[Federal Register Volume 77, Number 202 (Thursday, October 18, 2012)]
[Notices]
[Pages 64153-64160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25598]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68043; File No. SR-NYSEArca-2012-108]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change and Amendment No. 1 Thereto Relating to the
Listing and Trading of Shares of the NYSE Arca U.S. Equity Synthetic
Reverse Convertible Index Fund Under NYSE Arca Equities Rule 5.2(j)(3)
October 12, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that, on September 27, 2012, NYSE Arca, Inc.
(``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. On October 2, 2012, the Exchange submitted Amendment No. 1 to
the proposed rule change.\3\ The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange amended the filing to
specify that a list of components of the Index (as defined below),
with percentage weightings, will be available on the Exchange's Web
site, and that the Exchange may halt trading in the Shares (as
defined below) if the Index value, or the value of the components of
the Index, is not available or not disseminated as required.
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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
issue under Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3)
(``Investment Company Units''): NYSE Arca U.S. Equity Synthetic Reverse
Convertible Index Fund. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund
(``Fund'') under Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3),
which governs the listing and trading of Investment Company Units.\4\
The Shares will be issued by the ALPS ETF Trust (``Trust''). ALPS
Advisors, Inc. will be the Fund's investment adviser (``Adviser''), and
Rich Investment Solutions, LLC, will be the Fund's investment sub-
adviser (``Sub-Adviser'').\5\ The Bank of New York Mellon (``BNY'')
will serve as custodian, Fund accounting agent, and transfer agent for
the Fund. ALPS Distributors, Inc. will be the Fund's distributor
(``Distributor'').\6\
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\4\ NYSE Arca Equities Rule 5.2(j)(3)(A) provides that an
Investment Company Unit is a security that represents an interest in
a registered investment company that holds securities comprising, or
otherwise based on or representing an interest in, an index or
portfolio of securities (or holds securities in another registered
investment company that holds securities comprising, or otherwise
based on or representing an interest in, an index or portfolio of
securities).
\5\ 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.
\6\ The Trust is registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1) (``1940 Act''). On June 22, 2012, the Trust
filed with the Commission an amendment to its registration statement
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund (File Nos. 333-148826 and
811-22175) (``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 granting certain exemptive relief to the Trust under the 1940
Act. See Investment Company Act Release No. 812-13430 (May 1, 2008)
(``Exemptive Order'').
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The Adviser is affiliated with a broker-dealer and will implement
and maintain procedures designed to prevent the use and dissemination
of material, non-public information regarding the Fund's portfolio. The
Sub-Adviser is not affiliated with a broker-dealer. In the event (a)
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 and maintain procedures designed to
prevent the use and dissemination of material, non-public information
regarding the Fund's portfolio.
NYSE Arca will be the ``Index Provider'' for the Fund. NYSE Arca is
not affiliated with the Trust, the Adviser, the Sub-Adviser, or the
Distributor. NYSE Arca is affiliated with a broker-dealer and will
implement a fire wall and maintain procedures designed to prevent the
use and dissemination of material, non-public information regarding the
Index.
[[Page 64154]]
Description of the Fund
According to the Registration Statement, the Fund will seek
investment results that correspond generally to the performance, before
the Fund's fees and expenses, of the NYSE Arca U.S. Equity Synthetic
Reverse Convertible Index (``Index''). The Index reflects the
performance of a portfolio consisting of short over-the-counter
(``OTC'') put options that have been written on 20 of the most volatile
U.S. stocks that also have market capitalization of at least $5
billion.
In seeking to replicate, before expenses, the performance of the
Index, the Fund will generally sell (i.e., write) 90-day OTC ``down and
in'' put options, as described below, in proportion to their weightings
in the Index on economic terms which mirror those of the Index. Each
option written by the Fund will be covered through investments in three
month Treasury bills (``T-bills'') at least equal to the Fund's maximum
liability under the option (i.e., the strike price). The Sub-Adviser
will seek a correlation over time of 0.95 or better between the Fund's
performance and the performance of the Index. A figure of 1.00 would
represent perfect correlation.\7\
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\7\ According to the Registration Statement, while the Fund will
not invest in traditional reverse convertible securities (i.e.,
those which convert into the underlying stock), the down and in put
options written by the Fund will have the effect of exposing the
Fund to the return of reverse convertible securities (based on
equity securities) as if the Fund owned such reverse convertible
securities directly.
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Index Methodology and Construction
According to the Registration Statement, the Index measures the
return of a hypothetical portfolio consisting of OTC put options which
have been written on each of 20 stocks and a cash position calculated
as described below. The 20 stocks on which options will be written are
those 20 stocks from a selection of the largest capitalized (over $5
billion in market capitalization) stocks which also have listed options
and which have the highest volatility, as determined by the Index
Provider. These stocks will be NMS stocks as defined in Rule 600 of
Regulation NMS under the Exchange Act.\8\
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\8\ Terms relating to the Trust, the Fund, and the Shares
referred to, but not defined, herein are defined in the Registration
Statement.
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The options are of the type known as ``down and in'' put options. A
down and in option is a contract that becomes a typical option (i.e.,
the option ``knocks in'' at a predetermined strike price) once the
underlying stock declines to a specified price (``barrier price'').
These types of options are found in ``reverse convertible'' securities,
which convert into the underlying stock (or settle in cash) only upon a
decline in the value of the underlying stock rather than a rise (as is
the case with typical convertible instruments).
According to the Registration Statement, each option included in
the Index is a ``European-style'' option (i.e., an option which can
only be exercised at its expiration) with a 90-day term. The strike
prices of the option positions included in the Index are determined
based on the closing prices of the options' underlying stocks as of the
beginning of each 90-day period. The barrier price of each such option
is 80% of the strike price. At the expiration of each 90-day period, if
an underlying stock closes at or below its respective barrier price, a
cash settlement payment in an amount equal to the difference between
the strike price and the closing price of the stock is deemed to be
made, and the Index value is correspondingly reduced. If the underlying
stock does not close at or below the barrier price, then the option
expires worthless and the entire amount of the premium payment is
retained within the Index.
The components of the Index will be OTC down and in puts written on
20 equally weighted stocks selected based on the following screening
parameters:
(1) U.S. listing of U.S. companies;
(2) Publicly listed and traded options available;
(3) Listed market capitalization greater than $5 billion;
(4) Top 20 stocks when ranked by 3-month implied volatility;
(5) The underlying company equity securities will have a minimum
trading volume of at least 50 million shares for the preceding six
months; and
(6) Underlying company equity securities will have a minimum
average daily trading volume of at least one million shares and a
minimum average daily trading value of at least $10 million for the
preceding six months.
The selection of the twenty underlying stocks will occur each
quarter (March, June, September, and December) two days prior to the
third Friday of the month, in line with option expiration for listed
options. The selection of the twenty underlying stocks will not,
however, be limited to those with listed options expiring in March,
June, September, or December.
The Index value will reflect a cash amount invested in on-the-run
3-month T-Bills plus the premium collected on the short position in the
20 down-and-in puts written by the Index each quarter. The notional
amount of each of the 20 down-and-in puts will be equal to 1/20th of
the cash amount in the Index at the beginning of each quarter. The cash
amount (initially 1,000 for the origination date of the Index) will be
incremented by premiums generated each quarter from the 20 down-and-in
puts sold, then decremented by cash settlements of any down-and-in puts
expiring in-the-money and the distribution amount (as defined below).
The cash amount will be invested in T-Bills and will accrete by
interest earned on the T-Bills.
The End of Day Index Value will be calculated as follows: End of
Day Index Value = Beginning of Quarter Index Value + Premium Generated
- Option Values + Accrued Interest - distribution amount, where:
Beginning of Quarter Index Value is 1,000 for the
origination date of the Index; thereafter, it is the previous quarter-
end End of Day Index Value;
Premium Generated is the sum of Option Values for each of
the 20 down-and-in puts sold by the Index at the end of the previous
quarter;
Option Value is the value of each of the 20 down-and-in
puts written by the Index at the end of each quarter. The notional
amount of each down-and-in put sold by the Index for the current
quarter is 1/20th of the Beginning of Quarter Index Value;
Accrued Interest is the daily interest earned on the cash
amount held by the Index and invested in T-Bills;
Cash amount of the Index for any quarter is the Beginning
of Quarter Index Value plus the Premium Generated for that quarter;
Distribution amount for any quarter and paid out at the
beginning of the next relevant quarter is 2.5% of the End of Day Index
Value for the final day of the relevant quarter. If 2.5% of the End of
Day Index Value for the final day of the relevant quarter exceeds the
amount of the Premium Generated, then the distribution amount will
equal the Premium Generated.
A total return level for the Index will be calculated and
published at the end of each day. The total return calculation will
assume the quarterly index distribution is invested directly in the
Index at the beginning of the quarter in which it is paid.
The Registration Statement provides the following example. A stock
``ABC'' trades at $50 per share at the start of the 90-day period, and
a down and in 90-day put was written at an 80% barrier (resulting in a
strike price of $50 per share and a barrier price of $40 per share) for
a premium of $4 per share:
Settlement above the barrier price: If at the end of 90 days the
ABC stock closed at any value above the barrier
[[Page 64155]]
price of $40, then the option would expire worthless and the Index's
value would reflect the retention of the $4 per share premium. The
Index's value thus would be increased by $4 per share on the ABC option
position.
Settlement at the barrier price: If at the end of 90 days ABC
closed at the barrier price of $40, then the option would settle in
cash at the closing price of $40, and the Index's value would be
reduced by $10 per share to reflect the settlement of the option.
However, the Index's value would reflect the retention of the $4 per
share premium, so the net loss to the Index's value would be $6 per
share on the ABC option position.
Settlement below the barrier price: If at the end of 90 days, ABC
closed at $35, then the option would settle in cash at the closing
price of $35, and the Index's value would be reduced by $15 per share
to reflect the settlement of the option. However, the Index's value
would reflect the retention of the $4 per share premium, so the net
loss to the Index's value would be $11 per share on the ABC option
position.
According to the Registration Statement, the Index's value is equal
to the value of the options positions comprising the Index plus a cash
position. The cash position starts at a base of 1,000. The cash
position is increased by option premiums generated by the option
positions comprising the Index and interest on the cash position at an
annual rate equal to the three month T-Bill rate. The cash position is
decreased by cash settlement on options which ``knock in'' (i.e., where
the closing price of the underlying stock at the end of the 90-day
period is at or below the barrier price). The cash position is also
decreased by a deemed quarterly cash distribution, currently targeted
at the rate of 2.5% of the value of the Index. However, if the option
premiums generated during the quarter are less than 2.5%, the deemed
distribution will be reduced by the amount of the shortfall.
The Fund's Investments
According to the Registration Statement, the Fund, under normal
circumstances,\9\ will invest at least 80% of its total assets in
component securities that comprise the Index and in T- Bills which will
be collateral for the options positions. The Fund will invest in the
option positions determined by the Index Provider by writing (i.e.,
selling) OTC 90-day down and in put options in proportion to their
weightings in the Index on economic terms which mirror those of the
Index. By writing an option, the Fund will receive premiums from the
buyer of the option, which will increase the Fund's return if the
option does not ``knock in'' and thus expires worthless. However, if
the option's underlying stock declines by a specified amount (or more),
the option will ``knock in'' and the Fund will be required to pay the
buyer the difference between the option's strike price and the closing
price. Therefore, by writing a put option, the Fund will be exposed to
the amount by which the price of the underlying is less than the strike
price. Accordingly, the potential return to the Fund will be limited to
the amount of option premiums it receives, while the Fund can
potentially lose up to the entire strike price of each option it sells.
Further, if the value of the stocks underlying the options sold by the
Fund increases, the Fund's returns will not increase accordingly.
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\9\ The term ``under normal circumstances'' includes, but is not
limited to, the absence of extreme volatility or trading halts in
the equities or options 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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Typically, the writer of a put option incurs an obligation to buy
the underlying instrument from the purchaser of the option at the
option's exercise price, upon exercise by the option purchaser.
However, the put options to be sold by the Fund will be settled in cash
only. The Fund may need to sell down and in put options on stocks other
than those underlying the option positions contained in the Index if
the Fund is unable to obtain a competitive market from OTC option
dealers on a stock underlying a particular option position in the
Index, thus preventing the Fund from writing an option on that
stock.\10\
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\10\ The Fund will transact only with OTC options dealers that
have in place an International Swaps and Derivatives Association
agreement with the Fund.
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Every 90 days, the options included within the Index are cash
settled or expire, and new option positions are established. The Fund
will enter into new option positions accordingly. This 90-day cycle
likely will cause the Fund to have frequent and substantial portfolio
turnover. If the Fund receives additional inflows (and issues more
Shares accordingly in large numbers known as ``Creation Units,'' as
further defined below) during a 90-day period, the Fund will sell
additional OTC down and in put options which will be exercised or
expire at the end of such 90-day period. Conversely, if the Fund
redeems Shares in Creation Unit size during a 90-day period, the Fund
will terminate the appropriate portion of the options it has sold
accordingly.
Secondary Investment Strategies
The Fund may invest its remaining assets in money market
instruments,\11\ including repurchase agreements \12\ or other funds
which invest exclusively in money market instruments, convertible
securities, structured notes (notes on which the amount of principal
repayment and interest payments are based on the movement of one or
more specified factors, such as the movement of a particular stock or
stock index), forward foreign currency exchange contracts, and in
swaps,\13\ options (other than options in which the Fund principally
will invest), and futures
[[Page 64156]]
contracts.\14\ Swaps, options (other than options in which the Fund
principally will invest), and futures contracts (and convertible
securities and structured notes) may be used by the Fund in seeking
performance that corresponds to the Index and in managing cash
flows.\15\ The Fund will not invest in money market instruments as part
of a temporary defensive strategy to protect against potential stock
market declines. The Adviser anticipates that it may take approximately
three business days (i.e., each day the New York Stock Exchange
(``NYSE'') is open) for additions and deletions to the Index to be
reflected in the portfolio composition of the Fund.
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\11\ The Fund may invest a portion of its assets in high-quality
money market instruments on an ongoing basis to provide liquidity.
The instruments in which the Fund may invest include: (i) Short-term
obligations issued by the U.S. Government; (ii) negotiable
certificates of deposit (``CDs''), fixed time deposits, and bankers'
acceptances of U.S. and foreign banks and similar institutions;
(iii) commercial paper rated at the date of purchase ``Prime-1'' by
Moody's Investors Service, Inc. or ``A-1+'' or ``A-1'' by Standard &
Poor's or, if unrated, of comparable quality as determined by the
Adviser; (iv) repurchase agreements; and (v) money market mutual
funds. CDs are short-term negotiable obligations of commercial
banks. Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated
interest rates. Banker's acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with
international transactions.
\12\ Repurchase agreements are agreements pursuant to which
securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed
price on an agreed date. These agreements may be made with respect
to any of the portfolio securities in which the Fund is authorized
to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into
repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii)
securities dealers (``Qualified Institutions''). The Adviser will
monitor the continued creditworthiness of Qualified Institutions.
The Fund also may enter into reverse repurchase agreements, which
involve the sale of securities with an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment and
have the characteristics of borrowing.
\13\ Swap agreements are contracts between parties in which one
party agrees to make periodic payments to the other party
(``Counterparty'') based on the change in market value or level of a
specified rate, index, or asset. In return, the Counterparty agrees
to make periodic payments to the first party based on the return of
a different specified rate, index, or asset. Swap agreements will
usually be done on a net basis, the Fund receiving or paying only
the net amount of the two payments. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to
each swap will be accrued on a daily basis and an amount of cash or
highly liquid securities having an aggregate value at least equal to
the accrued excess will be maintained in an account at the Trust's
custodian bank.
\14\ The Fund may utilize U.S. listed exchange-traded futures.
According to the Registration Statement, the Commodity Futures
Trading Commission has eliminated limitations on futures trading by
certain regulated entities, including registered investment
companies, and consequently registered investment companies may
engage in unlimited futures transactions and options thereon
provided that the investment adviser to the company claims an
exclusion from regulation as a commodity pool operator. In
connection with its management of the Trust, the Adviser has claimed
such an exclusion from registration as a commodity pool operator
under the Commodity Exchange Act (7 U.S.C. 1) (``CEA''). Therefore,
it is not subject to the registration and regulatory requirements of
the CEA, and there are no limitations on the extent to which the
Fund may engage in non-hedging transactions involving futures and
options thereon, except as set forth in the Registration Statement.
\15\ Swaps, options (other than options in which the Fund
principally will invest), and futures contracts will not be included
in the Fund's investment, under normal market circumstances, of at
least 80% of its total assets in component securities that comprise
the Index and in T-Bills, as described above.
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The Fund may invest in the securities of other investment companies
(including money market funds). Under the 1940 Act, the Fund's
investment in investment companies is limited to, subject to certain
exceptions, (i) 3% of the total outstanding voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to
any one investment company, and (iii) 10% of the Fund's total assets of
investment companies in the aggregate.\16\
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\16\ 15 U.S.C. 80a-12(d).
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The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including Rule 144A securities. The Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of the Fund's net assets are held in
illiquid securities. Illiquid securities include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.\17\
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\17\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also Investment Company Act
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970)
(Statement Regarding ``Restricted Securities''); Investment Company
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992)
(Revisions of Guidelines to Form N-1A). A fund's portfolio security
is illiquid if it cannot be disposed of in the ordinary course of
business within seven days at approximately the value ascribed to it
by the fund. See Investment Company Act Release No. 14983 (March 12,
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7
under the 1940 Act); Investment Company Act Release No. 17452 (April
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under
the 1933 Act).
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The Fund intends to qualify for and to elect to be treated as a
separate regulated investment company (``RIC'') under Subchapter M of
the Internal Revenue Code of 1986, as amended.\18\ As a RIC, the Fund
will not be subject to U.S. federal income tax on the portion of its
taxable investment income and capital gain it distributes to its
shareholders. To qualify for treatment as a RIC, a company must
annually distribute at least 90% of its net investment company taxable
income (which includes dividends, interest, and net capital gains) and
meet several other requirements relating to the nature of its income
and the diversification of its assets. If the Fund fails to qualify for
any taxable year as a RIC, all of its taxable income will be subject to
tax at regular corporate income tax rates without any deduction for
distributions to shareholders, and such distributions generally will be
taxable to shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits.
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\18\ 26 U.S.C. 851.
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The Fund will not invest in non-U.S. equity securities. The Fund's
investments will be consistent with the Fund's investment objective and
will not be used to enhance leverage.
As described above, the Index components must be based upon 20
equally weighted U.S. listed U.S. companies and have publicly listed
and traded options. In addition, the underlying companies will have a
market capitalization greater than $5 billion. Furthermore, the
underlying company equity securities will have a minimum trading volume
of at least 50 million shares for each of the preceding six months and
a minimum average daily trading value of at least $10 million for the
preceding six months. As such, the Exchange believes that the Index is
sufficiently broad based in scope and, as such, is less susceptible to
potential manipulation in view of the market capitalization and
liquidity criteria.
Pricing Fund Shares
According to the Registration Statement, the Fund's OTC put options
on equity securities will be valued pursuant to a third-party option
pricing model. Debt securities will be valued at the mean between the
last available bid and ask prices for such securities or, if such
prices are not available, at prices for securities of comparable
maturity, quality, and type. Securities for which market quotations are
not readily available, including restricted securities, will be valued
by a method that the Fund's Board of Trustees believe accurately
reflects fair value. Securities will be valued at fair value when
market quotations are not readily available or are deemed unreliable,
such as when a security's value or meaningful portion of the Fund's
portfolio is believed to have been materially affected by a significant
event. Such events may include a natural disaster, an economic event
like a bankruptcy filing, trading halt in a security, an unscheduled
early market close, or a substantial fluctuation in domestic and
foreign markets that has occurred between the close of the principal
exchange and the NYSE. In such a case, the value for a security is
likely to be different from the last quoted market price. In addition,
due to the subjective and variable nature of fair market value pricing,
it is possible that the value determined for a particular asset may be
materially different from the value realized upon such asset's sale.
Creations and Redemptions
Creation of Shares
The Trust will issue and sell Shares of the Fund only in Creation
Units of 100,000 Shares each on a continuous basis through the
Distributor, without a sales load, at its net asset value (``NAV'')
next determined after receipt, on any business day, of an order in
proper form. Creation Units of the Fund generally will be sold for cash
only, calculated based on the NAV per Share multiplied by the number of
Shares representing a Creation Unit (``Deposit Cash''), plus a
transaction fee.
The Custodian, through the National Securities Clearing Corporation
(``NSCC''), will make available on each business day, prior to the
opening of business on NYSE Arca (currently 9:30
[[Page 64157]]
a.m. Eastern Time (``E.T.'')), the amount of the Deposit Cash to be
deposited in exchange for a Creation Unit of the Fund.
To be eligible to place orders with the Distributor and 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 NSCC
(``Clearing Process''); or (ii) a Depository Trust Company (``DTC'')
participant, and, in each case, must have executed an agreement with
the Distributor, 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, whether through a
Participating Party or a DTC participant, must be received by the
Distributor no later than the closing time of the regular trading
session on the NYSE (ordinarily 4:00 p.m. E.T.) in each case on the
date such order is placed in order for creation of Creation Units to be
effected based on the NAV of Shares of the Fund as next determined on
such date after receipt of the order in proper form.
Redemption of Shares
Fund Shares may be redeemed only in Creation Units at the NAV next
determined after receipt of a redemption request in proper form by the
Fund through BNY and only on a business day. The Fund will not redeem
Shares in amounts less than a Creation Unit.
With respect to the Fund, BNY, through the NSCC, will make
available prior to the opening of business on NYSE Arca (currently 9:30
a.m. E.T.) on each business day, the amount of cash that will be paid
(subject to possible amendment or correction) in respect of redemption
requests received in proper form on that day (``Redemption Cash'').
The redemption proceeds for a Creation Unit generally will consist
of the Redemption Cash, as announced on the business day of the request
for redemption received in proper form, less a redemption transaction
fee.
Initial and Continued Listing
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except
that the Index is comprised of options based on ``US Component Stocks''
\19\ rather than US Component Stocks themselves. The Exchange
represents that, for initial and/or continued listing, the Fund will be
in compliance with Rule 10A-3 under the Exchange Act,\20\ as provided
by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be
outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares
that the NAV will be calculated daily and made available to all market
participants at the same time.
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\19\ NYSE Arca Equities Rule 5.2(j)(3) defines the term ``US
Component Stock'' to mean an equity security that is registered
under Sections 12(b) or 12(g) of the Exchange Act or an American
Depositary Receipt, the underlying equity security of which is
registered under Sections 12(b) or 12(g) of the Exchange Act.
\20\ 17 CFR 240.10A-3.
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Availability of Information
The Fund's Web site (www.alpsetfs.com), which will be publicly
available prior to the public offering of the Shares, will include a
form of the prospectus for the Fund that may be downloaded. The Fund's
Web site 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 mid-point of the
bid/ask spread at the time of calculation of such NAV (``Bid/Ask
Price''),\21\ 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.\22\
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\21\ The Bid/Ask Price of the Fund 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.
\22\ 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 Adviser will disclose for each portfolio
security and other financial instrument of the Fund the following
information: ticker symbol (if applicable), name of security and
financial instrument, number of securities or dollar value of financial
instruments held in the portfolio, and percentage weighting of the
security and financial instrument in the portfolio. The Fund's
portfolio holdings, including information regarding its option
positions, will be disclosed each day on the Fund's Web site. The Web
site information will be publicly available at no charge.
The NAV per Share for the Fund will be determined once daily as of
the close of the NYSE, usually 4:00 p.m. E.T., each day the NYSE is
open for trading. NAV per Share will be determined by dividing the
value of the Fund's portfolio securities, cash and other assets
(including accrued interest), less all liabilities (including accrued
expenses), by the total number of Shares outstanding.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder
Reports are available free upon request from the Trust, and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commission's Web site at www.sec.gov. Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information will be published daily in the financial section of
newspapers. Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association (``CTA'') high-speed
line. The value of the Index and the values of the OTC put options
components in the Index (which will each be weighted at 1/20 of the
Index value) will be published by one or more major market data vendors
every 15 seconds during the NYSE Arca Core Trading Session of 9:30 a.m.
E.T. to 4:00 p.m. E.T. A list of components of the Index, with
percentage weightings, will be available on the Exchange's Web site.
Each of the stocks underlying the OTC put options in the Index also
will underlie standardized options contracts traded on U.S. options
exchanges, which will disseminate quotation and last-sale information
with respect to such contracts. In addition, the Intraday Indicative
Value will be widely disseminated by one or more major market data
vendors at least every 15 seconds during the Core Trading Session.\23\
The dissemination of the Intraday Indicative Value will allow investors
to determine the value of the underlying portfolio of the Fund on a
daily basis and to provide a close
[[Page 64158]]
estimate of that value throughout the trading day.
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\23\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values taken from the CTA or other data feeds.
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Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies,
distributions, and taxes is included in the Registration Statement.
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.\24\ 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. These may include: (1) The
extent to which trading is not occurring in the securities comprising
the Fund's portfolio holdings and/or the financial instruments of the
Fund; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present.
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\24\ See NYSE Arca Equities Rule 7.12, Commentary .04.
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If the Intraday Indicative Value, the Index value, or the value of
the components of the Index is not available or is not being
disseminated as required, the Exchange may halt trading during the day
in which the disruption occurs; if the interruption persists past the
day in which it occurred, the Exchange will halt trading no later than
the beginning of the trading day following the interruption. The
Exchange will obtain a representation from the Fund that the NAV for
the Fund will be calculated daily and will be made available to all
market participants at the same time. Under NYSE Arca Equities Rule
7.34(a)(5), if the Exchange becomes aware that the NAV for the Fund is
not being disseminated to all market participants at the same time, it
will halt trading in the Shares until such time as the NAV is available
to all market participants.
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 4:00 a.m. to 8:00 p.m. E.T. in
accordance with NYSE Arca Equities Rule 7.34 (Opening, 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 Equities Rule 7.6, Commentary .03, 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.
Surveillance
The Exchange intends to utilize its existing surveillance
procedures applicable to derivative products (which include Investment
Company Units) to monitor trading in the Shares. 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 applicable federal securities
laws.
The Exchange's current trading surveillance focuses on detecting
securities trading outside their normal patterns. 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 may obtain information via the Intermarket
Surveillance Group (``ISG'') from other exchanges that are members of
ISG or with which the Exchange has entered into a comprehensive
surveillance sharing agreement.\25\
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\25\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
portfolio for the Fund may trade on markets that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Suitability
Currently, NYSE Arca Equities Rule 9.2(a) (Diligence as to
Accounts) provides that an Equity Trading Permit (``ETP'') Holder,
before recommending a transaction in any security, must have reasonable
grounds to believe that the recommendation is suitable for the customer
based on any facts disclosed by the customer as to its other security
holdings and as to its financial situation and needs. Further, the rule
provides, with a limited exception, that prior to the execution of a
transaction recommended to a non-institutional customer, the ETP Holder
must make reasonable efforts to obtain information concerning the
customer's financial status, tax status, investment objectives, and any
other information that such ETP Holder believes would be useful to make
a recommendation.
Prior to the commencement of trading, the Exchange will inform its
ETP Holders of the suitability requirements of NYSE Arca Equities Rule
9.2(a) in an Information Bulletin (``Bulletin''). Specifically, ETP
Holders will be reminded in the Information Bulletin that, in
recommending transactions in these securities, they must have a
reasonable basis to believe that (1) the recommendation is suitable for
a customer given reasonable inquiry concerning the customer's
investment objectives, financial situation, needs, and any other
information known by such member, and (2) the customer can evaluate the
special characteristics, and is able to bear the financial risks, of an
investment in the Shares. In connection with the suitability
obligation, the Information Bulletin will also provide that members
must make reasonable efforts to obtain the following information: (1)
The customer's financial status; (2) the customer's tax status; (3) the
customer's investment objectives; and (4) such other information used
or considered to be reasonable by such member or registered
representative in making recommendations to the customer.
In addition, FINRA has issued a regulatory notice relating to sales
practice procedures applicable to recommendations to customers by FINRA
members of reverse convertibles, as described in FINRA Regulatory
Notice 10-09 (February 2010) (``FINRA Regulatory Notice'').\26\ As
described above, while the Fund will not invest in traditional reverse
convertible securities, the down and in put options written by the Fund
will have the effect of exposing the Fund to the return of reverse
convertible securities as if the Fund owned such reverse convertible
securities directly. Therefore, the Bulletin will state that ETP
Holders that carry customer accounts should follow the FINRA guidance
set forth in the FINRA Regulatory Notice.
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\26\ The Exchange notes that NASD Rule 2310 relating to
suitability, referenced in the FINRA Regulatory Notice, has been
superseded by FINRA Rule 2111. See FINRA Regulatory Notice 12-25
(May 2012).
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As disclosed in the Registration Statement, the Fund is designed
for investors who seek to obtain income through selling options on
select equity securities which the Index Provider determines to have
the highest volatility. Because of the high volatility of the stocks
underlying the options
[[Page 64159]]
sold by the Fund, it is possible that the value of such stocks will
decline in sufficient magnitude to trigger the exercise of the options
and cause a loss which may outweigh the income from selling such
options. The Registration Statement states that, accordingly, the Fund
should be considered a speculative trading instrument and is not
necessarily appropriate for investors who seek to avoid or minimize
their exposure to stock market volatility. The Exchange's Information
Bulletin regarding the Fund, described below, will provide information
regarding the suitability of an investment in the Shares, as stated in
the Registration Statement.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in the 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 Units (and that Shares are not individually
redeemable); (2) 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; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Intraday Indicative Value will not be
calculated or publicly disseminated; (4) how information regarding the
Intraday Indicative Value is disseminated; (5) 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 (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 Exchange 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 Exchange Act for this proposed rule change is
the requirement under Section 6(b)(5) \27\ 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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\27\ 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 will be listed and traded on the Exchange pursuant to the
initial listing criteria in NYSE Arca Equities Rule 5.2(j)(3) and
Commentary .01 thereto and continued listing criteria in NYSE Arca
Equities Rule 5.5(g)(2). 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 may obtain
information via ISG from other exchanges that are members of ISG or
with which the Exchange has entered into a comprehensive surveillance
sharing agreement. The 20 stocks on which options will be written will
be from a selection of the largest capitalized (over $5 billion in
market capitalization) stocks which also have listed options and which
have the highest volatility, as determined by the Index Provider, and
will be NMS stocks as defined in Rule 600 of Regulation NMS under the
Exchange Act. Each option written by the Fund will be covered through
investments in three month T-Bills at least equal to the Fund's maximum
liability under the option (i.e., the strike price). The Fund will not
invest in non-U.S. equity securities and the Fund's investments will be
consistent with the Fund's investment objective and will not be used to
enhance leverage. FINRA has issued a regulatory notice relating to
sales practice procedures applicable to recommendations to customers by
FINRA members of reverse convertibles, as described in the FINRA
Regulatory Notice, and ETP Holders that carry customer accounts should
follow the FINRA guidance set forth therein. Prior to the commencement
of trading, the Exchange will inform its ETP Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares. The Information Bulletin will state that ETP
Holders that carry customer accounts should follow FINRA guidance set
forth in the FINRA Regulatory Notice.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that, if the Intraday Indicative Value, the Index value, or the value
of the components of the Index is not available or is not being
disseminated as required, the Exchange may halt trading during the day
in which the disruption occurs; if the interruption persists past the
day in which it occurred, the Exchange will halt trading no later than
the beginning of the trading day following the interruption. The
Exchange will obtain a representation from the Fund that the NAV for
the Fund will be calculated daily and will be made available to all
market participants at the same time. Under NYSE Arca Equities Rule
7.34(a)(5), if the Exchange becomes aware that the NAV for the Fund is
not being disseminated to all market participants at the same time, it
will halt trading in the Shares until such time as the NAV is available
to all market participants. The Fund's portfolio holdings, including
information regarding its option positions, will be disclosed each day
on the Fund's Web site. The Web site information will be publicly
available at no charge. Information regarding market price and trading
volume of the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Quotation and last-sale information for the Shares will be
available via the CTA high-speed line. The value of the Index and the
values of the OTC put options components in the Index (which will each
be weighted at 1/20 of the Index value) will be published by one or
more major market data vendors every 15 seconds during the NYSE Arca
Core Trading Session of 9:30 a.m. E.T. to 4:00 p.m. E.T. A list of
components of the Index, with percentage weightings, will be available
on the Exchange's Web site. Each of the stocks underlying the OTC put
options in the Index also will underlie standardized options contracts
traded on U.S. options exchanges, which will disseminate quotation and
last-sale information with respect to such contracts. In addition, the
Intraday Indicative Value will be disseminated by one or more major
market data vendors at least every 15 seconds during the NYSE Arca Core
Trading Session.
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 exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or
[[Page 64160]]
with which the Exchange has entered into a comprehensive surveillance
sharing agreement. In addition, as noted above, investors will have
ready access to information regarding the Fund's portfolio holdings,
the Intraday Indicative Value, and quotation and last-sale information
for the Shares.
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 purposes of the Act.
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 within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2012-108 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-108. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Section, 100 F Street
NE., Washington, DC 20549-1090, on official business days between 10:00
a.m. and 3:00 p.m. Copies of the filing will also be available for
inspection and copying at the NYSE's principal office and on its
Internet Web site at www.nyse.com. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEArca-2012-108 and should be submitted on or before
November 8, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25598 Filed 10-17-12; 8:45 am]
BILLING CODE 8011-01-P