Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Listing and Trading of Shares of the Innovator PTAM Core Bond ETF Under NYSE Arca Rule 8.600-E, 63929-63940 [2019-24973]
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Federal Register / Vol. 84, No. 223 / Tuesday, November 19, 2019 / Notices
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
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received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File No.
SR–CboeBZX–2019–094, and should be
submitted on or before December 10,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–24981 Filed 11–18–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87514; File No. SR–
NYSEArca–2019–78]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change, as Modified by
Amendment No. 1, Relating to Listing
and Trading of Shares of the Innovator
PTAM Core Bond ETF Under NYSE
Arca Rule 8.600–E
khammond on DSKJM1Z7X2PROD with NOTICES
November 13, 2019.
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 October
30, 2019, NYSE Arca, Inc. (‘‘NYSE
Arca’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change, and on November 8, 2019, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety. The proposed rule
change, as modified by Amendment No.
1, is described in Items I, II, and III
below, which Items have been prepared
by the Exchange. The Commission is
11 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
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publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of the following under
NYSE Arca Rule 8.600–E (‘‘Managed
Fund Shares’’): Innovator PTAM Core
Bond ETF. This Amendment No. 1 to
SR–NYSEArca–2019–78 replaces SR–
NYSEArca–2019–78 as originally filed
and supersedes such filing in its
entirety. The proposed change is
available on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade shares of the following under
NYSE Arca Rule 8.600–E which governs
the listing and trading of Managed Fund
Shares on the Exchange: 4 Innovator
PTAM Core Bond ETF (the ‘‘Fund’’).
The Shares will be offered by
Innovator ETFs Trust (the ‘‘Trust’’),
which is registered with the
Commission as an open-end
4 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Rule 5.2–E(j)(3),
seeks to provide investment results that correspond
generally to the price and yield performance of a
specific foreign or domestic stock index, fixed
income securities index or combination thereof.
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63929
management investment company.5 The
Fund is a series of the Trust.
Innovator Capital Management, LLC
will be the investment adviser
(‘‘Innovator’’ or ‘‘Adviser’’) to the Fund.
PT Asset Management, LLC (‘‘PTAM’’ or
the ‘‘Sub-Adviser’’), will serve as the
Fund’s investment sub-adviser. Foreside
Fund Services, LLC will be the
distributor (‘‘Distributor’’) for the Fund’s
Shares. US Bancorp Fund Services LLC
will act as the administrator and transfer
agent for the Fund. U.S. Bank, N.A. will
serve as the custodian (‘‘Custodian’’) for
the Fund.
Commentary .06 to Rule 8.600–E
provides that, if the investment adviser
to the investment company issuing
Managed Fund Shares is affiliated with
a broker-dealer, such investment adviser
shall erect and maintain a ‘‘fire wall’’
between the investment adviser and the
broker-dealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.6 In addition,
Commentary .06 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material nonpublic information
5 The Trust is registered under the 1940 Act. On
July 5, 2019, the Trust filed with the Commission
its registration statement on Form N–1A under the
Securities Act of 1933 (15 U.S.C. 77a), and under
the 1940 Act relating to the Fund (File Nos. 333–
146827 and 811–22135) (‘‘Registration Statement’’).
The description of the operation of the Trust and
the Fund herein is based, in part, on the
Registration Statement. In addition, the
Commission has issued an order upon which the
Trust may rely, granting certain exemptive relief
under the 1940 Act. See Investment Company Act
Release No. 32854 (October 6, 2017) (File No. 812–
14781).
6 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and Sub-Adviser and their
related personnel are subject to the provisions of
Rule 204A–1 under the Advisers Act relating to
codes of ethics. This Rule requires investment
advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as
well as compliance with other applicable securities
laws. Accordingly, procedures designed to prevent
the communication and misuse of non-public
information by an investment adviser must be
consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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Federal Register / Vol. 84, No. 223 / Tuesday, November 19, 2019 / Notices
regarding the open-end fund’s portfolio.
The Adviser and Sub-Adviser are not
registered as broker-dealers. The
Adviser is not affiliated with a brokerdealer. The Sub-Adviser is affiliated
with a broker-dealer and has
implemented and will maintain a fire
wall with respect to its broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the portfolio. In the event (a)
the Adviser or the Sub-Adviser becomes
registered as a broker-dealer or newly
affiliated with a broker-dealer, or (b) any
new adviser or sub-adviser is a
registered broker-dealer or becomes
affiliated with a broker-dealer, it will
implement and maintain a fire wall with
respect to relevant personnel and any
broker-dealer affiliate regarding access
to information concerning the
composition and/or changes to the
portfolio, and will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding such
portfolio.
Innovator PTAM Core Bond ETF
Principal Investments
khammond on DSKJM1Z7X2PROD with NOTICES
According to the Registration
Statement, the investment objective of
the Fund is to seek to maximize total
return through income and capital
appreciation. Under normal market
conditions,7 the Fund intends to invest
at least 80% of its net assets in a
portfolio of ‘‘Fixed Income Securities’’
(described below).8
In managing the Fund’s portfolio,
PTAM intends to use a value-oriented
strategy looking for higher-yielding and
undervalued fixed income securities
that offer above-average total return.
Pursuant to this investment strategy, the
Fund may invest in the following Fixed
Income Securities, as discussed below:
7 The term ‘‘normal market conditions’’ is defined
in NYSE Arca Rule 8.600–E(c)(5). On a temporary
basis, including for defensive purposes, during the
initial invest-up period (i.e., the six-week period
following the commencement of trading of Shares
on the Exchange) and during periods of high cash
inflows or outflows (i.e., rolling periods of seven
calendar days during which inflows or outflows of
cash, in the aggregate, exceed 10% of the Fund’s net
assets as of the opening of business on the first day
of such periods), the Fund may depart from its
principal investment strategies; for example, it may
hold a higher than normal proportion of its assets
in cash. During such periods, the Fund may not be
able to achieve its investment objective. The Fund
may adopt a defensive strategy when the Adviser
and/or the Sub-Adviser believes securities in which
the Fund normally invests have elevated risks due
to market, political or economic factors and in other
extraordinary circumstances.
8 The Fund may enter into short sales of any
securities in which the Fund may invest.
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• U.S. Government obligations 9 and
sovereign debt obligations of non-U.S.
governments;
• U.S. Government Agency Securities
(including agency asset-backed
securities (‘‘ABS’’) and agency
mortgage-backed securities (‘‘MBS’’)); 10
• Non-agency ABS; 11
• Non-agency MBS; 12
• Stripped MBS; 13
• Treasury Inflation Protected
Securities (‘‘TIPS’’);
• Corporate bonds;
• Bank loans, including first lien
senior secured floating rate bank loans
(‘‘Senior Loans’’), secured and
unsecured loans, second lien or more
junior loans, and bridge loans;
• Fixed income convertible securities;
• Municipal bonds and municipal
securities issued by tender option bond
trusts (collectively, ‘‘Municipal
Securities’’); and
• Custodial receipts trusts.
The Fund may invest up to 75% of its
net assets in Municipal Securities.
The Fund may hold cash and cash
equivalents.14 In addition, the Fund
may hold the following short-term
9 Examples of U.S. Government obligations
include direct obligations of the U.S. Treasury,
including Treasury bills, notes and bonds, all of
which are backed as to principal and interest
payments by the full faith and credit of the United
States, and separately traded principal and interest
component parts of such obligations that are
transferable through the Federal book-entry system
known as Separate Trading of Registered Interest
and Principal of Securities (‘‘STRIPS’’) and
Coupons Under Book Entry Safekeeping
(‘‘CUBES’’).
10 Examples of U.S. Government Agency
Securities include securities issued or guaranteed
by agencies and instrumentalities of the U.S.
government. These include all types of securities
issued by the Government National Mortgage
Association (‘‘Ginnie Mae’’), the Federal National
Mortgage Association (‘‘Fannie Mae’’) and the
Federal Home Loan Mortgage Corporation (‘‘Freddie
Mac’’), including funding notes, subordinated
benchmark notes, collateralized mortgage
obligations (‘‘CMOs’’) and Real Estate Mortgage
Investment Conduits (‘‘REMICs’’).
11 For purposes of this filing, non-agency ABS are
collateralized bond obligations (‘‘CBOs’’),
collateralized loan obligations (‘‘CLOs’’), and other
collateralized debt obligations (‘‘CDOs’’).
12 For purposes of this filing, non-agency MBS are
collateralized mortgage obligations (‘‘CMOs’’);
commercial mortgage-backed securities (‘‘CMBS’’);
residential mortgage-backed securities (‘‘RMBS’’);
and principal-only (PO) and interest-only (IO)
stripped MBS. Non-agency ABS and non-agency
MBS are referred to herein as ‘‘Private ABS/MBS.’’
The Fund may invest in agency RMBS and CMBS
by investing in to-be-announced transactions.
13 Stripped MBS are derivative multi-class
mortgage securities which are usually structured
with two classes of shares that receive different
proportions of the interest and principal from a
pool of mortgage assets. These include IO and PO
securities issued outside a REMIC or CMO
structure.
14 For purposes of this filing, cash equivalents are
the short-term instruments with maturities of less
than 3 months enumerated in Commentary .01(c) to
Rule 8.600–E.
PO 00000
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instruments with maturities of three
months or more: Certificates of deposit;
bankers’ acceptances; repurchase
agreements and reverse repurchase
agreements; bank time deposits; and
commercial paper.
The Fund may utilize exchange-listed
and over-the-counter (‘‘OTC’’) traded
derivatives instruments for duration/
yield curve management and/or hedging
purposes, for risk management purposes
or as part of its investment strategies.
The Fund will use derivative
instruments primarily to hedge interest
rate risk, actively manage interest rate
exposure, hedge foreign currency risk
and actively manage foreign currency
exposure. The Fund may also use
derivative instruments to enhance
returns, as a substitute for, or to gain
exposure to, a position in an underlying
asset, to reduce transaction costs, to
maintain full market exposure, to
manage cash flows or to preserve
capital. Derivatives may also be used to
hedge risks associated with the Fund’s
other portfolio investments. The Fund
will not use derivative instruments to
gain exposure to Private ABS/MBS, and
derivative instruments linked to such
securities will be used for hedging
purposes only. Derivatives that the
Fund may enter into are the following:
Futures on interest rates, currencies,
Fixed Income Securities and fixed
income indices; exchange-traded and
OTC options on interest rates,
currencies, Fixed Income Securities and
fixed income indices; swap agreements
on interest rates, currencies, Fixed
Income Securities and fixed income
indices; credit default swaps (‘‘CDX’’);
and currency forward contracts.
Non-Principal Investments
While the Fund, under normal market
conditions, will invest at least 80% of
its net assets in the Principal
Investments described above, the Fund
may invest its remaining assets in the
following ‘‘Non-Principal Investments.’’
The Fund may invest in exchangetraded common stock, exchange-traded
preferred stock, and exchange-traded
real estate investment trusts (‘‘REITs’’).
The Fund may invest in the securities
of other investment companies
registered under the 1940 Act, including
money market funds, exchange-traded
funds (‘‘ETFs’’), open-end funds (other
than money market funds and other
ETFs), and U.S. exchange-traded closedend funds.15
15 For purposes of this filing, the term ‘‘ETFs’’ are
Investment Company Units (as described in NYSE
Arca Rule 5.2–E(j)(3)); Portfolio Depositary Receipts
(as described in NYSE Arca Rule 8.100–E); and
Managed Fund Shares (as described in NYSE Arca
Rule 8.600–E). All ETFs will be listed and traded
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Federal Register / Vol. 84, No. 223 / Tuesday, November 19, 2019 / Notices
The Fund may hold exchange-traded
notes (‘‘ETNs’’).16
The Fund may hold exchange-traded
or OTC ‘‘Work Out Securities.’’ 17
The Fund may hold exchange-traded
or OTC equity securities issued upon
conversion of fixed income convertible
securities.
Investment Restrictions
khammond on DSKJM1Z7X2PROD with NOTICES
The Fund may not invest more than
5% of its total assets (determined at the
time of purchase) in any one Fixed
Income Security (excluding U.S.
government securities and TIPS) on a
per CUSIP basis. The Fund’s holdings in
derivative instruments for hedging
purposes would be excluded from the
determination of compliance with this
5% limitation. The total gross notional
value of the Fund’s holdings in
derivative instruments used to gain
exposure to a specific reference asset is
limited to 5% of the Fund’s total assets
(determined at the time of purchase).
The Fund may invest up to 50% of its
total assets in the aggregate in Private
ABS/MBS, provided that the Fund (1)
may not invest more than 30% of its
total assets in non-agency RMBS; (2)
may not invest more than 25% of its
total assets in non-agency CMBS; and
(3) may not invest more than 25% of its
total assets in non-agency ABS.
The Fund may invest up to 75% of its
net assets in Municipal Securities that
have a minimum original principal
outstanding of less than $100 million.
Under normal market conditions, the
Fund’s investments in Municipal
Securities will satisfy the following
criteria:
i. No single Municipal Securities
issuer will account for more than 10%
of the weight of the Fund’s portfolio; 18
in the U.S. on a national securities exchange. While
the Fund may invest in inverse ETFs, the Fund will
not invest in leveraged (e.g., 2X, –2X, 3X or –3X)
ETFs.
16 ETNs are Index-Linked Securities (as described
in NYSE Arca Rule 5.2–E(j)(6)). While the Fund
may invest in inverse ETNs, the Fund will not
invest in leveraged or inverse leveraged ETNs (e.g.,
2X or –3X).
17 For purposes of this filing, Work Out Securities
are U.S. or foreign equity securities of any type
acquired in connection with restructurings related
to issuers of Fixed Income Securities held by the
Fund. Work Out Securities are generally traded
OTC, but may be traded on a U.S. or foreign
exchange.
18 The Exchange notes that the Commission has
approved the listing and trading of another issue of
Managed Fund Shares that principally holds
municipal securities for which no single issuer
would account for more than 10% of the weight of
the fund’s portfolio. See Securities Exchange Act
Release No. 79293 (November 10, 2016), 81 FR
81189 (November 17, 2016) (SR–NYSEArca–2016–
107) (order approving listing and trading of shares
of Cumberland Municipal Bond ETF under Rule
8.600).
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16:47 Nov 18, 2019
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ii. No individual Municipal Security
will account for more than 5% of the
weight of the Fund’s portfolio; 19
iii. The Fund will limit its
investments in Municipal Securities of
any one state or U.S. territory to 20% of
the Fund’s total assets.20
The Exchange proposes that up to
25% of the Fund’s assets may be
invested in OTC derivatives that are
used to reduce currency, interest rate or
credit risk arising from the Fund’s
investments (that is, ‘‘hedge’’). The
Fund’s investments in OTC derivatives
other than OTC derivatives used to
hedge the Fund’s portfolio against
currency, interest rate or credit risk will
be limited to 20% of the assets in the
Fund’s portfolio. For purposes of these
percentage limitations on OTC
derivatives, the weight of such OTC
derivatives will be calculated as the
aggregate gross notional value of such
OTC derivatives.
The Fund’s holdings of bank loans
will not exceed 15% of the Fund’s total
assets, and the Fund’s holdings of bank
loans other than Senior Loans will not
exceed 5% of the Fund’s total assets.
The Fund’s holdings in fixed income
convertible securities and in equity
securities issued upon conversion of
such convertible securities will not
exceed 10% of the Fund’s total assets.
The Fund’s holdings in Work Out
Securities will not exceed 5% of the
Fund’s total assets.
The Fund will not invest in securities
or other financial instruments that have
not been described in this proposed rule
change.
19 The Exchange notes that the Commission has
approved the listing and trading of another issue of
Managed Fund Shares that principally holds
municipal securities for which no single bond
would exceed 5% of the fund’s portfolio. See
Securities Exchange Act Release No. 80885 (June 8,
2017), 82 FR 27302 (June 14, 2017) (order approving
listing and trading of shares of the IQ Municipal
Insured ETF, IQ Municipal Short Duration ETF, and
IQ Municipal Intermediate ETF under NYSE Arca
Equities Rule 8.600).
20 The Exchange notes that the Commission has
approved the listing and trading of other issues of
Managed Fund Shares that principally hold
municipal securities for which the applicable
fund’s assets in municipal securities of any one
state would be limited to 30% of such fund’s assets.
See Securities Exchange Act Release Nos. 80885
(June 8, 2017), 82 FR 27302 (June 14, 2017) (order
approving listing and trading of shares of the IQ
Municipal Insured ETF, IQ Municipal Short
Duration ETF, and IQ Municipal Intermediate ETF
under NYSE Arca Equities Rule 8.600); 79293
(November 10, 2016), 81 FR 81189 (November 17,
2016) (SR–NYSEArca–2016–107) (order approving
listing and trading of shares of Cumberland
Municipal Bond ETF under Rule 8.600); 78913
(September 23, 2016) (SR–Nasdaq–2016–002) (order
approving listing and trading of the First Trust
Municipal High Income ETF of First Trust
Exchange-Traded Fund III).
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63931
Other Restrictions
The Fund’s investments, including
derivatives, will be consistent with the
Fund’s investment objective and will
not be used to enhance leverage
(although certain derivatives and other
investments may result in leverage).
That is, the Fund’s investments will not
be used to seek performance that is the
multiple or inverse multiple (e.g., 2X or
-3X) of the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).21
Use of Derivatives by the Fund
The Fund may invest in the types of
derivatives described in the ‘‘Principal
Investments’’ section above for the
purposes described in that section.
Investments in derivative instruments
will be made in accordance with the
Fund’s investment objective and
policies.
To limit the potential risk associated
with such transactions, the Fund will
enter into offsetting transactions or
segregate or ‘‘earmark’’ assets
determined to be liquid by the Adviser
in accordance with procedures
established by the Trust’s Board of
Trustees. In addition, the Fund has
included appropriate risk disclosure in
its offering documents, including
leveraging risk. Leveraging risk is the
risk that certain transactions of the
Fund, including the Fund’s use of
derivatives, may give rise to leverage,
causing the Fund to be more volatile
than if it had not been leveraged.
Because the markets for certain assets,
or the assets themselves, may be
unavailable or cost prohibitive as
compared to derivative instruments,
suitable derivative transactions may be
an efficient alternative for the Fund to
obtain the desired asset exposure.
Impact on Arbitrage Mechanism
The Adviser and the Sub-Adviser
believe there will be minimal, if any,
impact to the arbitrage mechanism as a
result of the Fund’s use of derivatives
and Private ABS/MBS. The Adviser and
the Sub-Adviser understand that market
makers and participants should be able
to value derivatives and Private ABS/
MBS as long as the positions are
disclosed with relevant information.
The Adviser and the Sub-Adviser
believe that the price at which Shares of
the Fund trade will continue to be
disciplined by arbitrage opportunities
created by the ability to purchase or
redeem Shares of the Fund at their net
21 The Fund’s broad-based securities benchmark
index will be identified in a future amendment to
the Registration Statement following the Fund’s
first full calendar year of performance.
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khammond on DSKJM1Z7X2PROD with NOTICES
asset value (‘‘NAV’’), which should
ensure that Shares of the Fund will not
trade at a material discount or premium
in relation to their NAV.
The Adviser and Sub-Adviser do not
believe there will be any significant
impacts to the settlement or operational
aspects of the Fund’s arbitrage
mechanism due to the use of derivatives
and Private ABS/MBS.
Creation and Redemption of Shares
The Fund will issue and redeem
Shares on a continuous basis at NAV 22
only in large blocks of Shares (‘‘Creation
Units’’) in transactions with
‘‘Authorized Participants’’ (described
below). A Creation Unit will consist of
50,000 Shares. The size of a Creation
Unit is subject to change.
To be eligible to place orders with the
Distributor to create a Creation Unit of
the Fund, an entity must be (i) a
‘‘Participating Party,’’ i.e., a brokerdealer or other participant in the
clearing process through the Continuous
Net Settlement System of the National
Securities Clearing Corporation
(‘‘NSCC’’); or (ii) a Depository Trust
Company (‘‘DTC’’) Participant, and, in
each case, must have executed an
agreement with the Fund, the
Distributor and the Administrator with
respect to creations and redemptions of
Creation Units. A Participating Party
and DTC Participant are collectively
referred to as an Authorized Participant.
All orders to create Creation Units
must be placed for one or more Creation
Unit size aggregations. All orders to
create Creation Units must be received
by the Distributor no later than 4:00
p.m., E.T. on the date such order is
placed in order for the creation of
Creation Units to be effected based on
the NAV of Shares of the Fund as next
determined on such date after receipt of
the order in proper form.
Shares may be redeemed only in
Creation Unit aggregations at their NAV
next determined after receipt of a
redemption request in proper form by
the Fund through the Custodian and
only on a business day. Orders to
redeem Creation Units must be received
by 4:00 p.m., E.T.
The Custodian, through the NSCC,
will make available prior to the opening
of business on the Exchange (currently
9:30 a.m., E.T.) on each business day,
the amount of cash that will be
applicable (subject to possible
amendment or correction) to
redemption requests received in proper
form on that day. The redemption
proceeds for a Creation Unit
Aggregation generally will consist of
cash in an amount equal to the NAV of
Fund Shares next determined after a
redemption request is received, less a
redemption transaction fee.
Application of Generic Listing
Requirements
The Exchange is submitting this
proposed rule change because the
portfolio for the Fund will not meet all
of the ‘‘generic’’ listing requirements of
Commentary .01 to NYSE Arca Rule
8.600–E applicable to the listing of
Managed Fund Shares. The Fund’s
portfolio will meet all such
requirements except for those set forth
in Commentary .01(a)(1) and (a)(2) (with
respect to the Fund’s investments in
equity securities), (b)(1) (with respect to
the Fund’s investments in Fixed Income
Securities, including Municipal
Securities), (b)(4) (with respect to the
Fund’s investments in Private ABS/
MBS), (b)(5) (with respect to the Fund’s
investments in Private ABS/MBS), and
(e) (with respect to the Fund’s
investments in OTC derivatives), as
described below.
The Fund will not comply with all of
the requirements set forth in
22 The NAV of the Fund’s Shares generally will
be calculated once daily Monday through Friday as
of the close of regular trading on the New York
Stock Exchange (‘‘NYSE’’), generally 4:00 p.m.,
Eastern Time (‘‘E.T.’’). NAV per Share will be
calculated by dividing the Fund’s net assets by the
number of Fund Shares outstanding.
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Commentary .01(a)(1) 23 and (a)(2) 24 to
23 Commentary .01(a)(1) to NYSE Arca Rule
8.600–E provides that the component stocks of the
equity portion of a portfolio that are U.S.
Component Stocks shall meet the following criteria
initially and on a continuing basis:
(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 shall 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 shall have a minimum monthly
trading volume of 250,000 shares, or minimum
notional volume traded per month of $25,000,000,
averaged over the last six months;
(C) The most heavily weighted component stock
(excluding Derivative Securities Products and
Index-Linked Securities) shall 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) shall 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 herein, equity securities in
the portfolio shall be U.S. Component Stocks listed
on a national securities exchange and shall be NMS
Stocks as defined in Rule 600 of Regulation NMS
under the Securities Exchange Act of 1934; and
(F) American Depositary Receipts (‘‘ADRs’’) in a
portfolio may be exchange-traded or non- exchangetraded. However, no more than 10% of the equity
weight of a portfolio shall consist of non-exchangetraded ADRs.
24 Commentary .01(a)(2) to NYSE Arca Rule
8.600–E provides that the component stocks of the
equity portion of a portfolio that are Non-U.S.
Component Stocks shall meet the following criteria
initially and on a continuing basis:
(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
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NYSE Arca Rule 8.600–E with respect to
the Fund’s investments in equity
securities.25 Instead, the Exchange
proposes that (i) the Fund’s investments
in equity securities will meet the
requirements of Commentary .01(a) with
the exception of Commentary
.01(a)(1)(C) and .01(a)(1)(D) (with
respect to U.S. Component Stocks) and
Commentary .01(a)(2)(C) and
.01(a)(2)(D) (with respect to Non-U.S.
Component Stocks). Any Fund
investment in exchange-traded common
stocks, preferred stocks, REITS, ETFs,
ETNs, exchange-traded equity securities
issued upon conversion of fixed income
convertible securities, exchange-traded
Work Out Securities and U.S. exchangetraded closed-end funds would provide
for enhanced diversification of the
Fund’s portfolio and, in any case, would
be Non-Principal Investments and
would not exceed 20% of the Fund’s net
assets in the aggregate. With respect to
any Fund holdings of exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities and exchange-traded Work
Out Securities, such securities will not
exceed 10% and 5%, respectively, of the
Fund’s total assets. The Adviser and
Sub-Adviser represent that the Fund
generally will not actively invest in
equity securities issued upon
conversion of fixed income convertible
securities or Work Out Securities, but
may, at times, receive a distribution of
such securities in connection with the
Fund’s holdings in other securities.
Therefore, the Fund’s holdings in equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities generally would
not be acquired as the result of the
Fund’s voluntary investment decisions.
The Adviser and Sub-Adviser represent
that, under these circumstances,
application of the weighting
requirements of Commentary
.01(a)(1)(C) and Commentary .01(a)(2)(C)
and the minimum number of
components requirements of
Commentary .01(a)(1)(D) and
Commentary .01(a)(2)(D) would impose
an unnecessary burden on the Fund’s
ability to hold such equity securities.
The Fund will not comply with the
requirement in Commentary .01(b)(1) to
Rule 8.600–E that components that in
(E) Each Non-U.S. Component Stock shall be
listed and traded on an exchange that has last-sale
reporting.
25 For purposes of these exceptions, investments
in equity securities that are OTC Work Out
Securities, OTC equity securities issued upon
conversion of fixed income convertible securities,
or non-exchange-traded securities of other open-end
investment companies (e.g., mutual funds) are
excluded and are discussed further below.
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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. Instead, the Exchange
proposes that components that in the
aggregate account for at least 50% of the
fixed income weight of the portfolio
shall have a minimum original principal
amount outstanding of $50 million or
more. As noted above, the Fund may not
invest more than 5% of its total assets
(determined at the time of purchase) in
any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis.
With respect to the Fund’s
investments in Municipal Securities, the
Fund may invest up to 75% of its net
assets in Municipal Securities that have
a minimum original principal
outstanding of less than $100 million.
No single Municipal Securities issuer
will account for more than 10% of the
weight of the Fund’s portfolio; no
individual bond will account for more
than 5% of the weight of the Fund’s
portfolio; and the Fund will limit its
investments in Municipal Securities of
any one state or U.S. territory to 20% of
the Fund’s total assets. The Exchange
believes these limitations to the Funds
[sic] investments in Fixed Income
Securities, including Municipal
Securities, would provide significant
additional diversification to the Fund’s
investments in Fixed Income Securities,
and reduce concerns that the Fund’s
investments in such securities would be
readily susceptible to market
manipulation.
The Fund will not comply with the
requirements in Commentary .01(b)(4)
to Rule 8.600–E that component
securities that in the aggregate account
for at least 90% of the fixed income
weight of the portfolio meet one of the
criteria specified in Commentary
.01(b)(4), because certain Private ABS/
MBS cannot satisfy the criteria in
Commentary .01(b)(4).26 Instead, the
Exchange proposes that the Fund’s
investments in Fixed Income Securities
other than Private ABS/MBS will be
required to comply with the
26 Commentary .01(b)(4) provides that component
securities that in the aggregate account for at least
90% of the fixed income weight of the portfolio
must be either: (a) From issuers that are required
to file reports pursuant to Sections 13 and 15(d) of
the Act; (b) from issuers that have a worldwide
market value of its outstanding common equity held
by non-affiliates of $700 million or more; (c) from
issuers that have outstanding securities that are
notes, bonds debentures, or evidence of
indebtedness having a total remaining principal
amount of at least $1 billion; (d) exempted
securities as defined in Section 3(a)(12) of the Act;
or (e) from issuers that are a government of a foreign
country or a political subdivision of a foreign
country.
PO 00000
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63933
requirements of Commentary .01(b)(4).
As noted above, the Fund may not
invest more than 5% of its total assets
(determined at the time of purchase) in
any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis.
The Exchange notes that the
Commission has previously approved
the listing of Managed Fund Shares with
similar investment objectives and
strategies without imposing
requirements that a certain percentage
of such funds’ securities meet one of the
criteria set forth in Commentary
.01(b)(4).27
The Fund will not comply with the
requirement in Commentary .01(b)(5) to
Rule 8.600–E that Private ABS/MBS in
the Fund’s portfolio account, in the
aggregate, for no more than 20% of the
weight of the Fund’s portfolio.28
Instead, the Exchange proposes that, in
order to enable the portfolio to be more
diversified and provide the Fund with
an opportunity to earn higher returns,
the Fund may invest up to 50% of its
total assets in the aggregate in Private
ABS/MBS, provided that the Fund (1)
may not invest more than 30% of its
total assets in non-agency RMBS; (2)
may not invest more than 25% of its
total assets in non-agency CMBS; and
(3) may not invest more than 25% of its
total assets in non-agency ABS.
In addition, as noted above, the Fund
may not invest more than 5% of its total
assets (determined at the time of
purchase) in any one Fixed Income
Security (excluding U.S. government
securities and TIPS) on a per CUSIP
basis.29 The Exchange believes these
limitations would provide additional
diversification to the Fund’s Private
ABS/MBS investments and reduce
concerns that the Fund’s investment in
27 See, e.g., Exchange Act Release Nos. 67894
(September 20, 2012) 77 FR 59227 (September 26,
2012) (SR–BATS–2012–033) (order approving the
listing and trading of shares of the iShares Short
Maturity Bond Fund); 70342 (September 6, 2013),
78 FR 56256 (September 12, 2013) (SR–NYSEArca–
2013–71) (order approving the listing and trading of
shares of the SPDR SSgA Ultra Short Term Bond
ETF, SPDR SSgA Conservative Ultra Short Term
Bond ETF and SPDR SSgA Aggressive Ultra Short
Term Bond ETF).
28 Commentary .01(b)(5) to Rule 8.600–E provides
that non-agency, non-government-sponsored entity
(‘‘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 portfolio.
29 As noted above, the Fund’s holdings in
derivative instruments for hedging purposes would
be excluded from the determination of compliance
with this 5% limitation. The total gross notional
value of the Fund’s holdings in derivative
instruments used to gain exposure to a specific
asset is limited to 5% of the Fund’s total assets
(determined at the time of purchase).
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such securities would be readily
susceptible to market manipulation.
The Adviser and Sub-Adviser
represent that the RMBS sector can be
an important component of the Fund’s
investment strategy because of the
potential for attractive risk-adjusted
returns relative to other fixed income
sectors and the potential to add
significantly to the diversification in the
Fund’s portfolio. Similarly, the Private
ABS/MBS sectors also have the
potential for attractive risk-adjusted
returns and added portfolio
diversification.
The Fund’s portfolio will not comply
with the requirements set forth in
Commentary .01(e) to NYSE Arca Rule
8.600–E.30 Specifically, the Fund’s
investments in OTC derivatives may
exceed 20% of Fund assets, calculated
as the aggregate gross notional value of
such OTC derivatives. The Exchange
proposes that up to 25% of the Fund’s
assets (calculated as the aggregate gross
notional value) may be invested in OTC
derivatives that are used to reduce
currency, interest rate or credit risk
arising from the Fund’s investments
(that is, ‘‘hedge’’). The Fund’s
investments in OTC derivatives other
than OTC derivatives used to hedge the
Fund’s portfolio against currency,
interest rate or credit risk will be limited
to 20% of the assets in the Fund’s
portfolio, calculated as the aggregate
gross notional value of such OTC
derivatives.
The Adviser and Sub-Adviser believe
that it is important to provide the Fund
with additional flexibility to manage
risk associated with its investments.
Depending on market conditions, it may
be critical that the Fund be able to
utilize available OTC derivatives for this
purpose to attempt to reduce impact of
currency, interest rate or credit
fluctuations on Fund assets. Therefore,
the Exchange believes it is appropriate
to apply a limit of up to 25% of the
Fund’s assets to the Fund’s investments
in OTC derivatives (calculated as the
aggregate gross notional value of such
OTC derivatives), including forwards,
options and swaps, that are used for
hedging purposes, as described above.31
30 Commentary .01(e) to NYSE Arca Rule 8.600–
E provides that the portfolio may hold OTC
derivatives, including forwards, options and swaps
on commodities, currencies and financial
instruments (e.g., stocks, fixed income, interest
rates, and volatility) or a basket or index of any of
the foregoing; however, on both an initial and
continuing basis, no more than 20% of the assets
in the portfolio may be invested in OTC derivatives.
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.
31 The Commission has previously approved an
exception from requirements set forth in
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As noted above, the Fund may hold
equity securities that are Work Out
Securities, which generally are traded
OTC (but that may be traded on a U.S.
or foreign exchange), exchange-traded or
OTC equity securities issued upon
conversion of fixed income convertible
securities, and non-exchange-traded
securities of other open-end investment
company securities (e.g., mutual funds).
The Exchange believes that it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities,32 and
notwithstanding that the Fund’s
holdings of OTC equity securities issued
upon conversion of fixed income
convertible securities and OTC Work
Out Securities would not meet the
requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2) (A) through (E) to
Rule 8.600–E. Investments in nonexchange-traded securities of open-end
investment company securities will not
be principal investments of the Fund.33
Such investments, which may include
mutual funds that invest, for example,
principally in fixed income securities,
would be utilized to help the Fund meet
its investment objective and to equitize
cash in the short term. With respect to
any Fund holdings of OTC equity
securities issued upon conversion of
fixed income convertible securities and
OTC Work Out Securities, such
securities will not exceed 10% and 5%,
respectively, of the Fund’s total assets.
The Adviser and Sub-Adviser represent
Commentary .01(e) relating to investments in OTC
derivatives similar to those proposed with respect
to the Fund in Securities Exchange Act Release No.
80657 (May 11, 2017), 82 FR 22702 (May 17, 2017)
(SR–NYSEArca–2017–09) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment No. 2, Regarding Investments of the
Janus Short Duration Income ETF Listed Under
NYSE Arca Equities Rule 8.600).
32 Commentary .01 (a) to Rule 8.600–E specifies
the equity securities accommodated by the generic
criteria in Commentary .01(a), namely, U.S.
Component Stocks (as described in Rule 5.2–
E(j)(3)); Non-U.S. Component Stocks (as described
in Rule 5.2–E(j)(3)); Derivative Securities Products
(i.e., Investment Company Units and securities
described in Section 2 of Rule 8–E); and IndexLinked Securities that qualify for Exchange listing
and trading under Rule 5.2–E(j)(6).
33 For purposes of this section of the filing, nonexchange-traded securities of other registered
investment companies do not include money
market funds, which are cash equivalents under
Commentary .01(c) to Rule 8.600–E and for which
there is no limitation in the percentage of the
portfolio invested in such securities.
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that the Fund generally will not actively
invest in OTC equity securities issued
upon conversion of fixed income
convertible securities or OTC Work Out
Securities, but may, at times, receive a
distribution of such securities in
connection with the Fund’s holdings in
other securities. Therefore, the Fund’s
holdings in equity securities issued
upon conversion of fixed income
convertible securities and Work Out
Securities generally would not be
acquired as the result of the Fund’s
voluntary investment decisions.
With respect to investments in nonexchange-traded investment company
securities, because such securities have
a net asset value based on the value of
securities and financial assets the
investment company holds, the
Exchange believes it is both unnecessary
and inappropriate to apply to such
investment company securities the
criteria in Commentary .01(a)(1).34
The Exchange notes that Commentary
.01(a) through (d) to Rule 8.600–E
exclude application of those provisions
to certain ‘‘Derivative Securities
Products’’ that are exchange-traded
investment company securities,
including Investment Company Units
(as described in NYSE Arca Rule 5.2–
E(j)(3)), Portfolio Depositary Receipts (as
described in NYSE Arca Rule 8.100–E)
and Managed Fund Shares (as described
in NYSE Arca Rule 8.600–E).35 In its
34 The Commission has previously approved
proposed rule changes under Section 19(b) of the
Act for series of Managed Fund Shares that may
invest in non-exchange traded investment company
securities. See, e.g., Securities Exchange Act
Release No. 78414 (July 26, 2016), 81 FR 50576
(August 1, 2016) (SR–NYSEArca–2016–79) (order
approving listing and trading of shares of the Virtus
Japan Alpha ETF under NYSE Arca Equities Rule
8.600).
35 The Commission initially approved the
Exchange’s proposed rule change to exclude
‘‘Derivative Securities Products’’ (i.e., Investment
Company Units and securities described in Section
2 of Rule 8) and ‘‘Index-Linked Securities (as
described in Rule 5.2–E(j)(6)) from Commentary
.01(a)(A)(1) through (4) to Rule 5.2–E(j)(3) in
Securities Exchange Act Release No. 57751 (May 1,
2008), 73 FR 25818 (May 7, 2008) (SR–NYSEArca–
2008–29) (Order Granting Approval of a Proposed
Rule Change, as Modified by Amendment No. 1
Thereto, to Amend the Eligibility Criteria for
Components of an Index Underlying Investment
Company Units) (‘‘2008 Approval Order’’). See also,
Securities Exchange Act Release No. 57561 (March
26, 2008), 73 FR 17390 (April 1, 2008) (Notice of
Filing of Proposed Rule Change and Amendment
No. 1 Thereto to Amend the Eligibility Criteria for
Components of an Index Underlying Investment
Company Units). The Commission subsequently
approved generic criteria applicable to listing and
trading of Managed Fund Shares, including
exclusions for Derivative Securities Products and
Index-Linked Securities in Commentary .01(a)(1)(A)
through (D), in Securities Exchange Act Release No.
78397 (July 22, 2016), 81 FR 49320 (July 27, 2016)
(Order Granting Approval of Proposed Rule Change,
as Modified by Amendment No. 7 Thereto,
Amending NYSE Arca Equities Rule 8.600 To
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2008 Approval Order approving
amendments to Commentary .01(a) to
Rule 5.2(j)(3) that exclude Derivative
Securities Products from certain
provisions of Commentary .01(a) (which
exclusions are similar to those in
Commentary .01(a)(1) to Rule 8.600–E),
the Commission stated that ‘‘based on
the trading characteristics of Derivative
Securities Products, it may be difficult
for component Derivative Securities
Products to satisfy certain quantitative
index criteria, such as the minimum
market value and trading volume
limitations.’’ The Exchange notes that it
would be difficult or impossible to
apply to non-exchange-traded
investment company securities the
generic quantitative criteria (e.g., market
capitalization, trading volume, or
portfolio criteria) in Commentary .01 (a)
through (d) applicable to U.S.
Component Stocks. For example, the
requirement for U.S. Component Stocks
in Commentary .01(a)(1)(B) that there be
minimum monthly trading volume of
250,000 shares, or minimum notional
volume traded per month of
$25,000,000, averaged over the last six
months is tailored to exchange-traded
securities (e.g., U.S. Component Stocks)
and not to mutual fund shares, which
do not trade in the secondary market.
Moreover, application of such criteria
would not serve the purpose served
with respect to U.S. Component Stocks,
namely, to establish minimum liquidity
and diversification criteria for U.S.
Component Stocks held by series of
Managed Fund Shares.
The Exchange notes that the
Commission has previously approved
listing and trading of an issue of
Managed Fund Shares that may invest
in equity securities that are nonexchange-traded securities of other
open-end investment company
securities notwithstanding that the fund
would not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to such
fund’s investments in such securities.36
Thus, the Exchange believes that it is
appropriate to permit the Fund to invest
in non-exchange-traded open-end
management investment company
securities, as described above.
Adopt Generic Listing Standards for Managed Fund
Shares). See also, Amendment No. 7 to SR–
NYSEArca–2015–110, available at https://
www.sec.gov/comments/sr-nysearca-2015-110/
nysearca2015110-9.pdf.
36 See, e.g., Securities Exchange Act Release No.
83319 (May 24, 2018) (SR–NYSEArca–2018–15)
(Order Approving a Proposed Rule Change, as
Modified by Amendment No. 1 Thereto, to
Continue Listing and Trading Shares of the PGIM
Ultra Short Bond ETF Under NYSE Arca Rule
8.600–E).
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Deviations from the generic
requirements are necessary for the Fund
to achieve its investment objective in a
manner that is cost-effective and that
maximizes investors’ returns. Further,
the proposed alternative requirements
are narrowly tailored to allow the Fund
to achieve its investment objective in
manner that is consistent with the
principles of Section 6(b)(5) of the Act.
As a result, it is in the public interest
to approve listing and trading of Shares
of the Fund on the Exchange pursuant
to the requirements set forth herein.
The Exchange notes that, other than
Commentary .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e) to Rule 8.600–E, as
described above, the Fund’s portfolio
will meet all other requirements of Rule
8.600–E.
Availability of Information
The Fund’s website
(www.innovatoretfs.com) will include
the prospectus for the Fund that may be
downloaded. The Fund’s website will
include additional quantitative
information updated on a daily basis
including, for the Fund, (1) daily trading
volume, the prior business day’s
reported closing price, NAV and
midpoint of the bid/ask spread at the
time of calculation of such NAV (the
‘‘Bid/Ask Price’’),37 and a calculation of
the premium and discount of the Bid/
Ask Price against the NAV, and (2) data
in chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. On each business day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Fund will disclose on its
website the Disclosed Portfolio as
defined in NYSE Arca Rule 8.600–
E(c)(2) that forms the basis for the
Fund’s calculation of NAV at the end of
the business day.38
On a daily basis, the Fund will
disclose the information required under
NYSE Arca Rule 8.600–E(c)(2) to the
extent applicable. The website
information will be publicly available at
no charge.
37 The Bid/Ask Price of the Fund’s Shares will be
determined using the mid-point of the highest bid
and the lowest offer on the Exchange as of the time
of calculation of the Fund’s NAV. The records
relating to Bid/Ask Prices will be retained by the
Fund and its service providers.
38 Under accounting procedures followed by the
Fund, trades made on the prior business day (‘‘T’’)
will be booked and reflected in NAV on the current
business day (‘‘T+1’’). Accordingly, the Fund will
be able to disclose at the beginning of the business
day the portfolio that will form the basis for the
NAV calculation at the end of the business day.
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63935
In addition, a basket composition file,
which includes the security names and
share quantities, if applicable, required
to be delivered in exchange for the
Fund’s Shares, together with estimates
and actual cash components, will be
publicly disseminated daily prior to the
opening of the Exchange via the NSCC.
The basket represents one Creation Unit
of the Fund. Authorized Participants
may refer to the basket composition file
for information regarding Fixed Income
Securities, and any other instrument
that may comprise the Fund’s basket on
a given day.
Investors can also obtain the Trust’s
Statement of Additional Information
(‘‘SAI’’), the Fund’s Shareholder
Reports, and the Fund’s Forms N–CSR
and Forms N–SAR, filed twice a year.
The Fund’s SAI and Shareholder
Reports will be available free upon
request from the Trust, and those
documents and the Form N–CSR, Form
N–PX and Form N–SAR may be viewed
on-screen or downloaded from the
Commission’s website at www.sec.gov.
Intra-day and closing price
information regarding exchange-traded
options will be available from the
exchange on which such instruments
are traded. Intra-day and closing price
information regarding Fixed Income
Securities will be available from major
market data vendors. Price information
relating to OTC options, forwards and
swaps will be available from major
market data vendors. Intra-day price
information for exchange-traded
derivative instruments will be available
from the applicable exchange and from
major market data vendors. Intraday and
other price information for the Fixed
Income Securities in which the Fund
will invest will be available through
subscription services, such as
Bloomberg, Markit and Thomson
Reuters, which can be accessed by
Authorized Participants and other
market participants. Additionally, the
Trade Reporting and Compliance Engine
(‘‘TRACE’’) of the Financial Industry
Regulatory Authority (‘‘FINRA’’) will be
a source of price information for
corporate bonds to the extent
transactions in such securities are
reported to TRACE.39 Trade price and
39 Broker-dealers that are FINRA member firms
have an obligation to report transactions in
specified debt securities to TRACE to the extent
required under applicable FINRA rules. Generally,
such debt securities will have at issuance a maturity
that exceeds one calendar year. For Fixed Income
Securities that are not reported to TRACE, (i)
intraday price quotations will generally be available
from broker-dealers and trading platforms (as
applicable) and (ii) price information will be
available from feeds from market data vendors,
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other information relating to municipal
bonds is available through the
Municipal Securities Rulemaking
Board’s Electronic Municipal Market
Access (‘‘EMMA’’) system. Nonexchange-traded open-end investment
company securities are typically priced
once each business day and their prices
will be available through the applicable
fund’s website or from major market
data vendors. Price information
regarding U.S. government securities,
bank loans, Private ABS/MBS, cash
equivalents and short-term instruments
with maturities of three months or more
generally may be obtained from brokers
and dealers who make markets in such
securities or through nationally
recognized pricing services through
subscription agreements. Information
relating to Private ABS/MBS is widely
available from major market data
vendors such as Bloomberg.
Information regarding market price
and trading volume of the Shares, ETFs,
ETNs, common stocks, preferred stocks,
REITs, equity securities issued upon
conversion of fixed income convertible
securities, Work-Out Securities and
closed-end funds will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers.
Quotation and last sale information
for the Shares, ETFs, ETNs, closed-end
funds, REITs, U.S. exchange-traded
common stocks, U.S. exchange-traded
preferred stocks, U.S. exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities, and U.S. exchange-traded
Work-Out Securities will be available
via the Consolidated Tape Association
(‘‘CTA’’) high-speed line. Exchangetraded options quotation and last sale
information for options cleared via the
Options Clearing Corporation (‘‘OCC’’)
are available via the Options Price
Reporting Authority (‘‘OPRA’’). In
addition, the Portfolio Indicative Value
(‘‘PIV’’), as defined in NYSE Arca Rule
8.600–E(c)(3), will be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Core Trading
Session.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
published or other public sources, or online
information services, as described above.
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16:47 Nov 18, 2019
Jkt 250001
halt or suspend trading in the Shares of
the Fund.40 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached. Trading also may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. Trading in the Fund’s
Shares also will be subject to Rule
8.600–E(d)(2)(D) (‘‘Trading Halts’’).
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m.
to 8 p.m., E.T. in accordance with NYSE
Arca Rule 7.34–E (Early, Core, and Late
Trading Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Rule 7.6–E, the minimum price
variation (‘‘MPV’’) for quoting and entry
of orders in equity securities traded on
the NYSE Arca Marketplace is $0.01,
with the exception of securities that are
priced less than $1.00 for which the
MPV for order entry is $0.0001.
With the exception of the
requirements of Commentary .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e) to Rule
8.600–E as described above in
‘‘Application of Generic Listing
Requirements,’’ the Shares of the Fund
will conform to the initial and
continued listing criteria under NYSE
Arca Rule 8.600–E. Consistent with
NYSE Arca Rule 8.600–E(d)(2)(B)(ii), the
Adviser and Sub-Adviser will
implement and maintain, or be subject
to, procedures designed to prevent the
use and dissemination of material nonpublic information regarding the actual
components of the Fund’s portfolio.
The Exchange represents that, for
initial and continued listing, the Fund
will be in compliance with Rule 10A–
3 41 under the Act, as provided by NYSE
Arca Rule 5.3–E. The Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. The
Fund’s investments will be consistent
with its investment goal and will not be
used to provide multiple returns of a
benchmark or to produce leveraged
returns.
40 See
41 17
PO 00000
NYSE Arca Rule 7.12–E.
CFR 240.10A–3.
Frm 00100
Fmt 4703
Sfmt 4703
Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by FINRA on behalf of the
Exchange, or by regulatory staff of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws. The
Exchange represents that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
federal securities laws applicable to
trading on the Exchange.42
The surveillances referred to above
generally focus on detecting securities
trading outside their normal patterns,
which could be indicative of
manipulative or other violative activity.
When such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
The Exchange or FINRA, on behalf of
the Exchange, or both, will
communicate as needed regarding
trading in the Shares, certain exchangetraded options and certain exchangetraded futures, ETFs, ETNs, closed-end
funds, certain common stocks, certain
preferred stocks, certain REITs, certain
equity securities issued upon
conversion of fixed income convertible
securities, and certain Work-Out
Securities with other markets and other
entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’),
and the Exchange or FINRA, on behalf
of the Exchange, or both, may obtain
trading information regarding trading in
such securities and financial
instruments from such markets and
other entities.43 In addition, the
Exchange may obtain information
regarding trading in such securities and
financial instruments from markets and
other entities that are members of ISG or
with which the Exchange has in place
a CSSA. In addition, FINRA, on behalf
of the Exchange, is able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to FINRA’s TRACE.
FINRA also can access data obtained
42 FINRA conducts cross-market surveillances on
behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
43 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement (‘‘CSSA’’).
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from the Municipal Securities
Rulemaking Board relating to municipal
bond trading activity for surveillance
purposes in connection with trading in
the Shares.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
All statements and representations
made in this filing regarding (a) the
description of the portfolio or reference
assets, (b) limitations on portfolio
holdings or reference assets, or (c) the
applicability of Exchange listing rules
specified in this rule filing shall
constitute continued listing
requirements for listing the Shares of
the Fund on the Exchange.
The issuer must notify the Exchange
of any failure by the Fund 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 the
Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under NYSE Arca Rule 5.5–
E(m).
Information Bulletin
The Exchange will inform its Equity
Trading Permit Holders in an
Information Bulletin (‘‘Bulletin’’) of the
special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation Unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Rule 9.2–E(a), which
imposes a duty of due diligence on its
Equity Trading Permit Holders to learn
the essential facts relating to every
customer prior to trading the Shares; (3)
the risks involved in trading the Shares
during the Early and Late Trading
Sessions when an updated PIV will not
be calculated or publicly disseminated;
(4) how information regarding the PIV
and the Disclosed Portfolio is
disseminated; (5) the requirement that
Equity Trading Permit Holders deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (6) trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Act. The Bulletin will also disclose that
the NAV for the Shares will be
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16:47 Nov 18, 2019
Jkt 250001
calculated after 4:00 p.m., E.T. each
trading day.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 44 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares are
listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Rule
8.600–E. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange or FINRA, on behalf
of the Exchange, or both, will
communicate as needed regarding
trading in the Shares, certain exchangetraded options and certain exchangetraded futures, ETFs, ETNs, closed-end
funds, certain common stocks, certain
preferred stocks, certain REITs, certain
equity securities issued upon
conversion of fixed income convertible
securities and certain Work-Out
Securities with other markets and other
entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading in such
securities and financial instruments
from such markets and other entities.
The Exchange may obtain information
regarding trading in such securities and
financial instruments from markets and
other entities that are members of ISG or
with which the Exchange has in place
a CSSA. In addition, FINRA, on behalf
of the Exchange, is able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to TRACE. FINRA also
can access data obtained from the
Municipal Securities Rulemaking Board
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in the Shares.
The Adviser and Sub-Adviser are not
registered as broker-dealers. The
Adviser is not affiliated with a brokerdealer. The Sub-Adviser is affiliated
with a broker-dealer and has
implemented and will maintain a fire
44 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00101
Fmt 4703
Sfmt 4703
63937
wall with respect to its broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the portfolio.
The Exchange notes that, other than
Commentary .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e) to Rule 8.600–E, as
described above, the Fund’s portfolio
will meet all other requirements of Rule
8.600–E.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. In
addition, a large amount of information
will be publicly available regarding the
Fund and the Shares, thereby promoting
market transparency. Quotation and last
sale information for the Shares, ETFs,
ETNs, closed-end funds, certain REITs,
certain common stocks, certain
preferred stocks, certain equity
securities issued upon conversion of
fixed income convertible securities, and
certain Work-Out Securities will be
available via the CTA high-speed line.
Exchange-traded options quotation and
last sale information for options cleared
via the OCC are available via OPRA. The
Exchange will inform its Equity Trading
Permit Holders in an Information
Bulletin of the special characteristics
and risks associated with trading the
Shares. Trading in Shares of the Fund
will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. Trading in the
Shares will be subject to NYSE Arca
Rule 8.600–E(d)(2)(D), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, as
noted above, investors will have ready
access to information regarding the
Fund’s holdings, NAV, the PIV, the
Disclosed Portfolio, and quotation and
last sale information for the Shares.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
generally will principally hold fixed
income securities and that will enhance
competition among market participants,
to the benefit of investors and the
marketplace. As noted above, the
Exchange has in place surveillance
procedures relating to trading in the
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Shares and may obtain information via
ISG from other exchanges that are
members of ISG or with which the
Exchange has entered into a CSSA.
Deviations from the generic
requirements, as described above, are
necessary for the Fund to achieve its
investment objective in a manner that is
cost-effective and that maximizes
investors’ returns. Further, the proposed
alternative requirements are narrowly
tailored to allow the Fund to achieve its
investment objective in a manner that is
consistent with the principles of Section
6(b)(5) of the Act. As a result, it is in the
public interest to approve listing and
trading of Shares of the Fund on the
Exchange pursuant to the requirements
set forth herein.
As noted above, the Fund will not
comply with the requirements set forth
in Commentary .01(a)(1) and (a)(2) to
NYSE Arca Rule 8.600–E with respect to
the Fund’s investments in equity
securities. Instead, the Exchange
proposes that (i) the Fund’s investments
in equity securities will meet the
requirements of Commentary .01(a) with
the exception of Commentary
.01(a)(1)(C) and .01(a)(1)(D) (with
respect to U.S. Component Stocks) and
Commentary .01(a)(2)(C) and
.01(a)(2)(D) (with respect to Non-U.S.
Component Stocks).45 The Exchange
believes it is appropriate and in the
public interest to approve listing and
trading of Shares of the Fund
notwithstanding that the Fund’s
holdings in such equity securities do
not comply with the requirements set
forth in Commentary .01(a)(1) and (a)(2)
to NYSE Arca Rule 8.600–E in that any
Fund investment in exchange-traded
common stocks, preferred stocks, REITs,
ETFs, ETNs, U.S. exchange-traded
closed-end funds, exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities, and exchange-traded Work
Out Securities would provide for
enhanced diversification of the Fund’s
portfolio. Such securities would be NonPrincipal Investments, not exceeding
20% of the Fund’s net assets in the
aggregate.
The Exchange believes that it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(b)(1) to Rule 8.600–E
in that the Fund’s investments in
Municipal Securities will be welldiversified.
The Exchange believes that,
notwithstanding that the Fund’s
45 See
notes 23 and 24, supra.
VerDate Sep<11>2014
16:47 Nov 18, 2019
portfolio may not satisfy Commentary
.01(b)(1) to Rule 8.600–E, the Fund’s
portfolio will not be susceptible to
manipulation. As noted above, the Fund
will not comply with the requirements
set forth in Commentary .01(b)(1) to
NYSE Arca Rule 8.600–E with respect to
the Fund’s investments in Fixed Income
Securities, including Municipal
Securities. The Fund may not invest
more than 5% of its total assets
(determined at the time of purchase) in
any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis. In
addition, at least 50% of the weight of
the Fund’s portfolio would continue to
be subject to a substantial minimum
(i.e., $50 million) original principal
amount outstanding. These conditions
would provide the Fund with greater
ability to select from a broad range of
Fixed Income Securities, as described
above, that would support the Fund’s
investment goal.
With respect to the Fund’s
investments in Municipal Securities,
such securities will be diversified in
that no single Municipal Securities
issuer will account for more than 10%
of the weight of the Fund’s portfolio; no
individual Municipal Security will
account for more than 5% of the weight
of the Fund’s portfolio; and the Fund
will limit its investments in Municipal
Securities of any one state or U.S.
territory to 20% of the Fund’s total
assets.
The Exchange believes it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund notwithstanding that the
Fund’s holdings in such Private ABS/
MBS do not comply with the
requirements set forth in Commentary
.01(b)(4) to NYSE Arca Rule 8.600–E
because certain Private ABS/MBS
cannot satisfy the criteria in
Commentary .01(b)(4).46 Instead, the
Exchange proposes that the Fund’s
investments in Fixed Income Securities
other than Private ABS/MBS will be
required to comply with the
requirements of Commentary .01(b)(4).
As noted above, the Fund may not
invest more than 5% of its total assets
(determined at the time of purchase) in
any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis. The
Exchange believes this limitation would
provide additional diversification to the
Fund’s investments in Private ABS/
MBS, and reduce concerns that the
Fund’s investment in such securities
46 See
Jkt 250001
PO 00000
note 26, supra.
Frm 00102
Fmt 4703
Sfmt 4703
would be readily susceptible to market
manipulation.
The Exchange believes it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund notwithstanding that the
Fund’s holdings in such Private ABS/
MBS do not comply with the
requirements set forth in Commentary
.01(b)(5) to NYSE Arca Rule 8.600–E.
Instead, the Exchange proposes that, in
order to enable the portfolio to be more
diversified and provide the Fund with
an opportunity to earn higher returns,
the Fund may invest up to 50% of its
total assets in the aggregate in Private
ABS/MBS, provided that the Fund (1)
may not invest more than 30% of its
total assets in non-agency RMBS; (2)
may not invest more than 25% of its
total assets in non-agency CMBS; and
(3) may not invest more than 25% of its
total assets in non-agency ABS. In
addition, the Fund’s investment in
Private ABS/MBS is expected to provide
the Fund with benefits associated with
increased diversification, as Private
ABS/MBS investments tend to be less
correlated to interest rates than many
other fixed income securities.
In addition, as noted above, the Fund
may not invest more than 5% of its total
assets (determined at the time of
purchase) in any one Fixed Income
Security (excluding U.S. government
securities and TIPS) on a per CUSIP
basis.47 The Exchange believes these
limitations would provide additional
diversification to the Fund’s Private
ABS/MBS investments and reduce
concerns that the Fund’s investment in
such securities would be readily
susceptible to market manipulation.
As noted above, the Fund’s portfolio
will not comply with the requirements
set forth in Commentary .01(e) to NYSE
Arca Rule 8.600–E. The Exchange
proposes that up to 25% of the Fund’s
assets (calculated as the aggregate gross
notional value) may be invested in OTC
derivatives that are used to reduce
currency, interest rate or credit risk
arising from the Fund’s investments
(that is, ‘‘hedge’’), and that the Fund’s
investments in OTC derivatives other
than OTC derivatives used to hedge the
Fund’s portfolio against currency,
interest rate or credit risk will be limited
to 20% of the assets in the Fund’s
portfolio, calculated as the aggregate
gross notional value of such OTC
47 As noted above, the Fund’s holdings in
derivative instruments for hedging purposes would
be excluded from the determination of compliance
with this 5% limitation. The total gross notional
value of the Fund’s holdings in derivative
instruments used to gain exposure to a specific
asset is limited to 5% of the Fund’s total assets
(determined at the time of purchase).
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derivatives. As noted above, the Fund
will not use derivative instruments to
gain exposure to Private ABS/MBS, and
derivative instruments linked to such
securities will be used for hedging
purposes only.
The Exchange believes it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund notwithstanding that the
Fund’s holdings in OTC derivatives do
not comply with the requirements set
forth in Commentary .01(e) to NYSE
Arca Rule 8.600–E in that, depending on
market conditions, it may be critical that
the Fund be able to utilize available
OTC derivatives to attempt to reduce
impact of currency, interest rate or
credit fluctuations on Fund assets.
Therefore, the Exchange believes it is
appropriate to apply a limit of up to
25% of the Fund’s assets to the Fund’s
investments in OTC derivatives
(calculated as the aggregate gross
notional value of such OTC derivatives),
including forwards, options and swaps,
that are used for hedging purposes, as
described above.
The Adviser and Sub-Adviser
represent that OTC derivatives can be
tailored to hedge the specific risk arising
from the Fund’s investments and
frequently may be a more efficient
hedging vehicle than listed derivatives.
For example, the Fund could obtain an
OTC foreign currency derivative in a
notional amount that exactly matches
the notional amount of the Fund’s
investments. If the Fund were limited to
investing up to 20% of assets in OTC
derivatives, the Fund might have to
‘‘over hedge’’ or ‘‘under hedge’’ if round
lot sizes in listed derivatives were not
available. In addition, for example, an
OTC CDX option can be structured to
provide protection tailored to the
Fund’s credit exposure and can be a
more efficient way to hedge credit risk
with respect to specific exposures than
listed derivatives. Similarly, OTC
interest rate derivatives can be more
effective hedges of interest rate exposure
because they can be customized to
match the basis risk arising from the
term of the investments held by the
Fund.
Because the Fund, in furtherance of
its investment objective, may invest a
substantial percentage of its investments
in foreign currency denominated Fixed
Income Securities, the 20% limit in
Commentary .01(e) to Rule 8.600–E
could result in the Fund being unable to
fully pursue its investment objective
while attempting to sufficiently mitigate
investment risks. The inability of the
Fund to adequately hedge its holdings
would effectively limit the Fund’s
ability to invest in certain instruments,
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16:47 Nov 18, 2019
Jkt 250001
or could expose the Fund to additional
investment risk. For example, if the
Fund’s assets (on a gross notional value
basis) were $100 million and no listed
derivative were suitable to hedge the
Fund’s risk, under the generic standards
the Fund would be limited to holding
up to $20 million gross notional value
in OTC derivatives ($100 million *
20%). Accordingly, the maximum
amount the Fund would be able to
invest in foreign currency denominated
Fixed Income Securities while
remaining adequately hedged would be
$20 million. The Fund then would hold
$60 million in assets that could not be
hedged, other than with listed
derivatives, which, as noted above,
might not be sufficiently tailored to the
specific instruments to be hedged.
In addition, by applying the 20%
limitation in Commentary .01(e) to Rule
8.600–E, the Fund would be less able to
protect its holdings from more than one
risk simultaneously. For example, if the
Fund’s assets (on a gross notional basis)
were $100 million and the Fund held
$20 million in foreign currency
denominated Fixed Income Instruments
with two types of risks (e.g., currency
and credit risk) which could not be
hedged using listed derivatives, the
Fund would be faced with the choice of
either holding $20 million aggregate
gross notional value in OTC derivatives
to mitigate one of the risks while
passing the other risk to its
shareholders, or, for example, holding
$10 million aggregate gross notional
value in OTC derivatives on each of the
risks while passing the remaining
portion of each risk to the Fund’s
shareholders.
The Adviser and Sub-Adviser believe
that it is in the best interest of the
Fund’s shareholders for the Fund to be
allowed to reduce the currency, interest
rate or credit risk arising from the
Fund’s investments using the most
efficient financial instrument. While
certain risks can be hedged via listed
derivatives, OTC derivatives (such as
forwards, options and swaps) can be
customized to hedge against precise
risks. Accordingly, the Adviser and SubAdviser believe that OTC derivatives
may frequently be a more efficient
hedging vehicle than listed derivatives.
Therefore, the Exchange believes that
increasing the percentage limit in
Commentary .01(e), as described above,
to the Fund’s investments in OTC
derivatives, including forwards, options
and swaps, that are used specifically for
hedging purposes would help protect
investors and the public interest.
As noted above, the Fund’s portfolio
will not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
63939
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities, and, with respect to
the Fund’s holdings of OTC equity
securities issued upon conversion of
fixed income convertible securities and
OTC Work Out Securities, would not
meet the requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2)(A) through (E) to
Rule 8.600–E. The Exchange believes
that it is appropriate and in the public
interest to approve listing and trading of
Shares of the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities, and
notwithstanding that the Fund’s
holdings of OTC equity securities issued
upon conversion of fixed income
convertible securities and OTC Work
Out Securities would not meet the
requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2)(A) through (E) to
Rule 8.600–E. Investments in nonexchange-traded securities of open-end
investment company securities will not
be principal investments of the Fund.48
Such investments, which may include
mutual funds that invest, for example,
principally in fixed income securities,
would be utilized to help the Fund meet
its investment objective and to equitize
cash in the short term.
With respect to any Fund holdings of
exchange-traded or OTC equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities, such securities
will not exceed 10% and 5%,
respectively, of the Fund’s total assets.
The Adviser and Sub-Adviser represent
that the Fund generally will not actively
invest in equity securities issued upon
conversion of fixed income convertible
securities or Work Out Securities, but
may, at times, receive a distribution of
such securities in connection with the
Fund’s holdings in other securities.
Therefore, the Fund’s holdings in equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities generally would
not be acquired as the result of the
Fund’s voluntary investment decisions.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of shares of an additional type of
48 See
E:\FR\FM\19NON1.SGM
note 33, supra.
19NON1
63940
Federal Register / Vol. 84, No. 223 / Tuesday, November 19, 2019 / Notices
actively-managed exchange-traded
product that will enhance competition
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
additional type of actively-managed
exchange-traded product that generally
will principally hold fixed income
securities and that will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or up to 90 days (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
khammond on DSKJM1Z7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2019–78 on the subject line.
Paper Comments
• Send paper comments in triplicate
to: Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
VerDate Sep<11>2014
16:47 Nov 18, 2019
Jkt 250001
All submissions should refer to File
Number SR–NYSEArca–2019–78. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2019–78 and
should be submitted on or before
December 10, 2019.
notice is hereby given that on November
1, 2019, NYSE National, Inc. (‘‘NYSE
National’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Jill M. Peterson,
Assistant Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2019–24973 Filed 11–18–19; 8:45 am]
1. Purpose
BILLING CODE 8011–01–P
The purpose of the proposed rule
change is to amend the Exchange’s rules
to delete Cross Orders.
As defined in Rule 7.31(g), a Cross
Order is a two-sided order with
instructions to match the identified buyside with the identified sell-side at a
specified price (the ‘‘cross price’’). The
Exchange offers one type of Cross Order,
the Limit IOC Cross Order. As defined
in Rule 7.31(g)(1), a Limit IOC Cross
Order is a Cross Order that must trade
in full at its cross price, will not route,
and will cancel at the time of order
entry if the cross price is not between
the BBO or would trade through the
PBBO.
Due to a lack of demand for Cross
Orders, the Exchange proposes to
discontinue supporting Cross Orders.
Specifically, in the last three months,
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87518; File No. SR–
NYSENAT–2019–26]
Self-Regulatory Organizations; NYSE
National, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change to Amend Rule 7.31 to
Delete Cross Orders
November 13, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
49 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 7.31 (Orders and Modifiers) to
delete Cross Orders from its rules and
make other conforming changes. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
E:\FR\FM\19NON1.SGM
19NON1
]]>Agencies
[Federal Register Volume 84, Number 223 (Tuesday, November 19, 2019)]
[Notices]
[Pages 63929-63940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24973]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87514; File No. SR-NYSEArca-2019-78]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 1, Relating to
Listing and Trading of Shares of the Innovator PTAM Core Bond ETF Under
NYSE Arca Rule 8.600-E
November 13, 2019.
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 October 30, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') a proposed rule change, and on November 8, 2019, the
Exchange filed Amendment No. 1 to the proposed rule change, which
amended and replaced the proposed rule change in its entirety. The
proposed rule change, as modified by Amendment No. 1, is described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change, as modified by Amendment No. 1, from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.600-E (``Managed Fund Shares''): Innovator PTAM
Core Bond ETF. This Amendment No. 1 to SR-NYSEArca-2019-78 replaces SR-
NYSEArca-2019-78 as originally filed and supersedes such filing in its
entirety. The proposed change is available on the Exchange's website at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.600-E which governs the listing and trading of
Managed Fund Shares on the Exchange: \4\ Innovator PTAM Core Bond ETF
(the ``Fund'').
---------------------------------------------------------------------------
\4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3),
seeks to provide investment results that correspond generally to the
price and yield performance of a specific foreign or domestic stock
index, fixed income securities index or combination thereof.
---------------------------------------------------------------------------
The Shares will be offered by Innovator ETFs Trust (the ``Trust''),
which is registered with the Commission as an open-end management
investment company.\5\ The Fund is a series of the Trust.
---------------------------------------------------------------------------
\5\ The Trust is registered under the 1940 Act. On July 5, 2019,
the Trust filed with the Commission its registration statement on
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund (File Nos. 333-146827 and
811-22135) (``Registration Statement''). The description of the
operation of the Trust and the Fund herein is based, in part, on the
Registration Statement. In addition, the Commission has issued an
order upon which the Trust may rely, granting certain exemptive
relief under the 1940 Act. See Investment Company Act Release No.
32854 (October 6, 2017) (File No. 812-14781).
---------------------------------------------------------------------------
Innovator Capital Management, LLC will be the investment adviser
(``Innovator'' or ``Adviser'') to the Fund. PT Asset Management, LLC
(``PTAM'' or the ``Sub-Adviser''), will serve as the Fund's investment
sub-adviser. Foreside Fund Services, LLC will be the distributor
(``Distributor'') for the Fund's Shares. US Bancorp Fund Services LLC
will act as the administrator and transfer agent for the Fund. U.S.
Bank, N.A. will serve as the custodian (``Custodian'') for the Fund.
Commentary .06 to Rule 8.600-E provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect
and maintain a ``fire wall'' between the investment adviser and the
broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio.\6\ In
addition, Commentary .06 further requires that personnel who make
decisions on the open-end fund's portfolio composition must be subject
to procedures designed to prevent the use and dissemination of material
nonpublic information
[[Page 63930]]
regarding the open-end fund's portfolio. The Adviser and Sub-Adviser
are not registered as broker-dealers. The Adviser is not affiliated
with a broker-dealer. The Sub-Adviser is affiliated with a broker-
dealer and has implemented and will maintain a fire wall with respect
to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. In the
event (a) the Adviser or the Sub-Adviser becomes registered as a
broker-dealer or newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, it will implement and maintain a fire
wall with respect to relevant personnel and any broker-dealer affiliate
regarding access to information concerning the composition and/or
changes to the portfolio, and will be subject to procedures designed to
prevent the use and dissemination of material non-public information
regarding such portfolio.
---------------------------------------------------------------------------
\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
---------------------------------------------------------------------------
Innovator PTAM Core Bond ETF
Principal Investments
According to the Registration Statement, the investment objective
of the Fund is to seek to maximize total return through income and
capital appreciation. Under normal market conditions,\7\ the Fund
intends to invest at least 80% of its net assets in a portfolio of
``Fixed Income Securities'' (described below).\8\
---------------------------------------------------------------------------
\7\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5). On a temporary basis, including for
defensive purposes, during the initial invest-up period (i.e., the
six-week period following the commencement of trading of Shares on
the Exchange) and during periods of high cash inflows or outflows
(i.e., rolling periods of seven calendar days during which inflows
or outflows of cash, in the aggregate, exceed 10% of the Fund's net
assets as of the opening of business on the first day of such
periods), the Fund may depart from its principal investment
strategies; for example, it may hold a higher than normal proportion
of its assets in cash. During such periods, the Fund may not be able
to achieve its investment objective. The Fund may adopt a defensive
strategy when the Adviser and/or the Sub-Adviser believes securities
in which the Fund normally invests have elevated risks due to
market, political or economic factors and in other extraordinary
circumstances.
\8\ The Fund may enter into short sales of any securities in
which the Fund may invest.
---------------------------------------------------------------------------
In managing the Fund's portfolio, PTAM intends to use a value-
oriented strategy looking for higher-yielding and undervalued fixed
income securities that offer above-average total return. Pursuant to
this investment strategy, the Fund may invest in the following Fixed
Income Securities, as discussed below:
U.S. Government obligations \9\ and sovereign debt
obligations of non-U.S. governments;
---------------------------------------------------------------------------
\9\ Examples of U.S. Government obligations include direct
obligations of the U.S. Treasury, including Treasury bills, notes
and bonds, all of which are backed as to principal and interest
payments by the full faith and credit of the United States, and
separately traded principal and interest component parts of such
obligations that are transferable through the Federal book-entry
system known as Separate Trading of Registered Interest and
Principal of Securities (``STRIPS'') and Coupons Under Book Entry
Safekeeping (``CUBES'').
---------------------------------------------------------------------------
U.S. Government Agency Securities (including agency asset-
backed securities (``ABS'') and agency mortgage-backed securities
(``MBS'')); \10\
---------------------------------------------------------------------------
\10\ Examples of U.S. Government Agency Securities include
securities issued or guaranteed by agencies and instrumentalities of
the U.S. government. These include all types of securities issued by
the Government National Mortgage Association (``Ginnie Mae''), the
Federal National Mortgage Association (``Fannie Mae'') and the
Federal Home Loan Mortgage Corporation (``Freddie Mac''), including
funding notes, subordinated benchmark notes, collateralized mortgage
obligations (``CMOs'') and Real Estate Mortgage Investment Conduits
(``REMICs'').
---------------------------------------------------------------------------
Non-agency ABS; \11\
---------------------------------------------------------------------------
\11\ For purposes of this filing, non-agency ABS are
collateralized bond obligations (``CBOs''), collateralized loan
obligations (``CLOs''), and other collateralized debt obligations
(``CDOs'').
---------------------------------------------------------------------------
Non-agency MBS; \12\
---------------------------------------------------------------------------
\12\ For purposes of this filing, non-agency MBS are
collateralized mortgage obligations (``CMOs''); commercial mortgage-
backed securities (``CMBS''); residential mortgage-backed securities
(``RMBS''); and principal-only (PO) and interest-only (IO) stripped
MBS. Non-agency ABS and non-agency MBS are referred to herein as
``Private ABS/MBS.'' The Fund may invest in agency RMBS and CMBS by
investing in to-be-announced transactions.
---------------------------------------------------------------------------
Stripped MBS; \13\
---------------------------------------------------------------------------
\13\ Stripped MBS are derivative multi-class mortgage securities
which are usually structured with two classes of shares that receive
different proportions of the interest and principal from a pool of
mortgage assets. These include IO and PO securities issued outside a
REMIC or CMO structure.
---------------------------------------------------------------------------
Treasury Inflation Protected Securities (``TIPS'');
Corporate bonds;
Bank loans, including first lien senior secured floating
rate bank loans (``Senior Loans''), secured and unsecured loans, second
lien or more junior loans, and bridge loans;
Fixed income convertible securities;
Municipal bonds and municipal securities issued by tender
option bond trusts (collectively, ``Municipal Securities''); and
Custodial receipts trusts.
The Fund may invest up to 75% of its net assets in Municipal
Securities.
The Fund may hold cash and cash equivalents.\14\ In addition, the
Fund may hold the following short-term instruments with maturities of
three months or more: Certificates of deposit; bankers' acceptances;
repurchase agreements and reverse repurchase agreements; bank time
deposits; and commercial paper.
---------------------------------------------------------------------------
\14\ For purposes of this filing, cash equivalents are the
short-term instruments with maturities of less than 3 months
enumerated in Commentary .01(c) to Rule 8.600-E.
---------------------------------------------------------------------------
The Fund may utilize exchange-listed and over-the-counter (``OTC'')
traded derivatives instruments for duration/yield curve management and/
or hedging purposes, for risk management purposes or as part of its
investment strategies. The Fund will use derivative instruments
primarily to hedge interest rate risk, actively manage interest rate
exposure, hedge foreign currency risk and actively manage foreign
currency exposure. The Fund may also use derivative instruments to
enhance returns, as a substitute for, or to gain exposure to, a
position in an underlying asset, to reduce transaction costs, to
maintain full market exposure, to manage cash flows or to preserve
capital. Derivatives may also be used to hedge risks associated with
the Fund's other portfolio investments. The Fund will not use
derivative instruments to gain exposure to Private ABS/MBS, and
derivative instruments linked to such securities will be used for
hedging purposes only. Derivatives that the Fund may enter into are the
following: Futures on interest rates, currencies, Fixed Income
Securities and fixed income indices; exchange-traded and OTC options on
interest rates, currencies, Fixed Income Securities and fixed income
indices; swap agreements on interest rates, currencies, Fixed Income
Securities and fixed income indices; credit default swaps (``CDX'');
and currency forward contracts.
Non-Principal Investments
While the Fund, under normal market conditions, will invest at
least 80% of its net assets in the Principal Investments described
above, the Fund may invest its remaining assets in the following ``Non-
Principal Investments.''
The Fund may invest in exchange-traded common stock, exchange-
traded preferred stock, and exchange-traded real estate investment
trusts (``REITs'').
The Fund may invest in the securities of other investment companies
registered under the 1940 Act, including money market funds, exchange-
traded funds (``ETFs''), open-end funds (other than money market funds
and other ETFs), and U.S. exchange-traded closed-end funds.\15\
---------------------------------------------------------------------------
\15\ For purposes of this filing, the term ``ETFs'' are
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs.
---------------------------------------------------------------------------
[[Page 63931]]
The Fund may hold exchange-traded notes (``ETNs'').\16\
---------------------------------------------------------------------------
\16\ ETNs are Index-Linked Securities (as described in NYSE Arca
Rule 5.2-E(j)(6)). While the Fund may invest in inverse ETNs, the
Fund will not invest in leveraged or inverse leveraged ETNs (e.g.,
2X or -3X).
---------------------------------------------------------------------------
The Fund may hold exchange-traded or OTC ``Work Out Securities.''
\17\
---------------------------------------------------------------------------
\17\ For purposes of this filing, Work Out Securities are U.S.
or foreign equity securities of any type acquired in connection with
restructurings related to issuers of Fixed Income Securities held by
the Fund. Work Out Securities are generally traded OTC, but may be
traded on a U.S. or foreign exchange.
---------------------------------------------------------------------------
The Fund may hold exchange-traded or OTC equity securities issued
upon conversion of fixed income convertible securities.
Investment Restrictions
The Fund may not invest more than 5% of its total assets
(determined at the time of purchase) in any one Fixed Income Security
(excluding U.S. government securities and TIPS) on a per CUSIP basis.
The Fund's holdings in derivative instruments for hedging purposes
would be excluded from the determination of compliance with this 5%
limitation. The total gross notional value of the Fund's holdings in
derivative instruments used to gain exposure to a specific reference
asset is limited to 5% of the Fund's total assets (determined at the
time of purchase).
The Fund may invest up to 50% of its total assets in the aggregate
in Private ABS/MBS, provided that the Fund (1) may not invest more than
30% of its total assets in non-agency RMBS; (2) may not invest more
than 25% of its total assets in non-agency CMBS; and (3) may not invest
more than 25% of its total assets in non-agency ABS.
The Fund may invest up to 75% of its net assets in Municipal
Securities that have a minimum original principal outstanding of less
than $100 million. Under normal market conditions, the Fund's
investments in Municipal Securities will satisfy the following
criteria:
i. No single Municipal Securities issuer will account for more than
10% of the weight of the Fund's portfolio; \18\
---------------------------------------------------------------------------
\18\ The Exchange notes that the Commission has approved the
listing and trading of another issue of Managed Fund Shares that
principally holds municipal securities for which no single issuer
would account for more than 10% of the weight of the fund's
portfolio. See Securities Exchange Act Release No. 79293 (November
10, 2016), 81 FR 81189 (November 17, 2016) (SR-NYSEArca-2016-107)
(order approving listing and trading of shares of Cumberland
Municipal Bond ETF under Rule 8.600).
---------------------------------------------------------------------------
ii. No individual Municipal Security will account for more than 5%
of the weight of the Fund's portfolio; \19\
---------------------------------------------------------------------------
\19\ The Exchange notes that the Commission has approved the
listing and trading of another issue of Managed Fund Shares that
principally holds municipal securities for which no single bond
would exceed 5% of the fund's portfolio. See Securities Exchange Act
Release No. 80885 (June 8, 2017), 82 FR 27302 (June 14, 2017) (order
approving listing and trading of shares of the IQ Municipal Insured
ETF, IQ Municipal Short Duration ETF, and IQ Municipal Intermediate
ETF under NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------
iii. The Fund will limit its investments in Municipal Securities of
any one state or U.S. territory to 20% of the Fund's total assets.\20\
---------------------------------------------------------------------------
\20\ The Exchange notes that the Commission has approved the
listing and trading of other issues of Managed Fund Shares that
principally hold municipal securities for which the applicable
fund's assets in municipal securities of any one state would be
limited to 30% of such fund's assets. See Securities Exchange Act
Release Nos. 80885 (June 8, 2017), 82 FR 27302 (June 14, 2017)
(order approving listing and trading of shares of the IQ Municipal
Insured ETF, IQ Municipal Short Duration ETF, and IQ Municipal
Intermediate ETF under NYSE Arca Equities Rule 8.600); 79293
(November 10, 2016), 81 FR 81189 (November 17, 2016) (SR-NYSEArca-
2016-107) (order approving listing and trading of shares of
Cumberland Municipal Bond ETF under Rule 8.600); 78913 (September
23, 2016) (SR-Nasdaq-2016-002) (order approving listing and trading
of the First Trust Municipal High Income ETF of First Trust
Exchange-Traded Fund III).
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The Exchange proposes that up to 25% of the Fund's assets may be
invested in OTC derivatives that are used to reduce currency, interest
rate or credit risk arising from the Fund's investments (that is,
``hedge''). The Fund's investments in OTC derivatives other than OTC
derivatives used to hedge the Fund's portfolio against currency,
interest rate or credit risk will be limited to 20% of the assets in
the Fund's portfolio. For purposes of these percentage limitations on
OTC derivatives, the weight of such OTC derivatives will be calculated
as the aggregate gross notional value of such OTC derivatives.
The Fund's holdings of bank loans will not exceed 15% of the Fund's
total assets, and the Fund's holdings of bank loans other than Senior
Loans will not exceed 5% of the Fund's total assets.
The Fund's holdings in fixed income convertible securities and in
equity securities issued upon conversion of such convertible securities
will not exceed 10% of the Fund's total assets.
The Fund's holdings in Work Out Securities will not exceed 5% of
the Fund's total assets.
The Fund will not invest in securities or other financial
instruments that have not been described in this proposed rule change.
Other Restrictions
The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and will not be used to enhance
leverage (although certain derivatives and other investments may result
in leverage). That is, the Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (e.g., 2X or -3X)
of the Fund's primary broad-based securities benchmark index (as
defined in Form N-1A).\21\
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\21\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
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Use of Derivatives by the Fund
The Fund may invest in the types of derivatives described in the
``Principal Investments'' section above for the purposes described in
that section. Investments in derivative instruments will be made in
accordance with the Fund's investment objective and policies.
To limit the potential risk associated with such transactions, the
Fund will enter into offsetting transactions or segregate or
``earmark'' assets determined to be liquid by the Adviser in accordance
with procedures established by the Trust's Board of Trustees. In
addition, the Fund has included appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is the
risk that certain transactions of the Fund, including the Fund's use of
derivatives, may give rise to leverage, causing the Fund to be more
volatile than if it had not been leveraged. Because the markets for
certain assets, or the assets themselves, may be unavailable or cost
prohibitive as compared to derivative instruments, suitable derivative
transactions may be an efficient alternative for the Fund to obtain the
desired asset exposure.
Impact on Arbitrage Mechanism
The Adviser and the Sub-Adviser believe there will be minimal, if
any, impact to the arbitrage mechanism as a result of the Fund's use of
derivatives and Private ABS/MBS. The Adviser and the Sub-Adviser
understand that market makers and participants should be able to value
derivatives and Private ABS/MBS as long as the positions are disclosed
with relevant information. The Adviser and the Sub-Adviser believe that
the price at which Shares of the Fund trade will continue to be
disciplined by arbitrage opportunities created by the ability to
purchase or redeem Shares of the Fund at their net
[[Page 63932]]
asset value (``NAV''), which should ensure that Shares of the Fund will
not trade at a material discount or premium in relation to their NAV.
The Adviser and Sub-Adviser do not believe there will be any
significant impacts to the settlement or operational aspects of the
Fund's arbitrage mechanism due to the use of derivatives and Private
ABS/MBS.
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at NAV
\22\ only in large blocks of Shares (``Creation Units'') in
transactions with ``Authorized Participants'' (described below). A
Creation Unit will consist of 50,000 Shares. The size of a Creation
Unit is subject to change.
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\22\ The NAV of the Fund's Shares generally will be calculated
once daily Monday through Friday as of the close of regular trading
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m.,
Eastern Time (``E.T.''). NAV per Share will be calculated by
dividing the Fund's net assets by the number of Fund Shares
outstanding.
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To be eligible to place orders with the Distributor to create a
Creation Unit of the Fund, an entity must be (i) a ``Participating
Party,'' i.e., a broker-dealer or other participant in the clearing
process through the Continuous Net Settlement System of the National
Securities Clearing Corporation (``NSCC''); or (ii) a Depository Trust
Company (``DTC'') Participant, and, in each case, must have executed an
agreement with the Fund, the Distributor and the Administrator with
respect to creations and redemptions of Creation Units. A Participating
Party and DTC Participant are collectively referred to as an Authorized
Participant.
All orders to create Creation Units must be placed for one or more
Creation Unit size aggregations. All orders to create Creation Units
must be received by the Distributor no later than 4:00 p.m., E.T. on
the date such order is placed in order for the creation of Creation
Units to be effected based on the NAV of Shares of the Fund as next
determined on such date after receipt of the order in proper form.
Shares may be redeemed only in Creation Unit aggregations at their
NAV next determined after receipt of a redemption request in proper
form by the Fund through the Custodian and only on a business day.
Orders to redeem Creation Units must be received by 4:00 p.m., E.T.
The Custodian, through the NSCC, will make available prior to the
opening of business on the Exchange (currently 9:30 a.m., E.T.) on each
business day, the amount of cash that will be applicable (subject to
possible amendment or correction) to redemption requests received in
proper form on that day. The redemption proceeds for a Creation Unit
Aggregation generally will consist of cash in an amount equal to the
NAV of Fund Shares next determined after a redemption request is
received, less a redemption transaction fee.
Application of Generic Listing Requirements
The Exchange is submitting this proposed rule change because the
portfolio for the Fund will not meet all of the ``generic'' listing
requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to
the listing of Managed Fund Shares. The Fund's portfolio will meet all
such requirements except for those set forth in Commentary .01(a)(1)
and (a)(2) (with respect to the Fund's investments in equity
securities), (b)(1) (with respect to the Fund's investments in Fixed
Income Securities, including Municipal Securities), (b)(4) (with
respect to the Fund's investments in Private ABS/MBS), (b)(5) (with
respect to the Fund's investments in Private ABS/MBS), and (e) (with
respect to the Fund's investments in OTC derivatives), as described
below.
The Fund will not comply with all of the requirements set forth in
Commentary .01(a)(1) \23\ and (a)(2) \24\ to
[[Page 63933]]
NYSE Arca Rule 8.600-E with respect to the Fund's investments in equity
securities.\25\ Instead, the Exchange proposes that (i) the Fund's
investments in equity securities will meet the requirements of
Commentary .01(a) with the exception of Commentary .01(a)(1)(C) and
.01(a)(1)(D) (with respect to U.S. Component Stocks) and Commentary
.01(a)(2)(C) and .01(a)(2)(D) (with respect to Non-U.S. Component
Stocks). Any Fund investment in exchange-traded common stocks,
preferred stocks, REITS, ETFs, ETNs, exchange-traded equity securities
issued upon conversion of fixed income convertible securities,
exchange-traded Work Out Securities and U.S. exchange-traded closed-end
funds would provide for enhanced diversification of the Fund's
portfolio and, in any case, would be Non-Principal Investments and
would not exceed 20% of the Fund's net assets in the aggregate. With
respect to any Fund holdings of exchange-traded equity securities
issued upon conversion of fixed income convertible securities and
exchange-traded Work Out Securities, such securities will not exceed
10% and 5%, respectively, of the Fund's total assets. The Adviser and
Sub-Adviser represent that the Fund generally will not actively invest
in equity securities issued upon conversion of fixed income convertible
securities or Work Out Securities, but may, at times, receive a
distribution of such securities in connection with the Fund's holdings
in other securities. Therefore, the Fund's holdings in equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities generally would not be acquired as
the result of the Fund's voluntary investment decisions. The Adviser
and Sub-Adviser represent that, under these circumstances, application
of the weighting requirements of Commentary .01(a)(1)(C) and Commentary
.01(a)(2)(C) and the minimum number of components requirements of
Commentary .01(a)(1)(D) and Commentary .01(a)(2)(D) would impose an
unnecessary burden on the Fund's ability to hold such equity
securities.
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\23\ Commentary .01(a)(1) to NYSE Arca Rule 8.600-E provides
that the component stocks of the equity portion of a portfolio that
are U.S. Component Stocks shall meet the following criteria
initially and on a continuing basis:
(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
shall 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
shall have a minimum monthly trading volume of 250,000 shares, or
minimum notional volume traded per month of $25,000,000, averaged
over the last six months;
(C) The most heavily weighted component stock (excluding
Derivative Securities Products and Index-Linked Securities) shall
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) shall 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 herein, equity securities in the
portfolio shall be U.S. Component Stocks listed on a national
securities exchange and shall be NMS Stocks as defined in Rule 600
of Regulation NMS under the Securities Exchange Act of 1934; and
(F) American Depositary Receipts (``ADRs'') in a portfolio may
be exchange-traded or non- exchange-traded. However, no more than
10% of the equity weight of a portfolio shall consist of non-
exchange-traded ADRs.
\24\ Commentary .01(a)(2) to NYSE Arca Rule 8.600-E provides
that the component stocks of the equity portion of a portfolio that
are Non-U.S. Component Stocks shall meet the following criteria
initially and on a continuing basis:
(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.
\25\ For purposes of these exceptions, investments in equity
securities that are OTC Work Out Securities, OTC equity securities
issued upon conversion of fixed income convertible securities, or
non-exchange-traded securities of other open-end investment
companies (e.g., mutual funds) are excluded and are discussed
further below.
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The Fund will not comply with the requirement in Commentary
.01(b)(1) to Rule 8.600-E that 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. Instead, the Exchange proposes that components that in the
aggregate account for at least 50% of the fixed income weight of the
portfolio shall have a minimum original principal amount outstanding of
$50 million or more. As noted above, the Fund may not invest more than
5% of its total assets (determined at the time of purchase) in any one
Fixed Income Security (excluding U.S. government securities and TIPS)
on a per CUSIP basis.
With respect to the Fund's investments in Municipal Securities, the
Fund may invest up to 75% of its net assets in Municipal Securities
that have a minimum original principal outstanding of less than $100
million. No single Municipal Securities issuer will account for more
than 10% of the weight of the Fund's portfolio; no individual bond will
account for more than 5% of the weight of the Fund's portfolio; and the
Fund will limit its investments in Municipal Securities of any one
state or U.S. territory to 20% of the Fund's total assets. The Exchange
believes these limitations to the Funds [sic] investments in Fixed
Income Securities, including Municipal Securities, would provide
significant additional diversification to the Fund's investments in
Fixed Income Securities, and reduce concerns that the Fund's
investments in such securities would be readily susceptible to market
manipulation.
The Fund will not comply with the requirements in Commentary
.01(b)(4) to Rule 8.600-E that component securities that in the
aggregate account for at least 90% of the fixed income weight of the
portfolio meet one of the criteria specified in Commentary .01(b)(4),
because certain Private ABS/MBS cannot satisfy the criteria in
Commentary .01(b)(4).\26\ Instead, the Exchange proposes that the
Fund's investments in Fixed Income Securities other than Private ABS/
MBS will be required to comply with the requirements of Commentary
.01(b)(4). As noted above, the Fund may not invest more than 5% of its
total assets (determined at the time of purchase) in any one Fixed
Income Security (excluding U.S. government securities and TIPS) on a
per CUSIP basis.
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\26\ Commentary .01(b)(4) provides that component securities
that in the aggregate account for at least 90% of the fixed income
weight of the portfolio must be either: (a) From issuers that are
required to file reports pursuant to Sections 13 and 15(d) of the
Act; (b) from issuers that have a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more; (c) from issuers that have outstanding securities that are
notes, bonds debentures, or evidence of indebtedness having a total
remaining principal amount of at least $1 billion; (d) exempted
securities as defined in Section 3(a)(12) of the Act; or (e) from
issuers that are a government of a foreign country or a political
subdivision of a foreign country.
---------------------------------------------------------------------------
The Exchange notes that the Commission has previously approved the
listing of Managed Fund Shares with similar investment objectives and
strategies without imposing requirements that a certain percentage of
such funds' securities meet one of the criteria set forth in Commentary
.01(b)(4).\27\
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\27\ See, e.g., Exchange Act Release Nos. 67894 (September 20,
2012) 77 FR 59227 (September 26, 2012) (SR-BATS-2012-033) (order
approving the listing and trading of shares of the iShares Short
Maturity Bond Fund); 70342 (September 6, 2013), 78 FR 56256
(September 12, 2013) (SR-NYSEArca-2013-71) (order approving the
listing and trading of shares of the SPDR SSgA Ultra Short Term Bond
ETF, SPDR SSgA Conservative Ultra Short Term Bond ETF and SPDR SSgA
Aggressive Ultra Short Term Bond ETF).
---------------------------------------------------------------------------
The Fund will not comply with the requirement in Commentary
.01(b)(5) to Rule 8.600-E that Private ABS/MBS in the Fund's portfolio
account, in the aggregate, for no more than 20% of the weight of the
Fund's portfolio.\28\ Instead, the Exchange proposes that, in order to
enable the portfolio to be more diversified and provide the Fund with
an opportunity to earn higher returns, the Fund may invest up to 50% of
its total assets in the aggregate in Private ABS/MBS, provided that the
Fund (1) may not invest more than 30% of its total assets in non-agency
RMBS; (2) may not invest more than 25% of its total assets in non-
agency CMBS; and (3) may not invest more than 25% of its total assets
in non-agency ABS.
---------------------------------------------------------------------------
\28\ Commentary .01(b)(5) to Rule 8.600-E provides that non-
agency, non-government-sponsored entity (``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 portfolio.
---------------------------------------------------------------------------
In addition, as noted above, the Fund may not invest more than 5%
of its total assets (determined at the time of purchase) in any one
Fixed Income Security (excluding U.S. government securities and TIPS)
on a per CUSIP basis.\29\ The Exchange believes these limitations would
provide additional diversification to the Fund's Private ABS/MBS
investments and reduce concerns that the Fund's investment in
[[Page 63934]]
such securities would be readily susceptible to market manipulation.
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\29\ As noted above, the Fund's holdings in derivative
instruments for hedging purposes would be excluded from the
determination of compliance with this 5% limitation. The total gross
notional value of the Fund's holdings in derivative instruments used
to gain exposure to a specific asset is limited to 5% of the Fund's
total assets (determined at the time of purchase).
---------------------------------------------------------------------------
The Adviser and Sub-Adviser represent that the RMBS sector can be
an important component of the Fund's investment strategy because of the
potential for attractive risk-adjusted returns relative to other fixed
income sectors and the potential to add significantly to the
diversification in the Fund's portfolio. Similarly, the Private ABS/MBS
sectors also have the potential for attractive risk-adjusted returns
and added portfolio diversification.
The Fund's portfolio will not comply with the requirements set
forth in Commentary .01(e) to NYSE Arca Rule 8.600-E.\30\ Specifically,
the Fund's investments in OTC derivatives may exceed 20% of Fund
assets, calculated as the aggregate gross notional value of such OTC
derivatives. The Exchange proposes that up to 25% of the Fund's assets
(calculated as the aggregate gross notional value) may be invested in
OTC derivatives that are used to reduce currency, interest rate or
credit risk arising from the Fund's investments (that is, ``hedge'').
The Fund's investments in OTC derivatives other than OTC derivatives
used to hedge the Fund's portfolio against currency, interest rate or
credit risk will be limited to 20% of the assets in the Fund's
portfolio, calculated as the aggregate gross notional value of such OTC
derivatives.
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\30\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that
the portfolio may hold OTC derivatives, including forwards, options
and swaps on commodities, currencies and financial instruments
(e.g., stocks, fixed income, interest rates, and volatility) or a
basket or index of any of the foregoing; however, on both an initial
and continuing basis, no more than 20% of the assets in the
portfolio may be invested in OTC derivatives. 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.
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The Adviser and Sub-Adviser believe that it is important to provide
the Fund with additional flexibility to manage risk associated with its
investments. Depending on market conditions, it may be critical that
the Fund be able to utilize available OTC derivatives for this purpose
to attempt to reduce impact of currency, interest rate or credit
fluctuations on Fund assets. Therefore, the Exchange believes it is
appropriate to apply a limit of up to 25% of the Fund's assets to the
Fund's investments in OTC derivatives (calculated as the aggregate
gross notional value of such OTC derivatives), including forwards,
options and swaps, that are used for hedging purposes, as described
above.\31\
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\31\ The Commission has previously approved an exception from
requirements set forth in Commentary .01(e) relating to investments
in OTC derivatives similar to those proposed with respect to the
Fund in Securities Exchange Act Release No. 80657 (May 11, 2017), 82
FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, Regarding
Investments of the Janus Short Duration Income ETF Listed Under NYSE
Arca Equities Rule 8.600).
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As noted above, the Fund may hold equity securities that are Work
Out Securities, which generally are traded OTC (but that may be traded
on a U.S. or foreign exchange), exchange-traded or OTC equity
securities issued upon conversion of fixed income convertible
securities, and non-exchange-traded securities of other open-end
investment company securities (e.g., mutual funds). The Exchange
believes that it is appropriate and in the public interest to approve
listing and trading of Shares of the Fund on the Exchange
notwithstanding that the Fund would not meet the requirements of
Commentary .01(a)(1)(A) through (E) to Rule 8.600-E with respect to the
Fund's investments in non-exchange-traded securities of open-end
investment company securities,\32\ and notwithstanding that the Fund's
holdings of OTC equity securities issued upon conversion of fixed
income convertible securities and OTC Work Out Securities would not
meet the requirements of Commentary .01(a)(1)(A) through (E) and
Commentary .01(a)(2) (A) through (E) to Rule 8.600-E. Investments in
non-exchange-traded securities of open-end investment company
securities will not be principal investments of the Fund.\33\ Such
investments, which may include mutual funds that invest, for example,
principally in fixed income securities, would be utilized to help the
Fund meet its investment objective and to equitize cash in the short
term. With respect to any Fund holdings of OTC equity securities issued
upon conversion of fixed income convertible securities and OTC Work Out
Securities, such securities will not exceed 10% and 5%, respectively,
of the Fund's total assets. The Adviser and Sub-Adviser represent that
the Fund generally will not actively invest in OTC equity securities
issued upon conversion of fixed income convertible securities or OTC
Work Out Securities, but may, at times, receive a distribution of such
securities in connection with the Fund's holdings in other securities.
Therefore, the Fund's holdings in equity securities issued upon
conversion of fixed income convertible securities and Work Out
Securities generally would not be acquired as the result of the Fund's
voluntary investment decisions.
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\32\ Commentary .01 (a) to Rule 8.600-E specifies the equity
securities accommodated by the generic criteria in Commentary
.01(a), namely, U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Non-U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Derivative Securities Products (i.e., Investment Company
Units and securities described in Section 2 of Rule 8-E); and Index-
Linked Securities that qualify for Exchange listing and trading
under Rule 5.2-E(j)(6).
\33\ For purposes of this section of the filing, non-exchange-
traded securities of other registered investment companies do not
include money market funds, which are cash equivalents under
Commentary .01(c) to Rule 8.600-E and for which there is no
limitation in the percentage of the portfolio invested in such
securities.
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With respect to investments in non-exchange-traded investment
company securities, because such securities have a net asset value
based on the value of securities and financial assets the investment
company holds, the Exchange believes it is both unnecessary and
inappropriate to apply to such investment company securities the
criteria in Commentary .01(a)(1).\34\
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\34\ The Commission has previously approved proposed rule
changes under Section 19(b) of the Act for series of Managed Fund
Shares that may invest in non-exchange traded investment company
securities. See, e.g., Securities Exchange Act Release No. 78414
(July 26, 2016), 81 FR 50576 (August 1, 2016) (SR-NYSEArca-2016-79)
(order approving listing and trading of shares of the Virtus Japan
Alpha ETF under NYSE Arca Equities Rule 8.600).
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The Exchange notes that Commentary .01(a) through (d) to Rule
8.600-E exclude application of those provisions to certain ``Derivative
Securities Products'' that are exchange-traded investment company
securities, including Investment Company Units (as described in NYSE
Arca Rule 5.2-E(j)(3)), Portfolio Depositary Receipts (as described in
NYSE Arca Rule 8.100-E) and Managed Fund Shares (as described in NYSE
Arca Rule 8.600-E).\35\ In its
[[Page 63935]]
2008 Approval Order approving amendments to Commentary .01(a) to Rule
5.2(j)(3) that exclude Derivative Securities Products from certain
provisions of Commentary .01(a) (which exclusions are similar to those
in Commentary .01(a)(1) to Rule 8.600-E), the Commission stated that
``based on the trading characteristics of Derivative Securities
Products, it may be difficult for component Derivative Securities
Products to satisfy certain quantitative index criteria, such as the
minimum market value and trading volume limitations.'' The Exchange
notes that it would be difficult or impossible to apply to non-
exchange-traded investment company securities the generic quantitative
criteria (e.g., market capitalization, trading volume, or portfolio
criteria) in Commentary .01 (a) through (d) applicable to U.S.
Component Stocks. For example, the requirement for U.S. Component
Stocks in Commentary .01(a)(1)(B) that there be minimum monthly trading
volume of 250,000 shares, or minimum notional volume traded per month
of $25,000,000, averaged over the last six months is tailored to
exchange-traded securities (e.g., U.S. Component Stocks) and not to
mutual fund shares, which do not trade in the secondary market.
Moreover, application of such criteria would not serve the purpose
served with respect to U.S. Component Stocks, namely, to establish
minimum liquidity and diversification criteria for U.S. Component
Stocks held by series of Managed Fund Shares.
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\35\ The Commission initially approved the Exchange's proposed
rule change to exclude ``Derivative Securities Products'' (i.e.,
Investment Company Units and securities described in Section 2 of
Rule 8) and ``Index-Linked Securities (as described in Rule 5.2-
E(j)(6)) from Commentary .01(a)(A)(1) through (4) to Rule 5.2-
E(j)(3) in Securities Exchange Act Release No. 57751 (May 1, 2008),
73 FR 25818 (May 7, 2008) (SR-NYSEArca-2008-29) (Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to Amend the Eligibility Criteria for Components of an
Index Underlying Investment Company Units) (``2008 Approval
Order''). See also, Securities Exchange Act Release No. 57561 (March
26, 2008), 73 FR 17390 (April 1, 2008) (Notice of Filing of Proposed
Rule Change and Amendment No. 1 Thereto to Amend the Eligibility
Criteria for Components of an Index Underlying Investment Company
Units). The Commission subsequently approved generic criteria
applicable to listing and trading of Managed Fund Shares, including
exclusions for Derivative Securities Products and Index-Linked
Securities in Commentary .01(a)(1)(A) through (D), in Securities
Exchange Act Release No. 78397 (July 22, 2016), 81 FR 49320 (July
27, 2016) (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). See also, Amendment No. 7 to SR-NYSEArca-2015-110,
available at https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-9.pdf.
---------------------------------------------------------------------------
The Exchange notes that the Commission has previously approved
listing and trading of an issue of Managed Fund Shares that may invest
in equity securities that are non-exchange-traded securities of other
open-end investment company securities notwithstanding that the fund
would not meet the requirements of Commentary .01(a)(1)(A) through (E)
to Rule 8.600-E with respect to such fund's investments in such
securities.\36\ Thus, the Exchange believes that it is appropriate to
permit the Fund to invest in non-exchange-traded open-end management
investment company securities, as described above.
---------------------------------------------------------------------------
\36\ See, e.g., Securities Exchange Act Release No. 83319 (May
24, 2018) (SR-NYSEArca-2018-15) (Order Approving a Proposed Rule
Change, as Modified by Amendment No. 1 Thereto, to Continue Listing
and Trading Shares of the PGIM Ultra Short Bond ETF Under NYSE Arca
Rule 8.600-E).
---------------------------------------------------------------------------
Deviations from the generic requirements are necessary for the Fund
to achieve its investment objective in a manner that is cost-effective
and that maximizes investors' returns. Further, the proposed
alternative requirements are narrowly tailored to allow the Fund to
achieve its investment objective in manner that is consistent with the
principles of Section 6(b)(5) of the Act. As a result, it is in the
public interest to approve listing and trading of Shares of the Fund on
the Exchange pursuant to the requirements set forth herein.
The Exchange notes that, other than Commentary .01(a)(1), (a)(2),
(b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E, as described above,
the Fund's portfolio will meet all other requirements of Rule 8.600-E.
Availability of Information
The Fund's website (www.innovatoretfs.com) will include the
prospectus for the Fund that may be downloaded. The Fund's website will
include additional quantitative information updated on a daily basis
including, for the Fund, (1) daily trading volume, the prior business
day's reported closing price, NAV and midpoint of the bid/ask spread at
the time of calculation of such NAV (the ``Bid/Ask Price''),\37\ and a
calculation of the premium and discount of the Bid/Ask Price against
the NAV, and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Fund will disclose on its website the Disclosed Portfolio as defined in
NYSE Arca Rule 8.600-E(c)(2) that forms the basis for the Fund's
calculation of NAV at the end of the business day.\38\
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\37\ The Bid/Ask Price of the Fund's Shares will be determined
using the mid-point of the highest bid and the lowest offer on the
Exchange as of the time of calculation of the Fund's NAV. The
records relating to Bid/Ask Prices will be retained by the Fund and
its service providers.
\38\ Under accounting procedures followed by the Fund, trades
made on the prior business day (``T'') will be booked and reflected
in NAV on the current business day (``T+1''). Accordingly, the Fund
will be able to disclose at the beginning of the business day the
portfolio that will form the basis for the NAV calculation at the
end of the business day.
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On a daily basis, the Fund will disclose the information required
under NYSE Arca Rule 8.600-E(c)(2) to the extent applicable. The
website information will be publicly available at no charge.
In addition, a basket composition file, which includes the security
names and share quantities, if applicable, required to be delivered in
exchange for the Fund's Shares, together with estimates and actual cash
components, will be publicly disseminated daily prior to the opening of
the Exchange via the NSCC. The basket represents one Creation Unit of
the Fund. Authorized Participants may refer to the basket composition
file for information regarding Fixed Income Securities, and any other
instrument that may comprise the Fund's basket on a given day.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Fund's
Forms N-CSR and Forms N-SAR, filed twice a year. The Fund's SAI and
Shareholder Reports will be available free upon request from the Trust,
and those documents and the Form N-CSR, Form N-PX and Form N-SAR may be
viewed on-screen or downloaded from the Commission's website at
www.sec.gov.
Intra-day and closing price information regarding exchange-traded
options will be available from the exchange on which such instruments
are traded. Intra-day and closing price information regarding Fixed
Income Securities will be available from major market data vendors.
Price information relating to OTC options, forwards and swaps will be
available from major market data vendors. Intra-day price information
for exchange-traded derivative instruments will be available from the
applicable exchange and from major market data vendors. Intraday and
other price information for the Fixed Income Securities in which the
Fund will invest will be available through subscription services, such
as Bloomberg, Markit and Thomson Reuters, which can be accessed by
Authorized Participants and other market participants. Additionally,
the Trade Reporting and Compliance Engine (``TRACE'') of the Financial
Industry Regulatory Authority (``FINRA'') will be a source of price
information for corporate bonds to the extent transactions in such
securities are reported to TRACE.\39\ Trade price and
[[Page 63936]]
other information relating to municipal bonds is available through the
Municipal Securities Rulemaking Board's Electronic Municipal Market
Access (``EMMA'') system. Non-exchange-traded open-end investment
company securities are typically priced once each business day and
their prices will be available through the applicable fund's website or
from major market data vendors. Price information regarding U.S.
government securities, bank loans, Private ABS/MBS, cash equivalents
and short-term instruments with maturities of three months or more
generally may be obtained from brokers and dealers who make markets in
such securities or through nationally recognized pricing services
through subscription agreements. Information relating to Private ABS/
MBS is widely available from major market data vendors such as
Bloomberg.
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\39\ Broker-dealers that are FINRA member firms have an
obligation to report transactions in specified debt securities to
TRACE to the extent required under applicable FINRA rules.
Generally, such debt securities will have at issuance a maturity
that exceeds one calendar year. For Fixed Income Securities that are
not reported to TRACE, (i) intraday price quotations will generally
be available from broker-dealers and trading platforms (as
applicable) and (ii) price information will be available from feeds
from market data vendors, published or other public sources, or
online information services, as described above.
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Information regarding market price and trading volume of the
Shares, ETFs, ETNs, common stocks, preferred stocks, REITs, equity
securities issued upon conversion of fixed income convertible
securities, Work-Out Securities and closed-end funds will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Quotation and last sale information for the Shares, ETFs, ETNs,
closed-end funds, REITs, U.S. exchange-traded common stocks, U.S.
exchange-traded preferred stocks, U.S. exchange-traded equity
securities issued upon conversion of fixed income convertible
securities, and U.S. exchange-traded Work-Out Securities will be
available via the Consolidated Tape Association (``CTA'') high-speed
line. Exchange-traded options quotation and last sale information for
options cleared via the Options Clearing Corporation (``OCC'') are
available via the Options Price Reporting Authority (``OPRA''). In
addition, the Portfolio Indicative Value (``PIV''), as defined in NYSE
Arca Rule 8.600-E(c)(3), will be widely disseminated by one or more
major market data vendors at least every 15 seconds during the Core
Trading Session.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\40\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Trading in the Fund's Shares also
will be subject to Rule 8.600-E(d)(2)(D) (``Trading Halts'').
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\40\ See NYSE Arca Rule 7.12-E.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m., E.T. in accordance
with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions).
The Exchange has appropriate rules to facilitate transactions in the
Shares during all trading sessions. As provided in NYSE Arca Rule 7.6-
E, the minimum price variation (``MPV'') for quoting and entry of
orders in equity securities traded on the NYSE Arca Marketplace is
$0.01, with the exception of securities that are priced less than $1.00
for which the MPV for order entry is $0.0001.
With the exception of the requirements of Commentary .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E as described
above in ``Application of Generic Listing Requirements,'' the Shares of
the Fund will conform to the initial and continued listing criteria
under NYSE Arca Rule 8.600-E. Consistent with NYSE Arca Rule 8.600-
E(d)(2)(B)(ii), the Adviser and Sub-Adviser will implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Fund's portfolio.
The Exchange represents that, for initial and continued listing,
the Fund will be in compliance with Rule 10A-3 \41\ under the Act, as
provided by NYSE Arca Rule 5.3-E. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time. The
Fund's investments will be consistent with its investment goal and will
not be used to provide multiple returns of a benchmark or to produce
leveraged returns.
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\41\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by FINRA on behalf
of the Exchange, or by regulatory staff of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws. The Exchange represents that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.\42\
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\42\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, certain
exchange-traded options and certain exchange-traded futures, ETFs,
ETNs, closed-end funds, certain common stocks, certain preferred
stocks, certain REITs, certain equity securities issued upon conversion
of fixed income convertible securities, and certain Work-Out Securities
with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on
behalf of the Exchange, or both, may obtain trading information
regarding trading in such securities and financial instruments from
such markets and other entities.\43\ In addition, the Exchange may
obtain information regarding trading in such securities and financial
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a CSSA. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by the Fund reported to
FINRA's TRACE. FINRA also can access data obtained
[[Page 63937]]
from the Municipal Securities Rulemaking Board relating to municipal
bond trading activity for surveillance purposes in connection with
trading in the Shares.
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\43\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement (``CSSA'').
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio or reference assets, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
of the Fund on the Exchange.
The issuer must notify the Exchange of any failure by the Fund 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 the
Fund is not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-
E(m).
Information Bulletin
The Exchange will inform its Equity Trading Permit Holders in an
Information Bulletin (``Bulletin'') of the special characteristics and
risks associated with trading the Shares. Specifically, the Bulletin
will discuss the following: (1) The procedures for purchases and
redemptions of Shares in Creation Unit aggregations (and that Shares
are not individually redeemable); (2) NYSE Arca Rule 9.2-E(a), which
imposes a duty of due diligence on its Equity Trading Permit Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (3) the risks involved in trading the Shares during the
Early and Late Trading Sessions when an updated PIV will not be
calculated or publicly disseminated; (4) how information regarding the
PIV and the Disclosed Portfolio is disseminated; (5) the requirement
that Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \44\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\44\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares are listed and traded on the Exchange pursuant to the initial
and continued listing criteria in NYSE Arca Rule 8.600-E. The Exchange
has in place surveillance procedures that are adequate to properly
monitor trading in the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws. The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, certain
exchange-traded options and certain exchange-traded futures, ETFs,
ETNs, closed-end funds, certain common stocks, certain preferred
stocks, certain REITs, certain equity securities issued upon conversion
of fixed income convertible securities and certain Work-Out Securities
with other markets and other entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in such securities and financial
instruments from such markets and other entities. The Exchange may
obtain information regarding trading in such securities and financial
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a CSSA. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by the Fund reported to TRACE.
FINRA also can access data obtained from the Municipal Securities
Rulemaking Board relating to municipal bond trading activity for
surveillance purposes in connection with trading in the Shares.
The Adviser and Sub-Adviser are not registered as broker-dealers.
The Adviser is not affiliated with a broker-dealer. The Sub-Adviser is
affiliated with a broker-dealer and has implemented and will maintain a
fire wall with respect to its broker-dealer affiliate regarding access
to information concerning the composition and/or changes to the
portfolio.
The Exchange notes that, other than Commentary .01(a)(1), (a)(2),
(b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E, as described above,
the Fund's portfolio will meet all other requirements of Rule 8.600-E.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information will be publicly available regarding the Fund and the
Shares, thereby promoting market transparency. Quotation and last sale
information for the Shares, ETFs, ETNs, closed-end funds, certain
REITs, certain common stocks, certain preferred stocks, certain equity
securities issued upon conversion of fixed income convertible
securities, and certain Work-Out Securities will be available via the
CTA high-speed line. Exchange-traded options quotation and last sale
information for options cleared via the OCC are available via OPRA. The
Exchange will inform its Equity Trading Permit Holders in an
Information Bulletin of the special characteristics and risks
associated with trading the Shares. Trading in Shares of the Fund will
be halted if the circuit breaker parameters in NYSE Arca Rule 7.12-E
have been reached or because of market conditions or for reasons that,
in the view of the Exchange, make trading in the Shares inadvisable.
Trading in the Shares will be subject to NYSE Arca Rule 8.600-
E(d)(2)(D), which sets forth circumstances under which Shares of the
Fund may be halted. In addition, as noted above, investors will have
ready access to information regarding the Fund's holdings, NAV, the
PIV, the Disclosed Portfolio, and quotation and last sale information
for the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
generally will principally hold fixed income securities and that will
enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the
[[Page 63938]]
Shares and may obtain information via ISG from other exchanges that are
members of ISG or with which the Exchange has entered into a CSSA.
Deviations from the generic requirements, as described above, are
necessary for the Fund to achieve its investment objective in a manner
that is cost-effective and that maximizes investors' returns. Further,
the proposed alternative requirements are narrowly tailored to allow
the Fund to achieve its investment objective in a manner that is
consistent with the principles of Section 6(b)(5) of the Act. As a
result, it is in the public interest to approve listing and trading of
Shares of the Fund on the Exchange pursuant to the requirements set
forth herein.
As noted above, the Fund will not comply with the requirements set
forth in Commentary .01(a)(1) and (a)(2) to NYSE Arca Rule 8.600-E with
respect to the Fund's investments in equity securities. Instead, the
Exchange proposes that (i) the Fund's investments in equity securities
will meet the requirements of Commentary .01(a) with the exception of
Commentary .01(a)(1)(C) and .01(a)(1)(D) (with respect to U.S.
Component Stocks) and Commentary .01(a)(2)(C) and .01(a)(2)(D) (with
respect to Non-U.S. Component Stocks).\45\ The Exchange believes it is
appropriate and in the public interest to approve listing and trading
of Shares of the Fund notwithstanding that the Fund's holdings in such
equity securities do not comply with the requirements set forth in
Commentary .01(a)(1) and (a)(2) to NYSE Arca Rule 8.600-E in that any
Fund investment in exchange-traded common stocks, preferred stocks,
REITs, ETFs, ETNs, U.S. exchange-traded closed-end funds, exchange-
traded equity securities issued upon conversion of fixed income
convertible securities, and exchange-traded Work Out Securities would
provide for enhanced diversification of the Fund's portfolio. Such
securities would be Non-Principal Investments, not exceeding 20% of the
Fund's net assets in the aggregate.
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\45\ See notes 23 and 24, supra.
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The Exchange believes that it is appropriate and in the public
interest to approve listing and trading of Shares of the Fund on the
Exchange notwithstanding that the Fund would not meet the requirements
of Commentary .01(b)(1) to Rule 8.600-E in that the Fund's investments
in Municipal Securities will be well-diversified.
The Exchange believes that, notwithstanding that the Fund's
portfolio may not satisfy Commentary .01(b)(1) to Rule 8.600-E, the
Fund's portfolio will not be susceptible to manipulation. As noted
above, the Fund will not comply with the requirements set forth in
Commentary .01(b)(1) to NYSE Arca Rule 8.600-E with respect to the
Fund's investments in Fixed Income Securities, including Municipal
Securities. The Fund may not invest more than 5% of its total assets
(determined at the time of purchase) in any one Fixed Income Security
(excluding U.S. government securities and TIPS) on a per CUSIP basis.
In addition, at least 50% of the weight of the Fund's portfolio would
continue to be subject to a substantial minimum (i.e., $50 million)
original principal amount outstanding. These conditions would provide
the Fund with greater ability to select from a broad range of Fixed
Income Securities, as described above, that would support the Fund's
investment goal.
With respect to the Fund's investments in Municipal Securities,
such securities will be diversified in that no single Municipal
Securities issuer will account for more than 10% of the weight of the
Fund's portfolio; no individual Municipal Security will account for
more than 5% of the weight of the Fund's portfolio; and the Fund will
limit its investments in Municipal Securities of any one state or U.S.
territory to 20% of the Fund's total assets.
The Exchange believes it is appropriate and in the public interest
to approve listing and trading of Shares of the Fund notwithstanding
that the Fund's holdings in such Private ABS/MBS do not comply with the
requirements set forth in Commentary .01(b)(4) to NYSE Arca Rule 8.600-
E because certain Private ABS/MBS cannot satisfy the criteria in
Commentary .01(b)(4).\46\ Instead, the Exchange proposes that the
Fund's investments in Fixed Income Securities other than Private ABS/
MBS will be required to comply with the requirements of Commentary
.01(b)(4). As noted above, the Fund may not invest more than 5% of its
total assets (determined at the time of purchase) in any one Fixed
Income Security (excluding U.S. government securities and TIPS) on a
per CUSIP basis. The Exchange believes this limitation would provide
additional diversification to the Fund's investments in Private ABS/
MBS, and reduce concerns that the Fund's investment in such securities
would be readily susceptible to market manipulation.
---------------------------------------------------------------------------
\46\ See note 26, supra.
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The Exchange believes it is appropriate and in the public interest
to approve listing and trading of Shares of the Fund notwithstanding
that the Fund's holdings in such Private ABS/MBS do not comply with the
requirements set forth in Commentary .01(b)(5) to NYSE Arca Rule 8.600-
E. Instead, the Exchange proposes that, in order to enable the
portfolio to be more diversified and provide the Fund with an
opportunity to earn higher returns, the Fund may invest up to 50% of
its total assets in the aggregate in Private ABS/MBS, provided that the
Fund (1) may not invest more than 30% of its total assets in non-agency
RMBS; (2) may not invest more than 25% of its total assets in non-
agency CMBS; and (3) may not invest more than 25% of its total assets
in non-agency ABS. In addition, the Fund's investment in Private ABS/
MBS is expected to provide the Fund with benefits associated with
increased diversification, as Private ABS/MBS investments tend to be
less correlated to interest rates than many other fixed income
securities.
In addition, as noted above, the Fund may not invest more than 5%
of its total assets (determined at the time of purchase) in any one
Fixed Income Security (excluding U.S. government securities and TIPS)
on a per CUSIP basis.\47\ The Exchange believes these limitations would
provide additional diversification to the Fund's Private ABS/MBS
investments and reduce concerns that the Fund's investment in such
securities would be readily susceptible to market manipulation.
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\47\ As noted above, the Fund's holdings in derivative
instruments for hedging purposes would be excluded from the
determination of compliance with this 5% limitation. The total gross
notional value of the Fund's holdings in derivative instruments used
to gain exposure to a specific asset is limited to 5% of the Fund's
total assets (determined at the time of purchase).
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As noted above, the Fund's portfolio will not comply with the
requirements set forth in Commentary .01(e) to NYSE Arca Rule 8.600-E.
The Exchange proposes that up to 25% of the Fund's assets (calculated
as the aggregate gross notional value) may be invested in OTC
derivatives that are used to reduce currency, interest rate or credit
risk arising from the Fund's investments (that is, ``hedge''), and that
the Fund's investments in OTC derivatives other than OTC derivatives
used to hedge the Fund's portfolio against currency, interest rate or
credit risk will be limited to 20% of the assets in the Fund's
portfolio, calculated as the aggregate gross notional value of such OTC
[[Page 63939]]
derivatives. As noted above, the Fund will not use derivative
instruments to gain exposure to Private ABS/MBS, and derivative
instruments linked to such securities will be used for hedging purposes
only.
The Exchange believes it is appropriate and in the public interest
to approve listing and trading of Shares of the Fund notwithstanding
that the Fund's holdings in OTC derivatives do not comply with the
requirements set forth in Commentary .01(e) to NYSE Arca Rule 8.600-E
in that, depending on market conditions, it may be critical that the
Fund be able to utilize available OTC derivatives to attempt to reduce
impact of currency, interest rate or credit fluctuations on Fund
assets. Therefore, the Exchange believes it is appropriate to apply a
limit of up to 25% of the Fund's assets to the Fund's investments in
OTC derivatives (calculated as the aggregate gross notional value of
such OTC derivatives), including forwards, options and swaps, that are
used for hedging purposes, as described above.
The Adviser and Sub-Adviser represent that OTC derivatives can be
tailored to hedge the specific risk arising from the Fund's investments
and frequently may be a more efficient hedging vehicle than listed
derivatives. For example, the Fund could obtain an OTC foreign currency
derivative in a notional amount that exactly matches the notional
amount of the Fund's investments. If the Fund were limited to investing
up to 20% of assets in OTC derivatives, the Fund might have to ``over
hedge'' or ``under hedge'' if round lot sizes in listed derivatives
were not available. In addition, for example, an OTC CDX option can be
structured to provide protection tailored to the Fund's credit exposure
and can be a more efficient way to hedge credit risk with respect to
specific exposures than listed derivatives. Similarly, OTC interest
rate derivatives can be more effective hedges of interest rate exposure
because they can be customized to match the basis risk arising from the
term of the investments held by the Fund.
Because the Fund, in furtherance of its investment objective, may
invest a substantial percentage of its investments in foreign currency
denominated Fixed Income Securities, the 20% limit in Commentary .01(e)
to Rule 8.600-E could result in the Fund being unable to fully pursue
its investment objective while attempting to sufficiently mitigate
investment risks. The inability of the Fund to adequately hedge its
holdings would effectively limit the Fund's ability to invest in
certain instruments, or could expose the Fund to additional investment
risk. For example, if the Fund's assets (on a gross notional value
basis) were $100 million and no listed derivative were suitable to
hedge the Fund's risk, under the generic standards the Fund would be
limited to holding up to $20 million gross notional value in OTC
derivatives ($100 million * 20%). Accordingly, the maximum amount the
Fund would be able to invest in foreign currency denominated Fixed
Income Securities while remaining adequately hedged would be $20
million. The Fund then would hold $60 million in assets that could not
be hedged, other than with listed derivatives, which, as noted above,
might not be sufficiently tailored to the specific instruments to be
hedged.
In addition, by applying the 20% limitation in Commentary .01(e) to
Rule 8.600-E, the Fund would be less able to protect its holdings from
more than one risk simultaneously. For example, if the Fund's assets
(on a gross notional basis) were $100 million and the Fund held $20
million in foreign currency denominated Fixed Income Instruments with
two types of risks (e.g., currency and credit risk) which could not be
hedged using listed derivatives, the Fund would be faced with the
choice of either holding $20 million aggregate gross notional value in
OTC derivatives to mitigate one of the risks while passing the other
risk to its shareholders, or, for example, holding $10 million
aggregate gross notional value in OTC derivatives on each of the risks
while passing the remaining portion of each risk to the Fund's
shareholders.
The Adviser and Sub-Adviser believe that it is in the best interest
of the Fund's shareholders for the Fund to be allowed to reduce the
currency, interest rate or credit risk arising from the Fund's
investments using the most efficient financial instrument. While
certain risks can be hedged via listed derivatives, OTC derivatives
(such as forwards, options and swaps) can be customized to hedge
against precise risks. Accordingly, the Adviser and Sub-Adviser believe
that OTC derivatives may frequently be a more efficient hedging vehicle
than listed derivatives. Therefore, the Exchange believes that
increasing the percentage limit in Commentary .01(e), as described
above, to the Fund's investments in OTC derivatives, including
forwards, options and swaps, that are used specifically for hedging
purposes would help protect investors and the public interest.
As noted above, the Fund's portfolio will not meet the requirements
of Commentary .01(a)(1)(A) through (E) to Rule 8.600-E with respect to
the Fund's investments in non-exchange-traded securities of open-end
investment company securities, and, with respect to the Fund's holdings
of OTC equity securities issued upon conversion of fixed income
convertible securities and OTC Work Out Securities, would not meet the
requirements of Commentary .01(a)(1)(A) through (E) and Commentary
.01(a)(2)(A) through (E) to Rule 8.600-E. The Exchange believes that it
is appropriate and in the public interest to approve listing and
trading of Shares of the Fund on the Exchange notwithstanding that the
Fund would not meet the requirements of Commentary .01(a)(1)(A) through
(E) to Rule 8.600-E with respect to the Fund's investments in non-
exchange-traded securities of open-end investment company securities,
and notwithstanding that the Fund's holdings of OTC equity securities
issued upon conversion of fixed income convertible securities and OTC
Work Out Securities would not meet the requirements of Commentary
.01(a)(1)(A) through (E) and Commentary .01(a)(2)(A) through (E) to
Rule 8.600-E. Investments in non-exchange-traded securities of open-end
investment company securities will not be principal investments of the
Fund.\48\ Such investments, which may include mutual funds that invest,
for example, principally in fixed income securities, would be utilized
to help the Fund meet its investment objective and to equitize cash in
the short term.
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\48\ See note 33, supra.
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With respect to any Fund holdings of exchange-traded or OTC equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities, such securities will not exceed 10%
and 5%, respectively, of the Fund's total assets. The Adviser and Sub-
Adviser represent that the Fund generally will not actively invest in
equity securities issued upon conversion of fixed income convertible
securities or Work Out Securities, but may, at times, receive a
distribution of such securities in connection with the Fund's holdings
in other securities. Therefore, the Fund's holdings in equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities generally would not be acquired as
the result of the Fund's voluntary investment decisions.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
shares of an additional type of
[[Page 63940]]
actively-managed exchange-traded product that will enhance competition
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded product that
generally will principally hold fixed income securities and that will
enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-78 on the subject line.
Paper Comments
Send paper comments in triplicate to: Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-78. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2019-78 and should be submitted
on or before December 10, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24973 Filed 11-18-19; 8:45 am]
BILLING CODE 8011-01-P
