[Federal Register Volume 78, Number 247 (Tuesday, December 24, 2013)]
[Notices]
[Pages 77743-77749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30591]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71125; File No. SR-NYSEArca-2013-106]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1
Thereto, Relating to Listing and Trading of Shares of PIMCO Diversified
Income Exchange-Traded Fund, PIMCO Low Duration Exchange-Traded Fund
and PIMCO Real Return Exchange-Traded Fund under NYSE Arca Equities
Rule 8.600
December 18, 2013.
I. Introduction
On October 15, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the PIMCO
Diversified Income Exchange-Traded Fund, PIMCO Low Duration Exchange-
Traded Fund, and PIMCO Real Return Exchange-Traded Fund (individually,
``Fund'' and, collectively, ``Funds'') under NYSE Arca Equities Rule
8.600. On October 29, 2013, the Exchange filed Amendment No. 1 to the
proposal.\3\ The proposed rule change, as modified by Amendment No. 1
thereto, was published for comment in the Federal Register on November
5, 2013.\4\ The Commission received no comments on the proposal. This
order grants approval of the proposed rule change, as modified by
Amendment No. 1 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced and superseded the proposal in its
entirety.
\4\ See Securities Exchange Act Release No. 70774 (October 30,
2013), 78 FR 66396 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade the Shares of the Funds
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing
and trading of Managed Fund Shares on the Exchange. The Shares will be
offered by PIMCO ETF Trust (``Trust''), a statutory trust organized
under the laws of the State of Delaware and registered with the
Commission as an open-end management investment company.\5\ The
investment manager to the Funds will be Pacific Investment Management
Company LLC (``PIMCO'' or ``Adviser''). PIMCO Investments LLC will
serve as the distributor for the Funds. State Street Bank & Trust Co.
will serve as the custodian and transfer agent for the Funds. The
Exchange represents that the Adviser is not a registered broker-dealer
but is affiliated with a broker-dealer and has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition and/or changes to a Fund's
respective portfolio.\6\ The Exchange makes the following
representations and statements in describing the Funds and their
respective investment strategies, including other portfolio holdings
and investment limitations.
---------------------------------------------------------------------------
\5\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). On April 22, 2013, the Trust filed with the
Commission an amendment to the Trust's registration statement on
Form N-1A under the Securities Act of 1933 (``Securities Act'') and
under the 1940 Act relating to the Funds (File Nos. 333-155395 and
811-22250) (``Registration Statement'').
\6\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The
Exchange represents that in the event (a) the Adviser or any sub-
adviser is a registered broker-dealer or becomes newly affiliated
with a broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer,
it will implement a fire wall with respect to its relevant personnel
or its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to a portfolio, and will
be subject to procedures designed to prevent the use and
dissemination of material, non-public information regarding such
portfolio.
---------------------------------------------------------------------------
PIMCO Diversified Income Exchange-Traded Fund
The Fund's investment objective will be to seek maximum total
return, consistent with preservation of capital and prudent investment
management. The Fund will seek to achieve its investment objective by
investing under normal circumstances \7\ at least 65% of
[[Page 77744]]
its total assets in a diversified portfolio of ``Fixed Income
Instruments'' of varying maturities and forward contracts on Fixed
Income Instruments.
---------------------------------------------------------------------------
\7\ The term ``under normal circumstances'' includes, but is not
limited to, the absence of extreme volatility or trading halts in
the fixed income markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
---------------------------------------------------------------------------
Fixed Income Instruments include bonds, debt securities and other
similar instruments issued by various U.S. and non-U.S. public- or
private-sector entities. Specifically, with respect to each of the
Funds (except as noted below), the term ``Fixed Income Instruments''
includes: securities issued or guaranteed by the U.S. Government, its
agencies or government-sponsored enterprises; corporate debt securities
of U.S. and non-U.S. issuers, including convertible securities and
corporate commercial paper; mortgage-backed and other asset-backed
securities; inflation-indexed bonds issued both by governments and
corporations; event-linked bonds; bank capital and trust preferred
securities; loan participations and assignments; delayed funding loans
and revolving credit facilities; bank certificates of deposit, fixed
time deposits, and bankers' acceptances; repurchase agreements on Fixed
Income Instruments and reverse repurchase agreements on Fixed Income
Instruments; debt securities issued by states or local governments and
their agencies, authorities, and other government-sponsored
enterprises; obligations of non-U.S. governments or their subdivisions,
agencies, and government-sponsored enterprises; and obligations of
international agencies or supranational entities.\8\
---------------------------------------------------------------------------
\8\ Securities issued by U.S. Government agencies or government-
sponsored enterprises may not be guaranteed by the U.S. Treasury.
With respect to the Funds' investments in bank capital securities,
there are two common types: Tier I and Tier II. Bank capital is
generally, but not always, of investment grade quality. Tier I
securities are typically exchange-traded and often take the form of
trust preferred securities. Tier II securities are commonly thought
of as hybrids of debt and preferred stock. Tier II securities are
typically traded over-the-counter, are often perpetual (with no
maturity date), are callable, and have a cumulative interest
deferral feature. This means that under certain conditions, the
issuer bank can withhold payment of interest until a later date.
However, such deferred interest payments generally earn interest.
With respect to the PIMCO Real Return Exchange-Traded Fund, the term
``Fixed Income Instruments'' does not include: event-linked bonds;
bank capital and trust preferred securities; loan participations and
assignments; and debt securities issued by states or local
governments and their agencies, authorities, and other government-
sponsored enterprises.
---------------------------------------------------------------------------
Forwards on securities are contracts to purchase or sell securities
for a fixed price at a future date beyond normal settlement time.
Forwards on Fixed Income Instruments are contracts to purchase or sell
Fixed Income Instruments for a fixed price at a future date beyond
normal settlement time. The Adviser represents that a forward will be a
useful tool for gaining exposure across markets, particularly in the
U.S. Treasury, U.S. agency, non-U.S. government, and mortgage markets
when a Fund seeks exposure to a particular issue or maturity.\9\ In
general, forwards can be an economically attractive substitute for an
underlying physical security that a Fund would otherwise purchase.
Economic benefits include potentially lower transaction costs or
attractive relative valuation of a forward versus a physical security
(e.g., differences in yields).
---------------------------------------------------------------------------
\9\ Investments in forwards will be made in accordance with the
1940 Act and consistent with each Fund's investment objectives and
policies. With respect to each of the Funds, the Adviser represents
that each Fund will typically use forwards as a substitute for
taking a position in the underlying asset and/or as part of a
strategy designed to reduce exposure to other risks, such as
interest rate or currency risk. A Fund may also use forwards to
enhance returns. To limit the potential risk associated with such
transactions, each Fund will segregate or ``earmark'' assets
determined to be liquid by PIMCO in accordance with procedures
established by the Trust's Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations arising from
its use of forwards. These procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, each Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of a Fund, including a Fund's use
of derivatives, may give rise to leverage, causing a Fund to be more
volatile than if it had not been leveraged. To mitigate leveraging
risk, the Adviser will segregate or ``earmark'' liquid assets or
otherwise cover the transactions that may give rise to such risk.
---------------------------------------------------------------------------
A common forward commitment is a mortgage ``to be announced''
(``TBA''), which is an important vehicle for gaining exposure to the
mortgage pass-through market. Mortgage TBAs provide exposure to new
mortgage pools, issued by the Government National Mortgage Association,
Federal National Mortgage Association, or Federal Home Loan Mortgage
Corporation, which have a regular, once-a-month settlement. When a fund
purchases a mortgage TBA, the underlying mortgage-related securities
are delivered in the next settlement cycle (unless settlement is
``rolled'' to a future date).
The Adviser believes that liquidity of a forward settling
transaction depends on the underlying issue or exposure (e.g., greater
liquidity for Treasuries as compared to a particular collateralized
mortgage obligation). For example, the mortgage TBA market is highly
liquid and positions can be easily added, rolled, or closed. According
to Financial Industry Regulatory Authority (``FINRA'') Trade Reporting
and Compliance Engine (``TRACE'') data, TBAs represented approximately
94% of total agency trading volume in the month of April 2013.
Forwards are marked to market daily and can be priced intraday
based on the underlying issue or exposure. Intraday pricing of
securities to be settled on a forward basis is often available on
quotation services such as Bloomberg. The visibility of intraday prices
of forwards is related to the visibility of prices of the underlying
asset. Market participants can efficiently value forward settling
securities as long as they have access to the relevant information,
such as the underlying exposure.
On behalf of the funds it manages, PIMCO maintains standardized
Master Forward Agreements in place with various counterparties. These
standardized agreements include procedures for periodic collateral
movement between a fund and the applicable counterparty to reflect
changes in the value of forwards held by a fund.
In selecting individual Fixed Income Instruments, or in making
broader sector allocations for the Fund, PIMCO will develop an outlook
for interest rates, currency exchange rates and the economy, analyze
credit and call risks, and use other investment selection techniques.
The proportion of the Fund's assets committed to an individual
investment, or investments with particular characteristics (such as
quality, sector, interest rate, or maturity), will vary based on
PIMCO's outlook for the U.S. economy and the economies of other
countries in the world, the financial markets, and other factors. PIMCO
will attempt to identify areas of the bond market that are undervalued
relative to the rest of the market. PIMCO may identify these areas by
grouping Fixed Income Instruments into sectors such as money markets,
governments, corporates,\10\ mortgages, asset-backed, and
international. Once investment opportunities are identified, PIMCO will
shift assets among individual Fixed Income Instruments, or among
sectors, depending upon changes
[[Page 77745]]
in relative valuations, credit spreads, and other factors.
---------------------------------------------------------------------------
\10\ While non-emerging markets corporate debt securities
(excluding commercial paper) generally must have $100 million or
more par amount outstanding and significant par value traded to be
considered as an eligible investment for each of the Funds, at least
80% of issues of such securities held by a Fund must have $100
million or more par amount outstanding at the time of investment.
See also infra note 13, regarding emerging market corporate debt
securities.
---------------------------------------------------------------------------
In managing the Fund, PIMCO may employ both a bottom-up and top-
down approach to investment selection. PIMCO's bottom-up value
investment style will attempt to identify Fixed Income Instruments or
sectors that are undervalued by the market in comparison to PIMCO's own
determination of value. Using a top-down value investment style, PIMCO
also will consider various qualitative and quantitative factors
relating to the U.S. and non-U.S. economies and financial markets.
These factors may include the outlook and projected growth of various
sectors, projected growth trends in the U.S. and non-U.S. economies,
forecasts for interest rates and the relationship between short- and
long-term interest rates (yield curve), relative valuation levels in
the financial markets and various segments within those markets,
information relating to business cycles, borrowing needs and the cost
of capital, political trends data relating to trade balances, and labor
information. PIMCO has the flexibility to reallocate the Fund's assets
among individual investments or sectors based on its ongoing analyses.
The average portfolio duration of the Fund normally will vary from
three to eight years, based on PIMCO's forecast for interest rates.\11\
The Fund may invest in both investment grade debt securities and high
yield debt securities (``junk bonds''), subject to a maximum of 10% of
its total assets in debt securities rated below B by Moody's Investors
Service, Inc. (``Moody's''), or equivalently rated by Standard & Poor's
Rating Services (``S&P'') or Fitch, Inc. (``Fitch''), or, if unrated,
determined by PIMCO to be of comparable quality.\12\ The Fund may
invest in securities and instruments that are economically tied to
emerging market countries.\13\ The Fund may invest in securities and
instruments denominated in foreign currencies and in U.S. dollar-
denominated securities or instruments of foreign issuers. Subject to
the Fund's investment limitations relating to high yield debt
securities generally, the Fund may invest up to 20% of its assets in
mortgage-backed securities or in other asset-backed securities,
although this 20% limitation does not apply to securities issued or
guaranteed by Federal agencies and/or U.S. government sponsored
instrumentalities.
---------------------------------------------------------------------------
\11\ Duration is a measure used to determine the sensitivity of
a security's price to changes in interest rates. The longer a
security's duration, the more sensitive it will be to changes in
interest rates.
\12\ PIMCO utilizes sophisticated proprietary techniques in its
creditworthiness analysis of unrated securities similar to the
processes utilized by Moody's, S&P, and Fitch in their respective
analyses of rated securities. For example, in making a ``comparable
quality'' determination for an unrated security, PIMCO may evaluate
the likelihood of payment by the obligor, the nature and provisions
of the debt obligation, and/or the protection afforded by, and
relative position of, the debt obligation in the event of
bankruptcy, reorganization, or other arrangement under laws
affecting creditors' rights. Upon consideration of these and other
factors, PIMCO may determine that an unrated security is of
comparable quality to rated securities in which the Fund may invest
consistent with the Fund's credit quality guidelines described
above.
\13\ PIMCO will have broad discretion to identify countries that
it considers to qualify as emerging markets. In making investments
in emerging market securities, the Fund will emphasize those
countries with relatively low gross national product per capita and
with the potential for rapid economic growth. Emerging market
countries are generally located in Asia, Africa, the Middle East,
Latin America, and Eastern Europe. PIMCO will select the country and
currency composition based on its evaluation of relative interest
rates, inflation rates, exchange rates, monetary and fiscal
policies, trade and current account balances, legal and political
developments, and any other specific factors it believes to be
relevant. While emerging markets corporate debt securities
(excluding commercial paper) generally must have $200 million or
more par amount outstanding and significant par value traded to be
considered as an eligible investment for each of the Funds, at least
80% of issues of such securities held by a Fund must have $200
million or more par amount outstanding at the time of investment.
---------------------------------------------------------------------------
The Fund's portfolio or the Fund's broad-based securities market
index (as defined in Form N-1A) will include a minimum of 13 non-
affiliated issuers (excluding a portfolio or broad-based securities
market index consisting entirely of exempted securities).\14\ The Fund
may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis and may engage in short sales.\15\ The Fund
may, without limitation, seek to obtain market exposure to the
securities in which it invests by entering into a series of purchase
and sale contracts or by using other investment techniques (such as buy
backs or dollar rolls). The ``total return'' sought by the Fund will
consist of income earned on the Fund's investments, plus capital
appreciation, if any, which generally arises from decreases in interest
rates, foreign currency appreciation, or improving credit fundamentals
for a particular sector or security.
---------------------------------------------------------------------------
\14\ The Fund's broad-based securities market index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
\15\ Each of the Funds may make short sales of securities to:
offset potential declines in long positions in similar securities;
to increase the flexibility of the Fund; for investment return; and
as part of a risk arbitrage strategy.
---------------------------------------------------------------------------
PIMCO Low Duration Exchange-Traded Fund
The Fund's investment objective will be to seek maximum total
return, consistent with preservation of capital and prudent investment
management. The Fund will seek to achieve its investment objective by
investing under normal circumstances at least 65% of its total assets
in a diversified portfolio of Fixed Income Instruments of varying
maturities and forward contracts on such Fixed Income Instruments.\16\
The average portfolio duration of the Fund normally will vary from one
to three years based on PIMCO's forecast for interest rates. In
selecting individual Fixed Income Instruments, or in making broader
sector allocations for the Fund, PIMCO will develop an outlook for
interest rates, currency exchange rates and the economy, analyze credit
and call risks, and use other investment selection techniques.
---------------------------------------------------------------------------
\16\ See supra discussion regarding forwards.
---------------------------------------------------------------------------
The Fund will invest primarily in investment grade debt securities,
but may invest up to 10% of its total assets in high yield debt
securities rated B to Ba by Moody's, or equivalently rated by S&P or
Fitch, or, if unrated, determined by PIMCO to be of comparable
quality.\17\ The Fund may invest up to 30% of its total assets in
securities and instruments denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities and
instruments of foreign issuers, subject to the Fund's investment
limitations relating to particular asset classes set forth herein. The
Fund may invest up to 10% of its total assets in securities and
instruments that are economically tied to emerging market countries,
subject to the Fund's investment limitations relating to particular
asset classes set forth herein.\18\ The Fund will normally limit its
foreign currency exposure (from non-U.S. dollar-denominated securities
or currencies) to 20% of its total assets.
---------------------------------------------------------------------------
\17\ See supra note 12.
\18\ See supra note 13.
---------------------------------------------------------------------------
The Fund's portfolio or the Fund's broad-based securities market
index (as defined in Form N-1A) will include a minimum of 13 non-
affiliated issuers (excluding a portfolio or broad-based securities
market index consisting entirely of exempted securities).\19\ Subject
to the Fund's 10% investment limitations relating to high yield debt
securities, the Fund may invest up to 20% of its assets in mortgage-
backed securities or in other asset-backed
[[Page 77746]]
securities, although this 20% limitation does not apply to securities
issued or guaranteed by Federal agencies and/or U.S. government
sponsored instrumentalities. The Fund may purchase or sell securities
on a when-issued, delayed delivery, or forward commitment basis and may
engage in short sales.\20\ The Fund may, without limitation, seek to
obtain market exposure to the securities in which it invests by
entering into a series of purchase and sale contracts or by using other
investment techniques (such as buy backs or dollar rolls). The ``total
return'' sought by the Fund will consist of income earned on the Fund's
investments, plus capital appreciation, if any, which generally arises
from decreases in interest rates, foreign currency appreciation, or
improving credit fundamentals for a particular sector or security.
---------------------------------------------------------------------------
\19\ The Fund's broad-based securities market index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
\20\ See supra note 15.
---------------------------------------------------------------------------
PIMCO Real Return Exchange-Traded Fund
The Fund's investment objective will be to seek maximum real
return, consistent with preservation of capital and prudent investment
management. The Fund will seek its investment objective by investing
under normal circumstances at least 80% of its net assets in inflation-
indexed bonds of varying maturities issued by U.S. and non-U.S.
governments, their agencies or instrumentalities, and corporations, and
forward contracts on such Fixed Income Instruments.\21\ Assets not
invested in inflation-indexed bonds may be invested in other types of
Fixed Income Instruments. Inflation-indexed bonds are fixed income
securities that are structured to provide protection against inflation.
The value of the bond's principal or the interest income paid on the
bond is adjusted to track changes in an official inflation measure. The
U.S. Treasury uses the Consumer Price Index for Urban Consumers as the
inflation measure. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation
index, calculated by that government. ``Real return'' equals total
return less the estimated cost of inflation, which is typically
measured by the change in an official inflation measure.
---------------------------------------------------------------------------
\21\ See supra discussion regarding forwards.
---------------------------------------------------------------------------
Because market convention for bonds is to use nominal yields to
measure duration, duration for real return bonds, which are based on
real yields, are converted to nominal durations through a conversion
factor. The resulting nominal duration typically can range from 20% and
90% of the respective real duration. All security holdings will be
measured in effective (nominal) duration terms.\22\ The effective
duration of the Fund normally will vary within three years (plus or
minus) of the effective portfolio duration of the securities comprising
the Barclays Capital U.S. TIPS Index, as calculated by PIMCO, which as
of January 31, 2013, as converted, was 6.16 years.
---------------------------------------------------------------------------
\22\ Effective duration takes into account that for certain
bonds expected cash flows will fluctuate as interest rates change
and is defined in nominal yield terms, which is market convention
for most bond investors and managers. The effective duration of the
Barclays Capital U.S. TIPS Index (referenced below) will be
calculated using the same conversion factors as the Fund.
---------------------------------------------------------------------------
The Fund will invest primarily in investment grade debt securities,
but may invest up to 10% of its total assets in high yield debt
securities rated B to Ba by Moody's, or equivalently rated by S&P or
Fitch, or, if unrated, determined by PIMCO to be of comparable
quality.\23\
---------------------------------------------------------------------------
\23\ See supra note 12.
---------------------------------------------------------------------------
The Fund also may invest up to 30% of its total assets in
securities denominated in foreign currencies, and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers,
subject to the Fund's investment limitations relating to particular
asset classes set forth herein. The Fund may invest up to 10% of its
total assets in securities and instruments that are economically tied
to emerging market countries, subject to the Fund's investment
limitations relating to particular asset classes set forth herein.\24\
The Fund will normally limit its foreign currency exposure (from non-
U.S. dollar-denominated securities or currencies) to 20% of its total
assets.
---------------------------------------------------------------------------
\24\ See supra note 13.
---------------------------------------------------------------------------
The Fund's portfolio or the Fund's broad-based securities market
index (as defined in Form N-1A) will include a minimum of 13 non-
affiliated issuers (excluding a portfolio or broad-based securities
market index consisting entirely of exempted securities).\25\ Subject
to the Fund's 10% investment limitations relating to high yield debt
securities, the Fund may invest up to 20% of its assets in mortgage-
backed securities or in other asset-backed securities, although this
20% limitation does not apply to securities issued or guaranteed by
Federal agencies and/or U.S. government sponsored instrumentalities.
The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis and may engage in short
sales.\26\ The Fund may, without limitation, seek to obtain market
exposure to the securities in which it invests by entering into a
series of purchase and sale contracts or by using other investment
techniques (such as buy backs or dollar rolls).
---------------------------------------------------------------------------
\25\ The Fund's broad-based securities market index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
\26\ See supra note 15.
---------------------------------------------------------------------------
Other Portfolio Holdings
If PIMCO believes that economic or market conditions are
unfavorable to investors, PIMCO may temporarily invest up to 100% of a
Fund's assets in certain defensive strategies, including holding a
substantial portion of a Fund's assets in cash, cash equivalents, or
other highly rated short-term securities, including securities issued
or guaranteed by the U.S. government, its agencies, or
instrumentalities, and affiliated money market and/or short-term bond
funds.
While the debt securities in which the Funds primarily intend to
invest are expected to consist of Fixed Income Instruments, as
described above, the Funds may invest their respective remaining net
assets in other securities and financial instruments, as described
below.
Each of the Funds may engage in foreign currency transactions
through forward currency contracts. A forward foreign currency exchange
contract, which involves an obligation to purchase or sell a specific
currency at a future date at a price set at the time of the contract,
reduces the Fund's exposure to changes in the value of the currency it
will deliver and increases its exposure to changes in the value of the
currency it will receive for the duration of the contract. A Fund's
investments in foreign currency forwards will be subject to the limit
on a Fund's foreign currency exposure. For each of the PIMCO Low
Duration Exchange-Traded Fund and PIMCO Real Return Exchange-Traded
Fund, foreign currency exposure will not exceed 20% of the Fund's total
assets. There is no limit on the PIMCO Diversified Income Fund's
foreign currency exposure.
The Funds may invest in equity securities. The Funds will invest
only in U.S. and non-U.S. equity securities that trade in markets that
are members of the Intermarket Surveillance Group (``ISG''), which
includes all U.S. national securities exchanges and certain foreign
exchanges, or are parties to a comprehensive surveillance sharing
agreement with the Exchange. The Funds each may invest up to 10% of its
total assets in preferred stock,
[[Page 77747]]
convertible securities,\27\ and other equity-related securities.
---------------------------------------------------------------------------
\27\ A convertible security is a bond, debenture, note,
preferred stock, or other security that entitles the holder to
acquire common stock or other equity securities of the same or a
different issuer. A convertible security generally entitles the
holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted, or exchanged.
---------------------------------------------------------------------------
The Funds may invest in, to the extent permitted by Section
12(d)(1) of the 1940 Act and rules thereunder, other affiliated and
unaffiliated funds, such as open-end or closed-end management
investment companies, including other exchange-traded funds.
Each Fund may hold up to an aggregate amount of 15% of its
respective net assets in illiquid securities (calculated at the time of
investment), including Rule 144A securities deemed illiquid by the
Adviser, consistent with Commission guidance.\28\ The Funds will
monitor their 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 a 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.
---------------------------------------------------------------------------
\28\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
---------------------------------------------------------------------------
Investment Limitations
The Funds will be subject to the following investment limitations:
The Funds may not concentrate their investments in a particular
industry, as that term is used in the 1940 Act, and as interpreted,
modified, or otherwise permitted by regulatory authority having
jurisdiction from time to time.
With respect to the PIMCO Diversified Income Exchange-Traded Fund
and PIMCO Low Duration Exchange-Traded Fund, the Funds may not, with
respect to 75% of each Fund's total assets, purchase the securities of
any issuer, except securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, if, as a result
(i) more than 5% of a Fund's total assets would be invested in the
securities of that issuer, or (ii) a Fund would hold more than 10% of
the outstanding voting securities of that issuer. For purposes of this
restriction, each state and each separate political subdivision,
agency, authority, or instrumentality of such state, each multi-state
agency or authority, and each guarantor, if any, will be treated as
separate issuers of municipal bonds. The PIMCO Real Return Exchange-
Traded Fund will be non-diversified, which means that it may invest its
assets in a smaller number of issuers than a diversified fund.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue
Code.
The Funds will not invest in options contracts, futures contracts,
or swap agreements.
Additional information regarding the Trust, the Funds, and the
Shares, including investment strategies, risks, net asset value
(``NAV'') calculation, creation and redemption procedures, fees,
portfolio holdings, disclosure policies, distributions and taxes is
included in the Notice and the Registration Statement, as
applicable.\29\
---------------------------------------------------------------------------
\29\ See supra notes 4 and 5, respectively.
---------------------------------------------------------------------------
III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \30\ and the rules and regulations thereunder applicable to a
national securities exchange.\31\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\32\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to, and perfect the mechanism of, a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission notes that
the Funds and the Shares must comply with the requirements of NYSE Arca
Equities Rule 8.600 to be listed and traded on the Exchange.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f.
\31\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\33\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares of each Fund will be available via the
Consolidated Tape Association (``CTA'') high-speed line. In addition,
the Portfolio Indicative Value (``PIV''), as defined in NYSE Arca
Equities Rule 8.600(c)(3), for each Fund will be widely disseminated by
one or more major market data vendors at least every 15 seconds during
the Exchange's Core Trading Session.\34\ On each business day, before
commencement of trading in Shares in the Core Trading Session (9:30
a.m., E.T. to 4:00 p.m., E.T.) on the Exchange, each Fund will disclose
on the Trust's Web site the Disclosed Portfolio, as defined in NYSE
Arca Equities Rule 8.600(c)(2), that will form the basis for a Fund's
calculation of NAV at the end of the business day.\35\ The NAV of each
Fund's Shares will be determined as of the close of regular trading
(normally 4:00 p.m., E.T.) on each day the Exchange is open. In
addition, 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, and
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. The Trust's Web site will include a
form of the prospectus for the Funds and additional data relating to
NAV and other applicable quantitative information. Intra-day and
closing price information regarding equity securities traded on a
national securities exchange, including common stocks,
[[Page 77748]]
preferred stocks, securities convertible into stocks, closed-end funds,
exchange traded funds, and other equity-related securities, will be
available from the exchange on which such securities are traded. Price
information regarding non-exchange-traded open-end or closed-end
management investment companies will be available from major market
data vendors. Intra-day and closing price information regarding Fixed
Income Instruments also will be available from major market data
vendors. Price information relating to forwards will be available from
major market data vendors. Further, a basket composition file, which
will include the security names and quantities of securities required
to be delivered in exchange for a Fund's Shares, together with
estimates and actual cash components, will be publicly disseminated
daily prior to the opening of the New York Stock Exchange via the
National Securities Clearing Corporation. The basket will represent one
``Creation Unit'' of the Fund.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\34\ According to the Exchange, several major market data
vendors display or make widely available PIVs taken from CTA or
other data feeds.
\35\ On a daily basis, each Fund will disclose for each
portfolio security and other financial instrument of a Fund the
following information: ticker symbol (if applicable), name of
security and financial instrument, number of shares, if applicable,
and dollar value of securities and financial instruments held in the
portfolio, and percentage weighting of the security and financial
instrument in the portfolio. Each Fund's disclosure of forward
positions will include information that market participants can use
to value these positions intraday, and this information may include
tickers or other identifiers, or the underlying asset or index. The
Web site information will be publicly available at no charge.
---------------------------------------------------------------------------
The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares for each Fund that the NAV
per Share will be calculated daily and that the NAV and the Disclosed
Portfolio will be made available to all market participants at the same
time.\36\ In addition, the Exchange will halt trading in the Shares
under the specific circumstances set forth in NYSE Arca Equities Rule
8.600(d)(2)(D), and may halt trading in the Shares if trading is not
occurring in the securities or the financial instruments constituting
the Disclosed Portfolio of a Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\37\ The Exchange will consider the suspension of
trading in or removal from listing of the Shares if the PIV is no
longer calculated or available or the Disclosed Portfolio is not made
available to all market participants at the same time.\38\ The Exchange
represents that the Adviser is affiliated with a broker-dealer and has
implemented a fire wall with respect to its broker-dealer affiliate
regarding access to information concerning the composition and/or
changes to a portfolio.\39\ The Commission notes that the Adviser's
personnel who make decisions on a Fund's portfolio composition must be
subject to procedures designed to prevent the use and dissemination of
material, non-public information regarding a Fund's portfolio.\40\
Further, the Commission notes that the Reporting Authority that
provides the Disclosed Portfolio must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material, non-public information regarding the actual components of a
portfolio.\41\ The Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees. The Commission also notes that, with respect to equity
securities, the Funds will invest only in U.S. and non-U.S. equity
securities that trade in markets that are members of the ISG, which
includes all U.S. national securities exchanges and certain foreign
exchanges, or are parties to a comprehensive surveillance sharing
agreement with the Exchange.
---------------------------------------------------------------------------
\36\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\37\ 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 a Fund. Trading in Shares of a 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.
\38\ See NYSE Arca Equities Rule 8.600(d)(2)(C)(ii).
\39\ See supra note 6 and accompanying text. The Commission
notes that an investment adviser to an open-end fund is required to
be registered under the Investment Advisers Act of 1940 (``Advisers
Act''). As a result, the Adviser and its 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.
\40\ See Commentary .06 to NYSE Arca Equities Rule 8.600.
\41\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
---------------------------------------------------------------------------
The Exchange further represents that the Shares are deemed to be
equity securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange 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.
(4) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and exchange-traded securities held by
the Funds with other markets and other entities that are members of the
ISG, and FINRA, on behalf of the Exchange, may obtain trading
information regarding trading in the Shares and exchange-traded
securities held by the Funds from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and exchange-traded securities held by the Funds from markets
and other entities that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement. In
addition, FINRA, on behalf of the Exchange, is able to access, as
needed, trade information for certain Fixed Income Instruments reported
to TRACE. The Funds will invest only in U.S. and non-U.S. equity
securities that trade in markets that are members of the ISG. The
Exchange would be able to obtain surveillance information via ISG from
other exchanges that are members of ISG or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
(5) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin will discuss the
following: (a) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (and that Shares are not individually
redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (d) how information regarding the PIV is
[[Page 77749]]
disseminated; (e) the requirement that ETP Holders deliver a prospectus
to investors purchasing newly issued Shares prior to or concurrently
with the confirmation of a transaction; and (f) trading information.
(6) For initial and continued listing, each Fund will be in
compliance with Rule 10A-3 under the Act,\42\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\42\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(7) Each Fund may hold up to an aggregate amount of 15% of its
respective net assets in illiquid securities (calculated at the time of
investment), including Rule 144A securities deemed illiquid by the
Adviser, consistent with Commission guidance. The Funds will monitor
their 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 a Fund's net assets are held
in illiquid securities.
(8) Investments in forwards will be made in accordance with the
1940 Act and consistent with each Fund's investment objectives and
policies. To limit the potential risk associated with forwards, each
Fund will segregate or ``earmark'' liquid assets to cover its
obligations arising from its use of forwards. In addition, each Fund
will include appropriate risk disclosure in its offering documents,
including leveraging risk.
(9) While non-emerging markets corporate debt securities (excluding
commercial paper) generally must have $100 million or more par amount
outstanding and significant par value traded to be considered as an
eligible investment for each of the Funds, at least 80% of issues of
such securities held by a Fund must have $100 million or more par
amount outstanding at the time of investment.
(10) While emerging markets corporate debt securities (excluding
commercial paper) generally must have $200 million or more par amount
outstanding and significant par value traded to be considered as an
eligible investment for each of the Funds, at least 80% of issues of
such securities held by a Fund must have $200 million or more par
amount outstanding at the time of investment.
(11) Subject to each Fund's investment limitations relating to high
yield debt securities generally, each Fund may invest up to 20% of its
assets in mortgage-backed securities or in other asset-backed
securities, although this 20% limitation does not apply to securities
issued or guaranteed by Federal agencies and/or U.S. government
sponsored instrumentalities.
(12) The PIMCO Diversified Income Exchange-Traded Fund is subject
to a maximum of 10% of its total assets in debt securities rated below
B by Moody's, or equivalently rated by S&P or Fitch, or, if unrated,
determined by PIMCO to be of comparable quality.
(13) With respect to the PIMCO Low Duration Exchange-Traded Fund
and the PIMCO Real Return Exchange-Traded Fund, each Fund will normally
limit its foreign currency exposure (from non-U.S. dollar-denominated
securities or currencies) to 20% of its total assets. Each Fund will
invest primarily in investment grade debt securities, although it may
invest up to 10% of its total assets in high yield debt securities
rated B to Ba by Moody's, or equivalently rated by S&P or Fitch, or, if
unrated, determined by PIMCO to be of comparable quality.
(14) For purposes of calculating NAV, portfolio securities and
other assets for which market quotes are readily available will be
valued at market value. Market value will generally be determined on
the basis of last reported sales prices, or if no sales are reported,
as is the case for most securities traded over-the-counter, based on
quotes obtained from a quotation reporting system, established market
makers, or independent pricing services. For exchange-traded
securities, including common stocks, preferred stocks, securities
convertible into stocks, closed-end funds, exchange traded funds, and
other equity-related securities, market value also may be determined on
the day that the valuation is made based on the applicable exchange's
official closing price or last-reported sales price. Shares of non-
exchange-traded open-end or closed-end management investment companies
normally will be valued at their most recently calculated NAV. Fixed
Income Instruments, including those to be purchased under firm
commitment agreements (other than obligations having a maturity of 60
days or less), will be normally valued on the basis of quotes obtained
from brokers and dealers or independent pricing services, which take
into account appropriate factors such as institutional-sized trading in
similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data. In
addition, Fixed Income Instruments will normally be valued using data
reflecting the earlier closing of the principal markets for those
assets. Forwards for which market quotes are readily available will be
valued at market value. Local closing prices will be used for all
instrument valuation purposes. Typically, forwards on Fixed Income
Instruments will be marked to market daily.
(15) There will be minimal, if any, impact to the arbitrage
mechanism as a result of the use of forwards. Market makers and
participants should be able to value forwards as long as the positions
are disclosed with relevant information. The price at which Shares will
trade will be disciplined by arbitrage opportunities created by the
ability to purchase or redeem creation Shares at their NAV, which
should ensure that Shares will not trade at a material discount or
premium in relation to their NAV. There will not be any significant
impacts to the settlement or operational aspects of a Fund's arbitrage
mechanism due to the use of forwards. To the extent forwards are not
eligible for in-kind transfer, they will typically be substituted with
a ``cash in lieu'' amount when a Fund processes purchases or
redemptions of creation units in-kind.
(16) The Funds will not invest in options contracts, futures
contracts, or swap agreements.
(17) A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange.
This approval order is based on the Exchange's representations and
description of the Funds, including those set forth above and in the
Notice. For the foregoing reasons, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act \43\
and the rules and regulations thereunder applicable to a national
securities exchange.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-NYSEArca-2013-106), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78s(b)(2).
\45\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30591 Filed 12-23-13; 8:45 am]
BILLING CODE 8011-01-P