[Federal Register Volume 77, Number 202 (Thursday, October 18, 2012)]
[Notices]
[Pages 64160-64167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25599]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68044; File No. SR-NYSEArca-2012-109]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of Shares
of the U.S. Equity High Volatility Put Write 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. 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.
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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 NYSE Arca Equities Rule 5.2(j)(3) (``Investment Company
Units''): the U.S. Equity High Volatility Put Write 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
U.S. Equity High Volatility Put Write 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.\3\ The Shares will be
issued by the ALPS ETF Trust
[[Page 64161]]
(``Trust'').\4\ 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'').
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\3\ 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).
\4\ The Trust is registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1) (``1940 Act''). On May 3, 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. 28262 (May 1, 2008)
(File No. 812-13430) (``Exemptive Order'').
\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.
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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 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.
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 High
Volatility Put Write Index (``Index''). The Index measures the return
of a hypothetical portfolio consisting of U.S. exchange traded put
options which have been sold on each of 20 stocks and a cash position
calculated as described below. The 20 stocks on which options are sold
(``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.
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.
Index Methodology and Construction
According to the Registration Statement, the Index consists of at
least twenty components (``Index Components''), selected in accordance
with NYSE Arca's rules-based methodology for the Index. In selecting
the stocks underlying the Index Components, the Index Provider begins
with the universe of all U.S. exchange-listed stocks, and then screens
for those stocks that meet the following criteria: (1) Minimum market
capitalization of at least $5 billion; (2) minimum trading volume of at
least 50 million shares during the preceding 6 months; (3) minimum
average daily trading volume of one million shares during the preceding
6 months; (4) minimum average daily trading value of at least $10
million during the preceding 6 months; (5) share price of $10 or
higher; (6) the availability of U.S. exchange-listed options.\6\ The
Index is reconstituted/rebalanced every two months (i.e., six times a
year).
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\6\ 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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Stocks meeting the above criteria are then sorted in descending
order based upon the two month implied volatility as measured on
Bloomberg using the field labeled 2M--PUT--IMP--VOL--50DELTA--DFLT,
which is derived from at the money listed put options on each of such
stocks.\7\ The 20 stocks with the highest volatility are selected for
inclusion. The industry sector of each stock is also noted, and the
Index will not allow more than 10 of the 20 stocks to be from any one
industry sector.
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\7\ The Adviser represents that Bloomberg defines implied
volatility as Delta Ivol, which is volatility as expressed in delta.
Delta values range from 0 to 100, with 50 delta as the theoretical
at-the-money strike. A delta of less than 50 is considered out-of-
the-money, while a delta of greater than 50 is considered in-the-
money.
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Each listed put option included in the Index will be an ``American-
style'' option (i.e., an option which can be exercised at the strike
price at any time prior to its expiration) and have a 60-day term. The
strike price (i.e., the price at which a put option can be exercised)
of each put option included in the Index must be as close as possible
to 85% of the closing price of the option's underlying stock price as
of the beginning of each 60-day period.\8\ The listed put options
included in the Index can be exercised at any time prior to their
expiration, but the Index will reflect the value of each such option
throughout the 60-day period as if the option is not exercised until
its expiration. Each such option will automatically be deemed exercised
on its expiration date if its underlying stock price is below its
strike price. If the stock underlying the put option closes below the
option's strike 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 below its strike price,
then the option expires worthless and the entire amount of the premium
payment is retained within the Index.\9\
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\8\ The Adviser represents that a specific percentage cannot be
indicated because options are listed by an exchange in pre-defined
increments (i.e., 1, 1.5, or 2 increments) around the market price
of the stock, rounded to the nearest dollar.
\9\ 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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The Registration Statement provides the following example. Suppose
a stock ``ABC'' trades at $50 per share at the start of the 60 day
period, and a listed put option with a term of 60 days was sold with a
strike price of $42.50 per share for a premium of $2 per share:
Settlement at or above the strike price: If at the end of 60 days
the ABC stock closed at or above the strike price of $42.50, then the
option would expire
[[Page 64162]]
worthless and the Index's value would reflect the retention of the $2
per share premium. The Index's value thus would be increased by $2 per
share on the ABC option position.
Settlement below the strike price: If at the end of 60 days, ABC
closed at $35, then the option would automatically be deemed exercised
on its expiration date. The Index's value would change as if the Index
had been put (i.e., would buy) ABC at the strike price of $42.50 and
would sell ABC immediately at the closing price of $35. As a result,
the Index's value would be reduced by $7.50 per share. However, the
Index's value would also reflect the retention of the $2 per share
premium, so the net loss to the Index's value would be $5.50 per share
on the ABC option position.
The Index's value is equal to the value of the options positions
comprising the Index plus a cash position. The options positions are
equally weighted in the Index and the Fund's portfolio; that is, 1/20th
of the net asset value (``NAV'') of Shares of the Fund will be invested
in each option position at the beginning of the applicable 60-day
period. 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 Treasury-bill (``T-Bill'') rate. The cash
position is decreased by cash settlement on options which finish in the
money (i.e., where the closing price of the underlying stock at the end
of the 60-day period is below the strike price). The cash position is
also decreased by a deemed cash distribution paid following each 60-day
period, currently targeted at the rate of 1.5% of the value of the
Index. However, if the option premiums generated during the period are
less than 1.5%, the deemed distribution will be reduced by the amount
of the shortfall.
Primary Investments
The Fund under normal circumstances \10\ will invest at least 80%
of its total assets in component securities that comprise the Index
(i.e., the Fund's option positions) and in T-Bills.
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\10\ 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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The Fund will seek to track the performance of the Index by selling
listed 60-day put options in proportion to their weightings in the
Index. By selling an option, the Fund will receive premiums from the
buyer of the option, which will increase the Fund's return if the
option is not exercised and thus expires worthless. However, if the
option's underlying stock declines below the strike price, the option
will finish in-the-money and the Fund will be required to buy the
underlying stock at the strike price, effectively paying the buyer the
difference between the 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 stock is less than the strike price.
As the seller of a listed put option, the Fund will incur an obligation
to buy the underlying instrument from the purchaser of the option at
the option's strike price, upon exercise by the option purchaser. If a
listed put option sold by the Fund is exercised prior to the end of a
60-day period, the Fund will buy the underlying stock at the time of
exercise and at the strike price, and will hold the stock until the end
of the 60-day period.
Each put option sold 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).
Every 60 days, the options included within the Index are exercised
or expire and new option positions are established, and the Fund will
enter into new option positions accordingly and sell any underlying
stocks it owns as a result of the Fund's prior option positions having
been exercised. This 60-day cycle likely will cause the Fund to have
frequent and substantial portfolio turnover.\11\
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\11\ If the Fund receives additional inflows (and issues more
Shares accordingly in large numbers known as ``Creation Units,'' as
further described below under ``Creation of Shares'') during a 60-
day period, the Fund will sell additional listed put options which
will be exercised or expire at the end of such 60-day period.
Conversely, if the Fund redeems Shares in Creation Unit size during
a 60-day period, the Fund will terminate the appropriate portion of
the options it has sold accordingly.
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Secondary Investment Strategies
The Fund may invest its remaining assets in money market
instruments,\12\ including repurchase agreements \13\ or other funds
which invest exclusively in money market instruments, convertible
securities, and 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). Furthermore, the Fund may invest in one or more
financial instruments, including but not limited to futures contracts,
swap agreements \14\ and forward contracts, and options on securities
(other than options in which the Fund principally will invest), indices
and futures contracts.\15\ Swaps, options (other than options in which
the Fund principally will invest), and futures contracts \16\ may be
used by the
[[Page 64163]]
Fund in seeking performance that corresponds to the Index and in
managing cash flows.\17\
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\12\ 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; and (iv) 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. The Fund will not invest
in money market instruments as part of a temporary defensive
strategy to protect against potential stock market declines.
\13\ 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.
\14\ 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.
\15\ As an example of the use of such financial instruments, the
Fund may use total return swaps on one or more Index Components in
order to achieve exposures that are similar to those of the Index.
\16\ 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.
\17\ 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 up to 20% of its net assets in investments not
included in its Index, but which the Adviser believes will help the
Fund track the Index. For example, there may be instances in which the
Adviser may choose to purchase (or sell) securities not in the Index
which the Adviser believes are appropriate to substitute for one or
more Index Components in seeking to replicate, before fees and
expenses, the performance of the Index.
The Fund may borrow money from a bank up to a limit of 10% of the
value of its assets, but only for temporary or emergency purposes.
The Fund may not invest 25% of its total assets in the securities
of issuers conducting their principal business activities in the same
industry or group of industries (excluding the U.S. government or any
of its agencies or instrumentalities). Nonetheless, to the extent the
Fund's Index is concentrated in a particular industry or group of
industries, the Fund's investments will exceed this 25% limitation to
the extent that it is necessary to gain exposure to Index Components to
track its Index.\18\
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\18\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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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.\19\
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\19\ 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).
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.\20\
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\20\ 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 Securities Act of 1933).
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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.\21\ 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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\21\ 26 U.S.C. 851.
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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 invest in non-U.S. equity securities.
Pricing Fund Shares
The NAV per Share for the Fund will be determined once daily as of
the close of the NYSE, usually 4:00 p.m. Eastern time (``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.
The Fund's listed put options, as well as equity securities held by
the Fund, if any, will be valued at the last reported sale price on the
principal exchange on which such securities are traded, as of the close
of regular trading on the NYSE on the day the securities are being
valued or, if there are no sales, at the mean of the most recent bid
and ask prices. Debt securities will be valued at the mean between the
last available bid and asked 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 believes 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, a 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.
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 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
[[Page 64164]]
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 a.m. 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 U.S. exchange-listed options based on
``US Component Stocks'' \22\ 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,\23\ 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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\22\ 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.
\23\ 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 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''),\24\ 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.\25\
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\24\ The Bid/Ask Price of Shares 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.
\25\ Under accounting procedures to be 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
securities and 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.
An ``Intraday Indicative Value'' (``IIV'') of Shares of the Fund
will be calculated and widely disseminated by one or more major market
data vendors every fifteen seconds during the NYSE Arca Core Trading
Session of 9:30 a.m. E.T. to 4:00 p.m. E.T.\26\ The Exchange will
calculate the IIV by dividing the ``Estimated Fund Value'' (as defined
below) as of the time of the calculation by the total number of
outstanding Shares. ``Estimated Fund Value'' is the sum of the
estimated amount of cash held in the Fund's portfolio, the estimated
amount of accrued interest owing to the Fund, and the estimated value
of the securities held in the Fund's portfolio, minus the estimated
amount of liabilities. The IIV will be calculated based on the same
portfolio holdings disclosed on the Fund's Web site.
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\26\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available IIVs
taken from the Consolidated Tape Association (``CTA'') or other data
feeds.
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The dissemination of the IIV will allow investors to determine the
value of the underlying portfolio of the Fund on a daily basis and to
provide a close estimate of that value throughout the trading day. The
IIV should not be viewed as a ``real-time'' update of the NAV per Share
of the Fund because it may not be calculated in the same manner as the
NAV, which will be computed once a day, generally at the end of the
business day.
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 for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information for the
Shares will be available via the CTA high-speed line. The value of the
Index
[[Page 64165]]
will be published by one or more major market data vendors every 15
seconds during the NYSE Arca Core Trading Session.
Pricing information for the Index Components is available from the
U.S. options exchanges on which such components are listed and traded.
A list of the Index Components, with percentage weightings, will be
available on the Exchange's Web site.
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.
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 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 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.
As described above, the Fund will seek to track the performance of
the Index by selling listed 60-day put options in proportion to their
weightings in the Index. If the option's underlying stock declines
below the strike price, the option will finish in-the-money and the
Fund will be required to buy the underlying stock at the strike price,
effectively paying the buyer the difference between the strike price
and the closing price. Therefore, by writing a put option, the Fund is
exposed to the amount by which the price of the underlying stock is
less than the strike price. 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'').\27\ While the Fund will not invest in reverse convertibles,
the Fund's options strategies may raise issues similar to those raised
in the FINRA Regulatory Notice. Therefore, the Bulletin will state that
ETP Holders that carry customer accounts should follow the FINRA
Regulatory Notice with respect to suitability.
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\27\ 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 put 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 put options sold by the Fund, it is possible that the
value of such stocks will decline in sufficient magnitude to trigger
the exercise of the put options and cause a loss which may outweigh the
income from selling such put options. 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 Bulletin regarding the Fund,
described below, will provide information regarding the suitability of
an investment in the Shares, as stated 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.\28\ 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 and/or
financial instruments comprising the portfolio 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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\28\ See NYSE Arca Equities Rule 7.12, Commentary .04.
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If the IIV, the Index value, or the value of the Index Components
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
[[Page 64166]]
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, including all U.S. options exchanges on which Index Components are
listed and traded.\29\
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\29\ 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.
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 IIV will not be calculated or publicly
disseminated; (4) how information regarding the IIV 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) \30\ 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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\30\ 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 and continued listing criteria in NYSE Arca Equities Rule
5.2(j)(3). 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 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 Index. The Sub-Adviser is not affiliated with a broker-
dealer. NYSE Arca 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 Index. In selecting
the stocks underlying the Index Components, the Index Provider begins
with the universe of all U.S. exchange-listed stocks, and then screens
for those stocks that meet the following criteria: (1) Minimum market
capitalization of at least $5 billion; (2) minimum trading volume of at
least 50 million shares during the preceding 6 months; (3) minimum
average daily trading volume of one million shares during the preceding
6 months; (4) minimum average daily trading value of at least $10
million during the preceding 6 months; (5) share price of $10 or
higher; (6) the availability of U.S. exchange-listed options. The put
options which the Fund will sell will be listed on a national
securities exchange. 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. If the
IIV, the Index value, or the value of the Index Components 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 Fund may hold up to an aggregate amount
of 15% of its net assets in illiquid securities. 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 invest in non-U.S. equity
securities. The Fund's portfolio holdings, including information
regarding its option positions, will be disclosed each day on its Web
site. 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 the FINRA Regulatory Notice with respect to
suitability.
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 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
will be available via the CTA high-speed line. The value of the Index
will be published by one or more major market data vendors every 15
seconds during the NYSE Arca Core Trading Session. In addition, the IIV
will be widely disseminated by one or more major market data vendors at
least every 15 seconds during the Core Trading Session. The Fund's Web
site 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, 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 a daily
[[Page 64167]]
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 shares or dollar value of securities and 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. A list of the
Index Components, with percentage weightings, will be available on the
Exchange's Web site.
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 issue of Investment Company Units 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 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 holdings,
the IIV, 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-2012-109 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-2012-109. 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-2012-109 and should be submitted on or before
November 8, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25599 Filed 10-17-12; 8:45 am]
BILLING CODE 8011-01-P