. 5 to the proposed rule change, supra note 15.
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    (e) Non-agency, non-GSE, and privately-issued mortgage-related and 
other asset-backed securities components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the fixed 
income portion of the portfolio.
3. Requirements Relating to Cash and Cash Equivalents Components of the 
Portfolio
    Commentary .01(c) to NYSE Arca Equities Rule 8.600 \39\ sets forth 
standards for a Managed Fund Share portfolio holding cash and cash 
equivalents. Specifically, the portfolio may hold short-term 
instruments with maturities of less than 3 months and cash, and there 
would be no limitation to the percentage of the portfolio invested in 
such holdings. Short-term instruments include the following: \40\
---------------------------------------------------------------------------

    \39\ See Commentary .01(c) to NYSE Arca Equities Rule 8.600.
    \40\ See Commentary .01(c)(2)(i)-(vii) to NYSE Arca Equities 
Rule 8.600.
---------------------------------------------------------------------------

    (a) U.S. Government securities, including bills, notes, and bonds 
differing as to maturity and rates of interest, which are either issued 
or guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities;
    (b) Certificates of deposit issued against funds deposited in a 
bank or savings and loan association;
    (c) Bankers' acceptances, which are short-term credit instruments 
used to finance commercial transactions;
    (d) Repurchase agreements and reverse repurchase agreements;
    (e) Bank time deposits, which are monies kept on deposit with banks 
or savings and loan associations for a stated period of time at a fixed 
rate of interest;
    (f) Commercial paper, which are short-term unsecured promissory 
notes; and
    (g) Money market funds.
4. Requirements Applicable to Listed Derivatives Components of the 
Portfolio
    Commentary .01(d) to NYSE Arca Equities Rule 8.600 \41\ sets forth 
standards for a Managed Fund Share portfolio that holds listed 
derivatives, including futures, options, and swaps on commodities, 
currencies, and financial instruments (e.g., stocks, fixed income 
securities, interest rates, and volatility) or a basket or index of any 
of the foregoing. There would be no limitation to the percentage of the 
portfolio invested in such holdings, but portfolio holdings would be 
subject to the following requirements:
---------------------------------------------------------------------------

    \41\ See Commentary .01(d) to NYSE Arca Equities Rule 8.600.
---------------------------------------------------------------------------

    (a) In the aggregate, at least 90% of the weight of holdings 
invested in futures, exchange-traded options, and listed swaps shall, 
on both an initial and continuing basis, consist of futures, options, 
and swaps for which the Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other members or 
affiliates of the ISG or for which the principal market is a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement; \42\ and
---------------------------------------------------------------------------

    \42\ Commentary .01(d)(1) specifies that, for purposes of 
calculating the percentage limitations, a portfolio's investment in 
listed derivatives will be calculated as the aggregate gross 
notional value of the listed derivatives.
---------------------------------------------------------------------------

    (b) The aggregate gross notional value of listed derivatives based 
on any five or fewer underlying reference assets shall not exceed 65% 
of the weight of the portfolio (including gross notional exposures), 
and the aggregate gross notional value of listed derivatives based on 
any single underlying reference asset shall not exceed 30% of the 
weight of the portfolio (including gross notional exposures).
5. Requirements Applicable to Over-the-Counter (``OTC'') Derivatives 
Components of the Portfolio
    Commentary .01(e) to NYSE Arca Equities Rule 8.600 \43\ sets forth 
standards for a Managed Fund Share portfolio that holds OTC 
derivatives, including forwards, options, and swaps on commodities, 
currencies, and financial instruments (e.g., stocks, fixed income 
securities, interest rates, and volatility) or a basket or index of any 
of the foregoing. Commentary .01(e) requires that, on an initial and 
continuing basis, no more than 20% of the assets in the portfolio may 
be invested in OTC derivatives. The Exchange notes that, for purposes 
of calculating this limitation, a portfolio's investment in OTC 
derivatives will be calculated as the aggregate gross notional value of 
the OTC derivatives.
---------------------------------------------------------------------------

    \43\ See Commentary .01(e) to NYSE Arca Equities Rule 8.600.
---------------------------------------------------------------------------

6. Requirements Applicable to Securities Underlying Derivatives 
Components
    Commentary .01(f) to NYSE Arca Equities Rule 8.600 \44\ provides 
that, to the extent that listed or OTC derivatives are used to gain 
exposure to individual equities or fixed income securities, or to 
indexes of equities or fixed income securities, the aggregate gross 
notional value of this exposure must meet the applicable criteria set 
forth in Commentaries .01(a) and .01(b) to NYSE Arca Equities Rule 
8.600, respectively.\45\
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    \44\ See Commentary .01(f) to NYSE Arca Equities Rule 8.600.
    \45\ The Exchange provides examples illustrating the application 
of certain of the generic listing standard requirements criteria of 
NYSE Arca Equities Rule 8.600. See Amendment No. 6 Notice, supra 
note 17, 81 FR at 38764-65 (describing several portfolio scenarios 
and the method of calculating the holdings percentage limitations 
with respect to OTC derivatives and listed derivatives, among other 
securities).
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B. Other Aspects of the Proposal

    In addition to the generic listing standards applicable to Managed 
Fund Shares that satisfy those specific generic criteria, the Exchange 
also proposes to amend certain other aspects of NYSE Arca Equities Rule 
8.600, which governs the listing and trading of all Managed Fund 
Shares.
1. Disclosed Portfolio
    As part of the proposed rule change, the Exchange also proposes to 
amend NYSE Arca Equities Rule 8.600(c) to require that the Web site for 
all series of Managed Fund Shares, including Managed Fund Shares listed 
and traded on the Exchange pursuant to Commentary .01 to NYSE Arca 
Equities Rule 8.600, disclose certain additional information regarding 
the Disclosed Portfolio. The required information includes the 
following, to the extent applicable: Ticker symbol; CUSIP or other 
identifier; a description of the holding; with respect to holdings in 
derivatives, the identity of the security, commodity, index, or other 
asset upon which the derivative is based; the strike price for any 
options; the quantity of each security or other asset held as measured 
by select metrics (par value, notional value, number of shares,

[[Page 49324]]

number of contracts, and number of units); maturity date; coupon rate; 
effective date; market value; and percentage weighting of the holding 
in the portfolio.\46\
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    \46\ See NYSE Arca Equities Rule 8.600(c)(2)(A)-(K).
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2. Investment Objective
    In addition, the Exchange proposes to amend NYSE Arca Equities Rule 
8.600(d) to specify that all Managed Fund Shares must have a stated 
investment objective, which must be adhered to under normal market 
conditions.\47\ NYSE Arca Equities Rule 8.600(c)(5) would specify that 
the term ``normal market conditions'' includes, but is not limited to, 
the absence of trading halts in the applicable financial markets 
generally; operational issues (e.g., systems failure) causing 
dissemination of inaccurate market information; or force majeure type 
events such as natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.\48\
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    \47\ See NYSE Arca Equities Rule 8.600(d)(1)(C).
    \48\ See NYSE Arca Equities Rule 8.600(c)(5).
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3. Portfolio Indicative Value
    The Exchange seeks to amend the continued listing requirement in 
NYSE Arca Equities Rule 8.600(d)(2)(A) by changing the requirement that 
a Portfolio Indicative Value for Managed Fund Shares be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the time when the Managed Fund Shares trade on the 
Exchange to a requirement that the Portfolio Indicative Value be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Core Trading Session (as defined in NYSE Arca 
Equities Rule 7.34).\49\
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    \49\ See NYSE Arca Equities Rule 8.600(d)(2)(A).
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C. Additional Representations of the Exchange Applicable to the Listing 
and Trading of Managed Fund Shares

    In support of the proposed rule change, the Exchange represents 
that:
    (1) The Managed Fund Shares will continue to conform to the initial 
and continued listing criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange's surveillance procedures are adequate to continue 
to properly monitor the trading of the Managed Fund Shares in all 
trading sessions and to deter and detect violations of Exchange rules. 
Specifically, the Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products, which will include 
Managed Fund Shares, to monitor trading in the Managed Fund Shares.
    (3) Prior to the commencement of trading of a particular series of 
Managed Fund Shares, the Exchange will inform its Equity Trading Permit 
(``ETP'') Holders in a Bulletin of the special characteristics and 
risks associated with trading the Managed Fund Shares, including 
procedures for purchases and redemptions of Managed Fund Shares, 
suitability requirements under NYSE Arca Equities Rule 9.2(a), the 
risks involved in trading the Managed Fund Shares during the Opening 
and Late Trading Sessions when an updated Portfolio Indicative Value 
will not be calculated or publicly disseminated, information regarding 
the Portfolio Indicative Value and the Disclosed Portfolio, prospectus 
delivery requirements, and other trading information. In addition, the 
Bulletin will disclose that the Managed Fund Shares are subject to 
various fees and expenses, as described in the applicable registration 
statement, and will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. Finally, 
the Bulletin will disclose that the net asset value for the Managed 
Fund Shares will be calculated after 4:00 p.m. Eastern Time each 
trading day.
    (4) The issuer of a series of Managed Fund Shares will be required 
to comply with Rule 10A-3 under the Act for the initial and continued 
listing of Managed Fund Shares, as provided under NYSE Arca Equities 
Rule 5.3.
    (5) The Exchange, on a periodic basis and no less than annually, 
will review issues of Managed Fund Shares listed pursuant to Commentary 
.01 to NYSE Arca Equities Rule 8.600 for compliance with NYSE Arca 
Equities Rule 8.600, and will provide a report to the Regulatory 
Oversight Committee of the Exchange's Board of Directors regarding the 
Exchange's findings. In addition, the Exchange will provide the 
Commission staff with a report each calendar quarter that includes the 
following information for issues of Managed Fund Shares listed during 
such calendar quarter under Commentary .01 to NYSE Arca Equities Rule 
8.600: (1) Trading symbol and date of listing on the Exchange; (2) the 
number of active authorized participants and a description of any 
failure of an issue of Managed Fund Shares listed pursuant to 
Commentary .01 to NYSE Arca Equities Rule 8.600 or of an authorized 
participant to deliver shares, cash, or cash and financial instruments 
in connection with creation or redemption orders; and (3) a description 
of any failure of an issue of Managed Fund Shares to comply with NYSE 
Arca Equities Rule 8.600.
    (6) Prior to listing pursuant to Commentary .01 to NYSE Arca 
Equities Rule 8.600, an issuer would be required to represent to the 
Exchange that it will advise the Exchange of any failure by a series of 
Managed Fund Shares to comply with the continued listing requirements, 
and, pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements. If a series of Managed Fund Shares is not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Equities Rule 5.5(m).

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal to amend Commentary .01 to NYSE Arca Equities Rule 8.600 to 
adopt generic listing standards for Managed Fund Shares and to amend 
certain other provisions in NYSE Arca Equities Rule 8.600 applicable to 
the listing and trading of all Managed Fund Shares on the Exchange is 
consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\50\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 7 thereto, is consistent with Section 6(b)(5) of the 
Act,\51\ which requires, among other things, that the Exchange's rules 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \50\ 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).
    \51\ 15 U.S.C. 78f(b)(5).
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    In support of its proposal, the Exchange states that its proposed 
requirements for Managed Fund Shares are based in large part on the 
generic listing criteria currently applicable to Investment Company 
Units.\52\ As a general matter, the Commission believes that this is an 
appropriate approach with respect to underlying asset classes covered 
by the existing generic standards, because the mere addition of active 
management to an ETF portfolio that would qualify for generic listing 
as an index-based ETF should not affect the portfolio's susceptibility 
to

[[Page 49325]]

manipulation or the availability of arbitrage between the ETF and its 
underlying portfolio. Below, the Commission addresses the proposed 
criteria for each of the asset classes encompassed within the generic 
listing standards.
---------------------------------------------------------------------------

    \52\ See id. at 7-14. See also supra note 20.
---------------------------------------------------------------------------

    Equity Holdings. With respect to the equity securities holdings of 
the underlying portfolio, the criteria closely track the existing 
standards for Investment Company Units with four relevant differences. 
First, while the generic listing criteria for Investment Company Units 
do not permit the inclusion of any non-exchange-traded ADRs in the 
underlying index,\53\ the generic criteria for Managed Fund Shares 
permit an ETF to hold up to 10% of the equity weight of the portfolio 
in non-exchange-traded ADRs. This provision, however, is consistent 
with standards that the Commission has approved for specific ETFs 
listed and traded as Managed Fund Shares.\54\ Moreover, the Commission 
believes that the requirement that at least 90% of the equity portion 
of a portfolio consist of domestic equity securities (a category that 
includes ADRs) for which the Exchange may obtain transaction data 
should both deter manipulation of generically listed Managed Fund 
Shares and permit the Exchange to investigate any instances of 
manipulation.
---------------------------------------------------------------------------

    \53\ The Commission notes, however, that a portfolio of a series 
of Investment Company Units nevertheless may contain non-exchange-
listed ADRs because the Investment Company Unit portfolio need not 
consist only of components of the index underlying the series of 
Investment Company Units.
    \54\ See, e.g., Securities Exchange Act Release No. 72679 (July 
28, 2014), 79 FR 44878 (Aug. 1, 2014) (SR-NYSEArca-2014-71); 
Securities Exchange Act Release No. 67277 (June 27, 2012), 77 FR 
39554 (July 3, 2012) (SR-NYSEArca-2012-39).
---------------------------------------------------------------------------

    Second, the generic listing standards differ slightly from the 
existing generic standards for Investment Company Units with respect to 
Non-U.S. Component Stocks. The standards provide that all Non-U.S. 
Component Stocks in a Portfolio must have a minimum market value of at 
least $100 million. By contrast, the generic listing criterion for 
Investment Company Units requires only 90% of the Non-U.S. Component 
Stocks (excluding Derivative Securities Products) included in an index 
to meet the same minimum market-value threshold.\55\ Additionally, 
under the proposal, all Non-U.S. Component Stocks included in a 
portfolio must have a minimum global monthly trading volume of 250,000 
shares, or minimum global notional volume traded per month of 
$25,000,000, averaged over the previous six months.\56\ By contrast, 
only 70% of the weight of an index (excluding Derivative Securities 
Products) underlying generically listed Investment Company Units must 
satisfy the same monthly volume thresholds.\57\ The Commission believes 
that these provisions should reduce the extent to which Managed Fund 
Shares holding Non-U.S. Component Stocks may be susceptible to 
manipulation.
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    \55\ See Commentary .01 to NYSE Arca Equities Rule 
5.2(j)(3)(a)(B)(1).
    \56\ The Commission approved a listing rule that contained these 
heightened market capitalization and trading volume requirements. 
See Securities Exchange Act Release No. 75023 (May 21, 2015), 80 FR 
30519 (May 28, 2015) (SR-NYSEArca-2014-100).
    \57\ See Commentary .01 to NYSE Arca Equities Rule 
5.2(j)(3)(a)(B)(2).
---------------------------------------------------------------------------

    Third, while the Exchange's existing generic listing standards for 
index-based ETFs do not apply concentration limits to an index's 
exposure to specified exchange-traded products (called ``Derivative 
Securities Products''), which have concentration limits or price 
transparency requirements within their own listing standards, proposed 
Commentary .01(a) to NYSE Arca Rule 8.600 would also deem portfolio 
concentration limits not to apply to holdings of specified exchange-
traded notes (called ``Index-Linked Securities''). The Commission 
believes that this change should not increase the susceptibility of 
Managed Fund Shares to manipulation because Index-Linked Securities, 
like Derivative Securities Products, have asset-exposure concentration 
limits and requirements promoting price transparency within their own 
listing standards, and both Derivative Securities Products and Index-
Linked Securities are listed and traded on national securities 
exchanges (which are all members of ISG), publicly provide information 
about listed Derivative Securities Products and Index-Linked 
Securities, including price and other information relating to the 
underlying index or reference asset, as the case may be, and provide 
trading and price information and other quantitative date for investors 
and other market participants.
    And fourth, under current generic listing standards, index-based 
ETFs cannot seek inverse returns greater than 300% of the performance 
of their reference index, and there is no limit on positive leverage 
versus an index. By contrast, the proposed standards would impose an 
absolute cap--25%--on the amount of an ETF's portfolio that could be 
invested in leveraged or inverse-leveraged exchange-traded products. 
The Commission believes that a limitation on the overall use of 
leveraged exchange-traded products is consistent with Section 6(b)(5) 
of the Act because it will limit the extent to which the performance of 
a generically listed, actively managed ETF can be tied to a product 
whose performance over periods of longer than one day can differ 
significantly from its stated daily performance objective.\58\
---------------------------------------------------------------------------

    \58\ Cf. SEC Invester Alert, Leveraged and Inverse ETFs: 
Specialized Products with Extra Risks for Buy-and-Hold Investors, 
available at https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm.
---------------------------------------------------------------------------

    Fixed Income Holdings. With respect to the fixed income securities 
components of a portfolio, the generic listing standards for Managed 
Fund Shares are based in large part on the existing generic listing 
standards of Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) 
applicable to components of fixed income securities indexes underlying 
Investment Company Units,\59\ with three relevant differences. First, 
Commentary .01(b)(3) to NYSE Arca Equities Rule 8.600 does not require 
a minimum number of non-affiliated issuers for fixed income securities 
in the portfolio if at least 70% of the weight of the portfolio 
consists of equity securities as set forth in Commentary .01(a) to NYSE 
Arca Equities Rule 8.600. Second, Commentary .01(b)(5) to NYSE Arca 
Equities Rule 8.600 prohibits non-agency, non-GSE, and privately issued 
mortgage-related and other asset-backed securities components of a 
portfolio from constituting, in the aggregate, more than 20% of the 
weight of the fixed income portion of the portfolio.\60\ And third, the 
standards make explicit that convertible bonds both (a) have to meet 
the criteria for fixed-income holdings and (b) be convertible into 
equities that would meet the criteria for equity holdings.
---------------------------------------------------------------------------

    \59\ See Amendment No. 7, supra note 18, at 12-14.
    \60\ The Commission notes that it has approved listing and 
trading rules for specific ETFs listed as Managed Fund Shares that 
limit holdings of non-agency asset-backed securities to 20% of the 
value of the fund's portfolio. See, e.g., Securities Exchange Act 
Release No. 74297 (Feb. 18, 2015), 80 FR 9788 (Feb. 24, 2015) (SR-
BATS-2014-056); Securities Exchange Act Release No. 75566 (July 30, 
2015), 80 FR 46612 (Aug. 5, 2015) (SR-NYSEArca-2015-42).
---------------------------------------------------------------------------

    The Commission believes that, taken together, the requirements for 
the fixed income portion of the portfolio are reasonably designed to 
ensure that a substantial portion of the portfolio consists of fixed 
income securities for which information is publicly available, and, 
when applied in conjunction with the other applicable listing 
requirements, will permit the listing and trading only of Managed Fund 
Shares that are sufficiently broad-based to

[[Page 49326]]

minimize the potential for manipulation. The Commission also believes 
that these provisions should help to ensure that the fixed income 
securities portion of a portfolio consists of assets for which 
available intra-day values allow market participants to identify and 
capitalize upon arbitrage opportunities, which in turn should help keep 
the intra-day prices of generically listed Managed Fund Shares 
reasonably aligned with the intra-day values of their underlying 
assets.
    Cash and Cash Equivalents. With respect to cash and cash 
equivalents to be held in a portfolio, the Commission believes that the 
proposed standards appropriately define the type of short-term 
instruments that would qualify as such holdings.
    Derivatives Holdings. With respect to derivatives of any type 
included in the portfolio, Commentary .01(f) to NYSE Arca Equities Rule 
8.600 provides that, to the extent they are used to gain exposure to 
individual equities or fixed income securities, or to indexes of 
equities or fixed income securities, the total notional exposure to the 
underlying instruments--whether achieved through cash instruments or 
derivative instruments--must meet the numerical and other criteria set 
forth in Commentaries .01(a) and .01(b) to NYSE Arca Equities Rule 
8.600, as applicable. The Commission believes that this provision 
should make the portfolios less susceptible to manipulation by 
preventing circumvention of the quantitative and other requirements 
applicable to equity and fixed income security components of a 
portfolio.
    With respect to listed derivatives under Commentary .01(d) to NYSE 
Arca Equities Rule 8.600, the generic criterion allows a generically 
listed ETF to use listed derivatives to achieve 100% of its portfolio 
exposure, provided that, in the aggregate, at least 90% of the weight 
of the holdings in futures, exchange-traded options, and listed swaps 
consists of futures, options, and swaps for which (1) the Exchange may 
obtain information from other ISG members or affiliate members, or (2) 
the principal market is a market with which the Exchange has a 
comprehensive surveillance sharing agreement.\61\ Additionally, the 
Exchange represents that it (or the Financial Industry Regulatory 
Authority, Inc. on its behalf) will communicate regarding and obtain 
trade information as needed for the underlying exchange-listed 
instruments whose principal market is either an ISG member or a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement in place.\62\ The Commission believes that these provisions 
should both deter potential manipulation and permit the Exchange to 
investigate suspected manipulation of generically listed Managed Fund 
Shares that use listed derivatives. Moreover, the Commission believes 
that the price transparency of listed derivatives should enable market 
participants to identify and execute arbitrage strategies that will 
tend to equalize the market price of generically listed Managed Fund 
Shares with the value of the underlying portfolios. The Commission also 
notes that Commentary .01(d)(2) to NYSE Arca Equities Rule 8.600 
imposes concentration limits on the use of listed derivatives. The 
Commission believes that this limitation should make Portfolios that 
contain listed derivatives less susceptible to manipulation.\63\
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    \61\ See Amendment No. 7, supra note 18, at 23-24. The Exchange 
also states that: (1) A fund's investments in derivatives, including 
listed derivatives, would be subject to limits on leverage imposed 
by the Investment Company Act of 1940 (``1940 Act''); (2) to limit 
the potential risk associated with a fund's use of derivatives, a 
fund will segregate or ``earmark'' assets determined to be liquid by 
a fund in accordance with the 1940 Act (or, as permitted by 
applicable regulation, enter into certain offsetting positions) to 
cover its obligations under derivative instruments; and (3) a fund's 
investments would be consistent with its investment objective and 
would not be used to enhance leverage. See id. at 24.
    \62\ See id. at 27.
    \63\ Commentary .01(d)(2) to NYSE Arca Equities Rule 8.600 
requires that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the portfolio (including gross 
notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset 
shall not exceed 30% of the weight of the portfolio (including gross 
notional exposures).
---------------------------------------------------------------------------

    With respect to OTC derivatives, Commentary .01(e) to NYSE Arca 
Equities Rule 8.600 permits the portfolio to include OTC derivatives, 
but would limit the amount of these derivatives to 20% of the fund's 
assets in the portfolio, thereby ensuring that the preponderance of a 
fund's investments would not be in derivatives that are not listed and 
centrally cleared. The Commission believes that this limitation is 
sufficient to mitigate the risks associated with price manipulation 
because at least 80% of a Managed Fund Shares portfolio would consist 
of: Cash and cash equivalents; listed derivatives, of which 90% by 
portfolio weight would be traded on a principal market that is a member 
of ISG; and equity securities or fixed income instruments subject to 
numerous restrictions designed to prevent manipulation and ensure 
pricing transparency. The Commission notes that, for purposes of 
calculating this 20% limitation on OTC derivatives holdings, a 
portfolio's investment in OTC derivatives will be calculated as the 
aggregate gross notional value of the OTC derivatives.\64\
---------------------------------------------------------------------------

    \64\ See Commentary .01(e) to NYSE Arca Equities Rule 8.600.
---------------------------------------------------------------------------

    The Commission further notes that, in addition to the listing 
criteria described above for specific underlying asset classes, the 
Exchange has committed to conduct an ongoing compliance review of the 
ETFs that are generically listed as Managed Fund Shares. Specifically, 
the Exchange has represented that, no less than annually, it will 
review the Managed Fund Shares generically listed and traded on the 
Exchange under NYSE Arca Equities Rule 8.600 for compliance with that 
rule and will provide a report to its Regulatory Oversight Committee 
presenting the findings of its review. The Exchange has also committed 
to provide, on a quarterly basis, a report to the Commission staff that 
contains, for each ETF whose shares are generically listed and traded 
under Commentary .01 to NYSE Arca Equities Rule 8.600: (a) The symbol 
and date of listing; (b) the number of active authorized participants 
and a description of any failure by either a fund or an authorized 
participant to deliver promised baskets of shares, cash, or cash and 
instruments in connection with creation or redemption orders; and (c) a 
description of any failure by an ETF to comply with NYSE Arca Equities 
Rule 8.600.\65\ The Commission believes that the quarterly report 
provided by the Exchange will assist the Commission in using public 
data to review the trading characteristics of ETFs listed under these 
generic standards.\66\
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    \65\ See Amendment No. 7, supra note 18, at 19.
    \66\ The Commission also notes that all Managed Fund Shares 
listed pursuant to NYSE Arca Equities Rule 8.600, including 
generically listed Managed Fund Shares, are included within the 
definition of ``security'' or ``securities'' as those terms are used 
in the Exchange Rules. See NYSE Arca Equities Rule 8.600(b). 
Accordingly, Managed Fund Shares are subject to the full set of 
rules and procedures that govern the trading of securities on the 
Exchange. See Amendment No. 7, supra note 18, at 5 and 26.
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    The Commission also notes that, prior to listing pursuant to 
Commentary .01 to NYSE Arca Equities Rule 8.600, an issuer would be 
required to represent to the Exchange that it will advise the Exchange 
of any failure by a series of Managed Fund Shares to comply with the 
continued listing requirements, and, pursuant to its obligations under 
Section 19(g)(1) of the Act, the Exchange will monitor for compliance 
with the continued listing requirements.\67\ If a

[[Page 49327]]

series of Managed Fund Shares is not in compliance with the applicable 
listing requirements, the Exchange will commence delisting procedures 
under NYSE Arca Equities Rule 5.5(m).\68\
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    \67\ The Commission notes that another proposal relating to the 
generic listing and trading of Managed Fund Shares includes a 
representation that the exchange will ``surveil'' for compliance 
with the continued listing requirements. See, e.g., Securities 
Exchange Act Release No. 78005 (Jun. 7, 2016), 81 FR 38247 (Jun. 13, 
2016) (SR-BATS-2015-100). In the context of this representation, it 
is the Commission's view that ``monitor'' and ``surveil'' both mean 
ongoing oversight of a fund's compliance with the continued listing 
requirements. Therefore, the Commission does not view ``monitor'' as 
a more or less stringent obligation than ``surveil'' with respect to 
the continued listing requirements.
    \68\ See Amendment No. 7, supra note 18, at 19.
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    The Commission believes that the Managed Fund Shares generic 
listing criteria, taken together, should promote the listing only of 
Managed Fund Shares that are not susceptible to manipulation. 
Additionally, the generic listing standards as a whole should ensure 
that the underlying portfolios are composed predominantly of securities 
and instruments for which available intra-day values allow market 
participants to identify and capitalize upon arbitrage opportunities, 
which in turn should help keep the intra-day prices of generically 
listed Managed Fund Shares reasonably aligned with the intra-day values 
of their underlying assets.
    For the reasons discussed above, the Commission finds that the 
generic listing standards for Managed Fund Shares are consistent with 
Section 6(b)(5) of the Act.\69\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, the Exchange amends certain requirements of NYSE Arca 
Equities Rule 8.600 that apply to all Managed Fund Shares (i.e., both 
fund shares listed generically under the proposed standards and fund 
shares listed pursuant to filings by the Exchange under Section 
19(b)(1) of the Act and Rule 19b-4 thereunder). Specifically, the 
Exchange specifies the information that must be included in the 
Disclosed Portfolio disseminated by each actively managed ETF. 
Previously approved listing rules for specific ETFs listed as Managed 
Fund Shares have included identical disclosure requirements.\70\ The 
mandatory disclosures include information that market participants can 
use to value an actively managed ETF's holdings intra-day, which should 
facilitate arbitrage opportunities that should help keep the intra-day 
prices of Managed Fund Shares reasonably aligned with the intra-day 
values of their underlying assets.
---------------------------------------------------------------------------

    \70\ See, e.g., Securities Exchange Act Release No. 72666 (July 
3, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122).
---------------------------------------------------------------------------

    The Exchange also amends the continued listing requirement in NYSE 
Arca Equities Rule 8.600(d)(2)(A), which is applicable to all Managed 
Fund Shares, to require dissemination of the Portfolio Indicative Value 
at least every 15 seconds during the Core Trading Session, as defined 
in NYSE Arca Equities Rule 7.34. The Commission believes that this 
requirement is consistent with the intraday indicative value 
dissemination requirement for Investment Company Units,\71\ as well as 
with the representations made in support of approved proposals to list 
and trade shares of other series of Managed Fund Shares.\72\
---------------------------------------------------------------------------

    \71\ See, e.g., Commentary .01(c) and Commentary .02(c) to NYSE 
Arca Equities Rule 5.2(j)(3) (currently requiring the index-based 
ETF's intraday indicative value to be disseminated at least every 15 
seconds only during the Core Trading Session of the Exchange).
    \72\ See Amendment No. 7, supra note 18, at 20-21.
---------------------------------------------------------------------------

    Finally, the Exchange adds as an initial listing criterion 
applicable to all Managed Fund Shares (including those that are 
generically listed) the requirement that Managed Fund Shares must have 
a stated investment objective, which shall be adhered to under ``Normal 
Market Conditions,'' defined as circumstances including, but not 
limited to, the absence of: Trading halts in the applicable financial 
markets generally; operational issues causing dissemination of 
inaccurate market information or systems failure; or force majeure type 
events, such as natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.\73\ The Commission believes that this 
proposed change is consistent with previous Commission approvals of 
specific ETFs listed as Managed Fund Shares.
---------------------------------------------------------------------------

    \73\ See NYSE Arca Equities Rule 8.600(c)(5). See also NYSE Arca 
Equities Rule 8.600(d)(1)(C).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 7 thereto, is consistent with 
Section 6(b)(5) of the Act \74\ and the rules and regulations 
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\75\ that the proposed rule change (SR-NYSEArca-2015-110), as 
modified by Amendment No. 7 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-17825 Filed 7-26-16; 8:45 am]
 BILLING CODE 8011-01-P