[Federal Register Volume 76, Number 196 (Tuesday, October 11, 2011)]
[Notices]
[Pages 62873-62876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-26135]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65468; File No. SR-NYSEArca-2011-51]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change To List and Trade Managed Fund Shares
of TrimTabs Float Shrink ETF Under NYSE Arca Equities Rule 8.600
October 3, 2011.
I. Introduction
On July 29, 2011, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of TrimTabs Float Shrink ETF
(``Fund'') under NYSE Arca Equities Rule 8.600. The proposed rule
change was published for comment in the Federal Register on August 18,
[[Page 62874]]
2011.\3\ The Commission received no comments on the proposal [CONFIRM].
This order grants approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 65126 (August 12,
2011), 76 FR 51442 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade the Shares of the Fund
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing
and trading of Managed Fund Shares on the Exchange. The Shares will be
offered by AdvisorShares Trust (``Trust''), a statutory trust organized
under the laws of the State of Delaware and registered with the
Commission as an open-end management investment company.\4\ The
investment adviser to the Fund is AdvisorShares Investments, LLC
(``Adviser''). Trim Tabs Asset Management, LLC (``TrimTabs'' or ``Sub-
Adviser'') is the Fund's sub-adviser and provides day-to-day portfolio
management of the Fund. Foreside Fund Services, LLC is the principal
underwriter and distributor of the Fund's Shares. The Exchange states
that neither the Adviser nor the Sub-Adviser is affiliated with a
broker-dealer.\5\
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\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). On January 19, 2011, the Trust filed with the
Commission Form N-1A under the Securities Act of 1933 (15 U.S.C.
77a) and under the 1940 Act relating to the Fund (File Nos. 333-
157876 and 811-22110) (``Registration Statement''). In addition, the
Commission has issued an order granting certain exemptive relief to
the Trust under the1940 Act. See Investment Company Act Release No.
29291 (May 28, 2010) (File No. 812-13677) (``Exemptive Order'').
\5\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The
Exchange represents that in the event (a) The Adviser or the Sub-
Adviser becomes newly affiliated with a broker-dealer, or (b) any
new adviser or sub-adviser becomes affiliated with a broker-dealer,
it will implement a fire wall with respect to such broker-dealer
regarding access to information concerning the composition and/or
changes to the portfolio, and will be subject to procedures designed
to prevent the use and dissemination of material non-public
information regarding such portfolio.
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Description of the Fund
The Fund is an actively-managed exchange-traded fund that seeks to
achieve its investment objective primarily by investing in the broad
U.S. equity market, as represented by the Russell 3000[supreg] Index
(``Index''). The Fund seeks to achieve this goal by investing in stocks
with liquidity and fundamental characteristics that are historically
associated with superior long-term performance. The Sub-Adviser
designed the following quantitative stock selection rules to make
allocation decisions and to protect against dramatic over or under
weighting of individual securities in the Fund's portfolio.
The Sub-Adviser will rank stocks in the Index based on the
following criteria:
I. The decrease in their outstanding shares over approximately the
past 120 days (``float shrink'');
II. The increase in free cash flow (the money available to the
company that is not used to pay for its daily operations) over
approximately the past 120 days; and
III. The decrease in leverage over approximately the past 120 days.
Leverage is measured as the ratio of total liabilities to total assets.
The Sub-Adviser will use the relative decrease in leverage, rather than
amount of leverage itself, as a criterion because the degree of
leverage varies across industries.
The top decile of each respective ranking will consist of the
stocks of the companies with (I) the strongest reduction in shares
outstanding, (II) the strongest growth in free cash flow, and (III) the
largest decrease in leverage, respectively.
Stock Selection Algorithm
The Sub-Adviser will use an algorithm to give a relative weight to
the three decile rankings, combining them in a single ranking (combined
ranking). The algorithm will place a higher weight on the float shrink
ranking, followed by the free cash flow ranking, followed by the
leverage ranking. The Fund, under normal circumstances,\6\ will invest
in 80 to 120 stocks from among the top 10% of stocks in the combined
ranking. The Sub-Adviser's investment process is quantitative. The Sub-
Adviser designed the following stock selection rules, which involve
liquidity, weighting, rebalancing, and trading considerations:
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\6\ The term ``under normal market circumstances'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the fixed income markets or the financial markets
generally; operational issues causing dissemination of inaccurate
market information; or force majeure type events such as systems
failure, natural or man-made disaster, act of God, armed conflict,
act of terrorism, riot or labor disruption or any similar
intervening circumstance.
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Liquidity Screening
Before trading, the Fund will estimate the liquidity impact of its
suggested trades. Specifically, the Fund will avoid stocks whose
average trading volume over the past 30 days would be less than 50% of
the size of the Fund's proposed trades. As a result, the Fund will not
invest in stocks that meet its investment criteria in terms of float
shrink, free cash flow growth, and leverage if their trading volume is
below such levels. As such, the Fund will not invest in stocks that it
deems to be illiquid.
Weighting and Sector Allocation
Although the Fund initially will invest an equal dollar amount in
the stocks that meet its investment criteria, the Fund is not market
capitalization weighted. Thus, the Fund will overweight small-cap
stocks and mid-cap stocks relative to traditional, market cap weighted
indices.\7\
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\7\ Mid-sized companies may be more volatile than large-
capitalization companies, and returns on investments in stocks of
mid-sized companies could trail the returns on investments in stocks
of larger or smaller companies. Stock prices of small capitalization
companies may be more volatile than those of larger companies and,
therefore, the Fund's Share price may be more volatile than those of
funds that invest a larger percentage of their assets in stocks
issued by larger-capitalization companies.
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The relative weights of the sectors in the Fund may vary
significantly from those of traditional, market cap weighted indices.
Stocks with favorable liquidity characteristics may be concentrated in
certain sectors. Sector concentration might increase the Fund's
volatility over the short term. The Fund will not correct these sector
effects because the Sub-Adviser's research shows that historically they
are a source of long-term outperformance.
Other Investments
To respond to adverse market, economic, political, or other
conditions, the Fund may invest 100% of its total assets, without
limitation, in short-term, high-quality debt securities and money
market instruments. The Fund may invest in these instruments for
extended periods, depending on the Sub-Adviser's assessment of market
conditions. These debt securities and money market instruments include
shares of other mutual funds, commercial paper, certificates of
deposit, bankers' acceptances, U.S. Government securities, including
U.S. Treasury zero-coupon bonds, repurchase and reverse repurchase
agreements,\8\ and bonds that are BBB or higher.
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\8\ The Fund may enter into repurchase agreements with financial
institutions, which may be deemed to be loans. The Fund follows
certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-established
financial institutions whose condition will be continually monitored
by the Sub-Adviser. The Fund may enter into reverse repurchase
agreements without limit as part of the Fund's investment strategy.
Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price.
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The Fund will seek to qualify for treatment as a Regulated
Investment Company under Subchapter M of the
[[Page 62875]]
Internal Revenue Code. The Fund may not (i) With respect to 75% of its
total assets, purchase securities of any issuer (except securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or shares of investment companies) if, as a result,
more than 5% of its total assets would be invested in the securities of
such issuer; or (ii) acquire more than 10% of the outstanding voting
securities of any one issuer. In addition, the Fund may not invest 25%
or more of its total assets in the securities of one or more issuers
conducting their principal business activities in the same industry or
group of industries (this limitation does not apply to investments in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or shares of investment companies). The Fund will
not invest 25% or more of its total assets in any investment company
that so concentrates.
Pursuant to the terms of the Exemptive Order, the Fund will not
invest in options contracts, futures contracts or swap agreements. The
Fund's investments will be consistent with the Fund's investment
objective and will not be used to enhance leverage. The Fund will not
purchase illiquid securities. In addition, the Fund will not invest in
non-U.S.-registered equity securities, loan participation agreements,
and Rule 144A securities.
Additional information regarding the Trust, Fund, Shares, Fund's
investment strategies, risks, creation and redemption procedures, fees,
portfolio holdings and disclosure policies, distributions and taxes,
availability of information, trading rules and halts, and surveillance
procedures, among other things, can be found in the Notice and the
Registration Statement, as applicable.\9\
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\9\ See Notice and Registration Statement, supra notes 3 and 4,
respectively.
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III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act and the rules and regulations thereunder applicable to a national
securities exchange.\10\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\11\ which
requires, among other things, that the Exchange's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission notes that
the Shares must comply with the requirements of NYSE Arca Equities Rule
8.600 to be listed and traded on the Exchange.
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\10\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\11\ 17 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\12\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated
Tape Association high-speed line. In addition, the Portfolio Indicative
Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be
updated and disseminated by one or more major market data vendors at
least every 15 seconds during the Core Trading Session on the Exchange.
On each business day, before commencement of trading in Shares in the
Core Trading Session on the Exchange, the Fund will disclose on its Web
site the Disclosed Portfolio, as defined in NYSE Arca Equities Rule
8.600(c)(2), that will form the basis for the Fund's calculation of the
net asset value (``NAV'') at the end of the business day.\13\ The Fund
will calculate NAV once each business day as of the regularly scheduled
close of trading on the Exchange (normally 4 p.m. Eastern Time). In
addition, information regarding market price and trading volume of the
Shares is and will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services, and the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. The intra-day, closing, and settlement prices of
the portfolio securities are also readily available from the national
securities exchanges trading such securities, automated quotation
systems, published or other public sources, or on-line information
services such as Bloomberg or Reuters. The Fund's website will also
include a form of the prospectus for the Fund, information relating to
NAV, and other quantitative and trading information.
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\12\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\13\ On a daily basis, the Adviser will disclose on the Fund's
Web site for each portfolio security or other financial instrument
of the Fund the following information: Ticker symbol (if
applicable), name of security or financial instrument, number of
shares or dollar value of financial instruments held in the
portfolio, and percentage weighting of the security or financial
instrument in the portfolio. The Web site information will be
publicly available at no charge.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes 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.\14\
In addition, the Exchange will halt trading in the Shares under the
specific circumstances set forth in NYSE Arca Equities Rule
8.600(d)(2)(D), and may halt trading in the Shares if trading is not
occurring in the securities and/or the financial instruments comprising
the Disclosed Portfolio of the Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\15\ The Exchange will consider the suspension of
trading in or removal from listing of the Shares if the Portfolio
Indicative Value is no longer calculated or available or the Disclosed
Portfolio is not made available to all market participants at the same
time.\16\ The Exchange represents that neither the Adviser nor the Sub-
Adviser is affiliated with a broker-dealer.\17\ The
[[Page 62876]]
Commission notes that the Reporting Authority that provides the
Disclosed Portfolio must implement and maintain, or be subject to,
procedures designed to prevent the use and dissemination of material
non-public information regarding the actual components of the
portfolio.\18\
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\14\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\15\ With respect to trading halts, the Exchange may consider
other relevant factors in exercising its discretion to halt or
suspend trading in the Shares of the Fund. Trading in Shares of the
Fund will be halted if the circuit breaker parameters in NYSE Arca
Equities Rule 7.12 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.
\16\ See NYSE Arca Equities Rule 8.600(d)(2)(C)(ii).
\17\ See supra note 5 and accompanying text. The Commission
notes that an investment adviser to an open-end fund is required to
be registered under the Investment Advisers Act of 1940 (``Advisers
Act''). As a result, the Adviser and Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) Adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) Above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
\18\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
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The Exchange further represents that the Shares are deemed to be
equity securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin
of the special characteristics and risks associated with trading the
Shares. Specifically, the Information Bulletin will discuss the
following: (a) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (and that Shares are not individually
redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (d) how information regarding the
Portfolio Indicative Value is disseminated; (e) the requirement that
ETP Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (f) trading information.
(5) For initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 under the Act,\19\ as provided by NYSE Arca
Equities Rule 5.3.
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\19\ See 17 CFR 240.10A-3.
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(6) The Fund will not invest in non-U.S. equity securities, loan
participation agreements, and Rule 144A securities. In addition,
pursuant to the terms of the Exemptive Order, the Fund will not invest
in options contracts, futures contracts, or swap agreements. The Fund's
investments will be consistent with the Fund's investment objective and
will not be used to enhance leverage. The Fund will not purchase
illiquid securities.
(7) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.
This approval order is based on the Exchange's representations.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \20\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\20\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-NYSEArca-2011-51) be, and it
hereby is, approved.
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\21\ 15 U.S.C. 78s(b)(2).
\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
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pursuant to delegated authority.\22\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26135 Filed 10-7-11; 8:45 am]
BILLING CODE 8011-01-P