[Federal Register Volume 78, Number 172 (Thursday, September 5, 2013)]
[Notices]
[Pages 54715-54718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21535]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70284; File No. SR-NYSEArca-2013-83]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to
Investments in Leveraged Loans by the Peritus High Yield ETF
August 29, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on August 21, 2013, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to reflect a change to the holdings of the
Peritus High Yield ETF to achieve its investment objective to include
leveraged loans. Peritus High Yield ETF is currently listed and traded
on the Exchange under NYSE Arca Equities Rule 8.600. 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 Commission has approved listing and trading of shares
(``Shares'') of the Peritus High Yield ETF (``Fund'') on the Exchange
under NYSE Arca Equities Rule 8.600) \4\ (``Managed Fund Shares'').\5\
The Shares are offered by AdvisorShares Trust (the ``Trust''), a
statutory trust organized under the laws of the State of Delaware and
registered with the Commission as an open-end management investment
company.\6\ Peritus High Yield ETF is currently listed and traded on
the Exchange under NYSE Arca Equities Rule 8.600.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 63329 (November 17,
2010), 75 FR 71760 (November 24, 2010) (SR-NYSEArca-2010-86)
(``Prior Order''). The notice of filing of SR-NYSEArca-2010-86 was
published in Securities Exchange Act Release No. 63041 (October 5,
2010), 75 FR 62905 (October 13, 2010) (``First Prior Notice''). In
addition, the exchange filed a proposed rule change to reflect a
change to the Fund's holdings to achieve its investment objective to
include equity securities. See Securities Exchange Act Release No.
66818 (April 17, 2012), 77 FR 24233 (April 23, 2012) (SR-NYSEArca-
2012-33) (notice of filing and immediate effectiveness of proposed
rule change (``Second Prior Notice'' and, together with the First
Prior Notice and the Prior Order, the ``Prior Release'')). The Fund
and the Shares are currently in compliance with the listing
standards and other rules of the Exchange and the requirements set
forth in the Prior Release.
\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment advisor
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\6\ The Trust is registered under the 1940 Act. On October 29,
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 the 1940 Act relating to the Fund (File Nos.
333-157876 and 811-22110) (the ``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 the1940 Act. See Investment Company Act Release No.
29291 (May 28, 2010) (File No. 812-13677).
---------------------------------------------------------------------------
The investment adviser to the Fund is AdvisorShares Investments,
LLC (the ``Adviser''). Peritus I Asset Management, LLC is the Fund's
sub-adviser (``Peritus'' or the ``Sub-Adviser'').
According to the Registration Statement and as stated in the Prior
Release, the Fund's investment objective is to achieve high current
income with a secondary goal of capital appreciation. The Exchange
proposes to reflect a change to the holdings of the Fund to achieve its
investment objective to include up to 20% of its net assets in
``leveraged loans'', in addition to the other permitted investments set
forth in the Prior Release.\7\ The Adviser represents that the
investment objective of the Fund will not be changing.
---------------------------------------------------------------------------
\7\ The change to the Fund's holdings to include leveraged loans
will be effective upon filing with the Commission of an amendment to
the Trust's Registration Statement and upon the effectiveness and
operativeness of this proposal.
---------------------------------------------------------------------------
Leveraged loans will include loans referred to as senior loans,
bank loans and/or floating rate loans. The Fund will invest in such
leveraged loans that the Adviser or Sub-Adviser deems to be highly
liquid with readily available prices. The Fund will invest in leveraged
loans rated C or higher by a credit rating agency registered as a
nationally recognized statistical rating organization (``NRSRO'') with
the Commission (for example, Moody's Investors Service, Inc.), or is
unrated but considered to be of comparable quality by the Adviser or
Sub-Adviser.\8\ The Fund will not invest in leveraged loans that are in
default at time of purchase. The Fund will only invest in U.S. dollar-
denominated leveraged loans. In addition, for investment purposes, the
leveraged loan must have a par amount outstanding of U.S. $150 million
or greater at the time the loan is originally issued.\9\
---------------------------------------------------------------------------
\8\ In determining whether a security is of ``comparable
quality,'' the Adviser or Sub-Adviser will consider, for example,
whether the borrower of the security has issued other rated
securities; whether the obligations under the security are
guaranteed by another entity and the rating of such guarantor (if
any); whether and (if applicable) how the security is
collateralized; other forms of credit enhancement (if any); the
security's maturity date; liquidity features (if any); relevant cash
flow(s); valuation features; other structural analysis;
macroeconomic analysis; and sector or industry analysis.
\9\ The Commission previously has approved listing and trading
on NYSE Arca of an issue of Managed Fund Shares that primarily holds
senior loans that include leveraged loans. See Securities Exchange
Act Release No. 69244 (March 27, 2013), 78 FR 19766 (April 2, 2013)
(SR-NYSEArca-2013-08) (order approving listing and trading of SPDR
Blackstone/GSO Senior Loan ETF under NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------
Leveraged loans are borrowings by non-investment grade companies
(i.e., loans rated below Ba1 by Moody's
[[Page 54716]]
Investor Service and BBB+ by Standard & Poor's or are non-rated). The
word ``leveraged'' refers to the credit quality of the borrower--a non-
investment grade company--not to any sort of use of leverage or margin
within the loan structure. These are debt obligations that are
structured between the borrower and the lender or lender group. The
terms of the loan are negotiated up front and defined in the credit
agreement. Just as high yield bonds have indentures that govern the
terms of the debt obligation, leveraged loans have credit agreements
that specify the terms, including maturity, prepayment obligations,
financial covenants, and security. The terms of the loan can be
restructured throughout the life of the loan via an amendment process
that requires a certain percentage of holder approval. Once issued,
various pieces of the loan often trade in an active secondary market.
The four basic features of leveraged loans are as follows:
1. Seniority in the Capital Structure: Leveraged loans are
generally among the most senior debt obligations in the borrower's
capital structures and, as such, would generally have first priority in
payment.
2. Security Backing: Leveraged loans are generally secured by the
borrower's assets and operations. This usually includes both the
physical assets as well as other assets of the company. In the case of
a default, the loan holder would have a claim to those assets.
3. Covenant Protection: Pursuant to the credit agreement governing
the loan, loan holders are usually protected by a variety of covenants.
These covenants can include a maximum leverage test, minimum interest
coverage test, a restricted payments basket potentially limiting
payments for subordinate obligations and dividends, and/or prepayment
criteria. The covenants governing leveraged loans are generally more
restrictive than those governing high yield bonds, providing the loan
holder with added protections.
4. Floating Rate Interest Payments: These loans generally pay
interest with 3 month LIBOR as the base rate. The structure is usually
a specified spread over the floating LIBOR rate. However, in some cases
a LIBOR floor or ceiling may be specified.
As stated in the Prior Release, the Fund will not invest in options
contracts, futures contracts or swap agreements. The Fund's investments
will be consistent with its investment objective and will not be used
to enhance leverage.
As stated in the Prior Release, on each business day, before
commencement of trading in Shares in the Core Trading Session on the
Exchange, the Fund discloses on its Web site the Disclosed Portfolio
that will include, among other portfolio components, leveraged loans,
and that will form the basis for the Fund's calculation of net asset
value (``NAV'') at the end of the business day. The intra-day, closing
and settlement prices of the portfolio securities, including any
leveraged loans held by the Fund, will also be readily available from
the national securities exchanges trading such securities, automated
quotation systems, published or other public sources, or on-line
information services.
In calculating the Fund's NAV per Share, the Fund's investments
will generally be valued using market valuations.\10\ A market
valuation generally means a valuation (i) obtained from an exchange, a
pricing service, or a major market maker (or dealer), (ii) based on a
price quotation or other equivalent indication of value supplied by an
exchange, a pricing service, or a major market maker (or dealer) or
(iii) based on amortized cost.\11\ The Adviser may use various pricing
services, or discontinue the use of any pricing service, as approved by
the Trust's Board of Trustees from time to time. A price for leveraged
loans obtained from a pricing service based on such pricing service's
valuation matrix may be considered a market valuation. Valuations with
respect to leveraged loans will be based on information supplied by
pricing services or major market makers or dealers, as indicated in (i)
and (ii) above. Any assets or liabilities denominated in currencies
other than the U.S. dollar will be converted into U.S. dollars at the
current market rates on the date of valuation as quoted by one or more
sources.
---------------------------------------------------------------------------
\10\ Markit will be the primary price source for leveraged loans
in calculating the NAV of the Fund's portfolio.
\11\ For market valuation purposes, amortized cost will only
apply to securities that have a remaining maturity of 60 days or
less.
---------------------------------------------------------------------------
In the event that current market valuations are not readily
available or such valuations do not reflect current market value, the
Trust's procedures require that a security's fair value be determined
if a market price is not readily available.\12\ In determining such
value the Adviser or Sub-Adviser may consider, among other things, (i)
Price comparisons among multiple sources, (ii) a review of corporate
actions and news events, and (iii) a review of relevant financial
indicators (e.g., movement in interest rates, market indices, and
prices from the Fund's index providers). In these cases, the Fund's NAV
may reflect certain portfolio securities' fair values rather than their
market prices. Fair value pricing involves subjective judgments and it
is possible that the fair value determination for a security is
materially different than the value that could be realized upon the
sale of the security.
---------------------------------------------------------------------------
\12\ The Trust's Board of Trustees has established Fair Value
Procedures responsible for the valuation and revaluation of any
portfolio investments for which market quotations or prices are not
readily available. The Fund has implemented procedures designed to
prevent the use and dissemination of material, non-public
information regarding valuation and revaluation of any portfolio
investments.
---------------------------------------------------------------------------
All representations made in the Prior Release regarding the
availability of information relating to the Shares, trading halts,
trading rules, the Portfolio Indicative Value, and surveillance, among
others, will continue to apply to trading in the Shares.
Except for the changes noted above, all other representations made
in the Prior Release remain unchanged.\13\ The Fund will continue to
comply with all initial and continued listing requirements under NYSE
Arca Equities Rule 8.600.
---------------------------------------------------------------------------
\13\ See note 4, supra.
---------------------------------------------------------------------------
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \14\ 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.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
8.600. The Fund may invest up to 20% of its net assets in leveraged
loans, in addition to the other permitted investments set forth in the
Prior Release. The Fund will invest in such leveraged loans that the
Adviser or Sub-Adviser deems to be highly liquid with readily available
prices. The Fund will invest in leveraged loans rated C or higher by an
NRSRO or is unrated but considered to be of comparable quality by the
Adviser or Sub-Adviser. The Fund will not invest in leveraged loans
that are in default at time of purchase.
[[Page 54717]]
The Fund will only invest in U.S. dollar-denominated leveraged loans.
In addition, for investment purposes, the leveraged loan must have a
par amount outstanding of U.S. $150 million or greater at the time the
loan is originally issued. The Adviser represents that the investment
objective of the Fund will not be changing.
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 net asset value (``NAV'') per Share is calculated daily and
that the NAV and the Disclosed Portfolio is made available to all
market participants at the same time. The intra-day, closing and
settlement prices of the portfolio securities, including any leveraged
loans held by the Fund, will also be readily available from the
national securities exchanges trading such securities, automated
quotation systems, published or other public sources, or on-line
information services. The Portfolio Indicative Value, as defined in
NYSE Arca Equities Rule 8.600 (c)(3), is disseminated by one or more
major market data vendors at least every 15 seconds during the
Exchange's Core Trading Session. On each business day, before
commencement of trading in Shares in the Core Trading Session on the
Exchange, the Fund discloses on its Web site the Disclosed Portfolio
that will form the basis for the Fund's calculation of NAV at the end
of the business day. Information regarding market price and trading
volume of the Shares is and will be continually available on a real-
time basis throughout the day on brokers' computer screens and other
electronic services, and quotation and last-sale information is
available via the Consolidated Tape Association high-speed line.
Trading in Shares of the Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule 7.12 have been reached or because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. Trading in the Shares is
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of the Fund may be halted. The Web
site for the Fund includes a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information. In addition, as stated in the Prior Release, investors
have ready access to information regarding the Fund's holdings, the
Portfolio Indicative Value, the Disclosed Portfolio, and quotation and
last-sale information for the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest. As noted in the Prior Release, the Exchange has in
place surveillance procedures relating to trading in the Shares and 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. In
addition, as stated in the Prior Notice, investors have ready access to
information regarding the Fund's holdings, the Portfolio Indicative
Value, the Disclosed Portfolio, and quotation and last-sale information
for the Shares. As noted above, the Fund may invest up to 20% of its
net assets in only highly liquid leveraged loans with readily available
prices. The Fund will invest in leveraged loans rated C or higher by an
NRSRO or is unrated but considered to be of comparable quality by the
Adviser or Sub-Adviser. The Fund will not invest in leveraged loans
that are in default at time of purchase. The Fund will only invest in
U.S. dollar-denominated leveraged loans. In addition, for investment
purposes, the leveraged loan must have a par amount outstanding of U.S.
$150 million or greater at the time the loan is originally issued.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange believes that
the proposed rule change, in permitting the Fund to utilize leveraged
loans as part of its portfolio to achieve its investment objective,
will enhance competition among issues of Managed Fund Shares that
invest in leveraged loans.
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
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act\15\ and Rule 19b-
4(f)(6) thereunder.\16\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\18\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Commission notes that
waiver of the operative delay would permit the Fund to invest
immediately in leveraged loans that the Sub-Adviser believes will
further the Fund's investment objective to achieve high current income
with a secondary goal of capital appreciation.
---------------------------------------------------------------------------
\17\ Id.
\18\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
Under the proposal, the Fund's investments in leveraged loans would
be limited to 20% of its net assets. The Exchange states that the Fund
will not invest in leveraged loans that are in default at time of
purchase and that the Fund will only invest in U.S. dollar-denominated
leveraged loans. In addition, for investment purposes, each leveraged
loan must have a par amount outstanding of U.S. $150 million or greater
at the time the loan is originally issued. The Commission notes that it
has approved the listing and trading of shares of another exchange-
traded fund that principally invests in similar leveraged loans.\19\
The Exchange represents that the Fund's investment objective is not
changing, all other representations made in the Prior Release remain
unchanged, and the Fund will continue to comply with all of the listing
requirements under NYSE Arca Equities Rule 8.600. For the foregoing
reasons, the Commission believes that the proposed change does not
raise novel or unique regulatory issues and is consistent with the
protection of investors and the public interest. Therefore, the
Commission waives the 30-day operative delay requirement and designates
the
[[Page 54718]]
proposed rule change as operative upon filing.\20\
---------------------------------------------------------------------------
\19\ See note 9, supra.
\20\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-2013-83 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-2013-83. 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 Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m.. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; 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 No. SR-NYSEArca-2013-83 and should be
submitted on or before September 26, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
[FR Doc. 2013-21535 Filed 9-4-13; 8:45 am]
BILLING CODE 8011-01-P