[Federal Register Volume 79, Number 38 (Wednesday, February 26, 2014)]
[Notices]
[Pages 10848-10861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71588; File No. SR-NYSEArca-2014-10]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Adopt NYSE Arca Equities Rule 8.900, Which
Permits the Listing and Trading of Managed Portfolio Shares, and To
List and Trade Shares of the ActiveShares\SM\ Large-Cap Fund,
ActiveShares\SM\ Mid-Cap Fund, and ActiveShares\SM\ Multi-Cap Fund
Pursuant to That Rule
February 20, 2014.
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 February 7, 2014, 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 self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 adopt new NYSE Arca Equities Rule 8.900 to
permit it to list and trade Managed Portfolio Shares, which are shares
of actively managed exchange-traded funds (``ETFs'') for which the
portfolio is disclosed quarterly. In addition, the Exchange proposes to
list and trade shares of the following under proposed NYSE Arca
Equities Rule 8.900: ActiveShares\SM\ Large-Cap Fund; ActiveShares\SM\
Mid-Cap Fund; and ActiveShares\SM\ Multi-Cap 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 add new NYSE Arca Equities Rule 8.900 for
the purpose of permitting the listing and trading, or trading pursuant
to unlisted trading privileges (``UTP''), of Managed Portfolio Shares,
which are securities issued by an actively managed open-end investment
management company.\4\ The Exchange also proposes to amend NYSE Arca
Equities Rule 7.34 (Trading Sessions) to reference securities described
in proposed NYSE Arca Equities Rule 8.900 in Rule 7.34(a)(4)(A)
relating to trading halts for trading pursuant to UTP during the
Exchange's Opening Session.
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\4\ A Managed Portfolio 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 adviser
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) (``Index ETFs''), 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.
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In addition to the above-mentioned proposed rule changes, the
Exchange proposes to list and trade shares (``Shares'') of the
following under proposed NYSE Arca Equities Rule 8.900:
ActiveShares\SM\ Large-Cap Fund; ActiveShares\SM\ Mid-Cap Fund; and
ActiveShares\SM\ Multi-Cap Fund (each a ``Fund'' and, collectively, the
``Funds'').
Proposed Listing Rules
Proposed Rule 8.900(a) provides that the Corporation will consider
for trading, whether by listing or pursuant to UTP, Managed Portfolio
Shares that meet the criteria of Rule 8.900.
Proposed Rule 8.900(b) provides that Rule 8.900 is applicable only
to Managed Portfolio Shares and that, except to the extent inconsistent
with Rule 8.900, or unless the context otherwise requires, the rules
and procedures of the Corporation's Board of Directors shall be
applicable to the trading on the Corporation of such securities.
Proposed Rule 8.900(b) provides further that Managed Portfolio Shares
are included within the definition of ``security'' or ``securities'' as
such terms are used in the Rules of the Corporation.
Proposed Definitions. Proposed Rule 8.900(c)(1) defines the term
``Managed Portfolio Share'' as a security that (a) is issued by a
registered investment company (``Investment Company'') organized as an
open-end management investment company or similar entity, that invests
in a portfolio of securities selected by the Investment Company's
investment adviser consistent with the Investment Company's investment
objectives and policies; (b) is issued in any size amount for a cash
amount equal to the next determined net asset value (``NAV''); (c) may
be redeemed for cash by any Retail Investor (as defined below) in any
size less than a Redemption Unit (as defined below) for a cash amount
equal to the next determined NAV; and (d) when aggregated in a number
of shares equal to a Redemption Unit or multiples thereof, may be
redeemed at a holder's request, which holder will be paid though a
blind trust established for its benefit a portfolio of securities and/
or cash with a value equal to the next determined NAV.
Proposed Rule 8.900(c)(2) defines the term ``Retail Investor'' as
(i) a natural person; (ii) a trust established exclusively for the
benefit [sic] a natural person or a group of related family members; or
(iii) a tax deferred retirement plan where investments are selected by
a natural person purchasing for its own account.
Proposed Rule 8.900(c)(3) defines the term ``Portfolio Indicative
Value'' as the estimated indicative value of an Managed Portfolio Share
based on all of the issuer's holdings as of the close of business on
the prior business day.
Proposed Rule 8.900(c)(4) defines the term ``Redemption Unit'' as a
specified number of Managed Portfolio Shares used for determining
whether a Retail Investor may redeem for cash.
Proposed Rule 8.900(c)(5) defines the term [sic]Reporting
Authority'' in respect of a particular series of Managed Portfolio
Shares as a reporting service designated by the issuer and acceptable
to the Corporation or by the exchange
[[Page 10849]]
that lists a particular series of Managed Portfolio Shares (if the
Corporation is trading such series pursuant to UTP) as the official
source for calculating and reporting information relating to such
series, including, but not limited to, the Portfolio Indicative Value,
NAV, or other information relating to the issuance, redemption or
trading of Managed Portfolio Shares. A series of Managed Portfolio
Shares may have more than one Reporting Authority, each having
different functions.
Proposed Rule 8.900(d) sets forth initial and continued listing
criteria applicable to Managed Portfolio Shares. Proposed Rule
8.900(d)(1) provides that, for each series of Managed Portfolio Shares,
the Corporation will establish a minimum number of Managed Portfolio
Shares required to be outstanding at the time of commencement of
trading on the Corporation. In addition, the Corporation will obtain a
representation from the issuer of each series of Managed Portfolio
Shares that the NAV per share for the series will be calculated daily
and that the NAV will be made available to all market participants at
the same time.\5\
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\5\ NYSE Arca Equities Rule 7.34(a)(5) (``Trading Halts of
Derivative Securities Products Listed on the NYSE Arca
Marketplace)'' provides that, with respect to Derivative Securities
Products listed on the NYSE Arca Marketplace for which a net asset
value is disseminated, if the Exchange becomes aware that the a net
asset value is not being disseminated to all market participants at
the same time, it will halt trading in the affected Derivative
Securities Product on the NYSE Arca Marketplace until such time as
the a net asset value is available to all market participants.
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Proposed Rule 8.900(d)(2) provides that each series of Managed
Portfolio Shares will be listed and traded subject to application of
the following continued listing criteria. Proposed Rule 8.900(d)(2)(A)
provides that the Portfolio Indicative Value for Managed Portfolio
Shares will be widely disseminated by one or more major market data
vendors at least every 15 seconds during Core Trading Session.
Proposed Rule 8.900(d)(2)(B) provides that the Corporation will
consider the suspension of trading in or removal from listing of a
series of Managed Portfolio Shares under any of the following
circumstances: (i) if, following the initial twelve-month period after
commencement of trading on the Exchange of a series of Managed
Portfolio Shares, there are fewer than 50 beneficial holders of the
series of Managed Portfolio Shares for 30 or more consecutive trading
days; (ii) if the value of the Portfolio Indicative Value is no longer
calculated or made available to all market participants at the same
time; (iii) if the Investment Company issuing the Managed Portfolio
Shares has failed to file any filings required by the Commission or if
the Corporation is aware that the Investment Company is not in
compliance with the conditions of any exemptive order or no-action
relief granted by the Commission to the Investment Company with respect
to the series of Managed Portfolio Shares; or (iv) if such other event
shall occur or condition exists which, in the opinion of the
Corporation, makes further dealings on the Corporation inadvisable.
Proposed Rule 8.900(d)(2)(C) provides that, if the Portfolio
Indicative Value of a series of Managed Portfolio Shares is not being
disseminated as required, the Corporation may halt trading during the
day in which the interruption to the dissemination of the Portfolio
Indicative Value occurs. If the interruption to the dissemination of
the Portfolio Indicative Value persists past the trading day in which
it occurred, the Corporation will halt trading no later than the
beginning of the trading day following the interruption. If a series of
Managed Portfolio Shares is trading on the Corporation pursuant to UTP,
the Corporation will halt trading in that series as specified in Rule
7.34(a). In addition, if the Exchange becomes aware that the NAV with
respect to a series of Managed Portfolio Shares is not disseminated to
all market participants at the same time, it will halt trading in such
series until such time as the NAV is available to all market
participants.
Proposed Rule 8.900(d)(2)(D) provides that, upon termination of an
Investment Company, the Corporation requires that Managed Portfolio
Shares issued in connection with such entity be removed from
Corporation listing.
Proposed Rule 8.900(d)(2)(E) provides that voting rights shall be
as set forth in the applicable Investment Company prospectus. Proposed
Rule 8.600(e) relates to limitation of Corporation liability.
Proposed Rule 8.900(e), which relates to limitation of corporation
liability, provides that neither the Corporation, the Reporting
Authority, nor any agent of the Corporation shall have any liability
for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current
portfolio value; the current value of the portfolio of securities
required to be deposited to the open-end management investment company
in connection with issuance of Managed Portfolio Shares; the amount of
any dividend equivalent payment or cash distribution to holders of
Managed Portfolio Shares; NAV; or other information relating to the
purchase, redemption, or trading of Managed Portfolio Shares, resulting
from any negligent act or omission by the Corporation, the Reporting
Authority or any agent of the Corporation, or any act, condition, or
cause beyond the reasonable control of the Corporation, its agent, or
the Reporting Authority, including, but not limited to, an act of God;
fire; flood; extraordinary weather conditions; war; insurrection; riot;
strike; accident; action of government; communications or power
failure; equipment or software malfunction; or any error, omission, or
delay in the reports of transactions in one or more underlying
securities.
Proposed Commentary .01 to NYSE Arca Equities Rule 8.900 provides
that the Corporation will file separate proposals under Section 19(b)
of the Act before the listing and trading of Managed Portfolio Shares.
Proposed Commentary .02 to NYSE Arca Equities Rule 8.900 provides that
transactions in Managed Portfolio Shares will occur during the trading
hours specified in NYSE Arca Equities Rule 7.34(a).
Proposed Commentary .03 to NYSE Arca Equities Rule 8.900 provides
that the Exchange will implement written surveillance procedures for
Managed Portfolio Shares.
Proposed Commentary .04 to NYSE Arca Equities Rule 8.900 provides
that Authorized Participants (as described further below) redeeming
Managed Portfolio Shares will sign an agreement with the applicable
fund requiring the establishment of a blind trust for the benefit of
such Authorized Participant that will receive all consideration from
the issuer in a redemption, which blind trust will be bound not to
disclose the consideration received in a redemption except as required
by law and will liquidate any securities received in a redemption in
accordance with standing instructions for the Authorized Participant.
Proposed Commentary .05 to NYSE Arca Equities Rule 8.900 provides
that, if the investment adviser to the Investment Company issuing
Managed Portfolio Shares is affiliated with a broker-dealer, such
investment adviser shall erect a ``fire wall'' between the investment
adviser and the broker-dealer with respect to access to information
concerning the composition and/or changes to such Investment Company
portfolio. Personnel who make decisions on the Investment Company's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material nonpublic information regarding
the applicable Investment Company portfolio.
[[Page 10850]]
Other Rules
The Exchange proposes to amend NYSE Arca Equities Rule 7.34(a)(4)
to include Managed Portfolio Shares under ``Derivative Securities
Products'' for purposes of Rule 7.34(a)(4) relating to trading halts
for trading pursuant to UTP of Derivative Securities Products on the
Exchange.\6\
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\6\ The Exchange will propose applicable NYSE Arca Equities
listing fees for Managed Portfolio Shares in the NYSE Arca Equities
Schedule of Fees and Charges via a separate proposed rule change.
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Key Features of Managed Portfolio Shares
While funds issuing Managed Portfolio Shares will be actively-
managed and, to that extent, will be similar to Managed Fund Shares,
Managed Portfolio Shares differ from Managed Fund Shares in the
following important respects. First, in contrast to Managed Fund
Shares, which are actively-managed funds listed and traded under NYSE
Arca Equities Rule 8.600 \7\ and for which a ``Disclosed Portfolio'' is
required to be disseminated at least once daily,\8\ the portfolio for
an issue of Managed Portfolio Shares will be disclosed quarterly in
accordance with normal disclosure requirements otherwise applicable to
open-end investment companies registered under the 1940 Act.\9\ Second,
in connection with the redemption of shares in Redemption Unit size,
the delivery of any portfolio securities in kind will generally be
effected through a blind trust for the benefit of the redeeming
Authorized Participant and the blind trust will liquidate the portfolio
securities without disclosing the identity of such securities to the
Authorized Participant. Third, as with traditional open-end investment
companies, retail investors will be able to redeem shares for cash
directly from a fund on any day and in any size less than a Redemption
Unit at the fund's NAV, as described in more detail below. Fourth,
investors will be able to purchase shares for cash directly from a fund
in any amount on any day a fund determines its NAV, as described in
more detail below. Investors may choose to purchase shares directly
from a fund if they want to assure that they will not purchase shares
at a premium.
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\7\ The Commission has previously approved listing and trading
on the Exchange of a number of issues of Managed Fund Shares under
Rule 8.600. See, e.g., Securities Exchange Act Release Nos. 57801
(May 8, 2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31)
(order approving Exchange listing and trading of twelve actively-
managed funds of the WisdomTree Trust); 60460 (August 7, 2009), 74
FR 41468 (August 17, 2009) (SR-NYSEArca-2009-55) (order approving
listing of Dent Tactical ETF); 63076 (October 12, 2010), 75 FR 63874
(October 18, 2010) (SR-NYSEArca-2010-79) (order approving Exchange
listing and trading of Cambria Global Tactical ETF); 63802 (January
31, 2011), 76 FR 6503 (February 4, 2011) (SR-NYSEArca-2010-118)
(order approving Exchange listing and trading of the SiM Dynamic
Allocation Diversified Income ETF and SiM Dynamic Allocation Growth
Income ETF).
\8\ NYSE Arca Equities Rule 8.600(c)(2) defines the term
``Disclosed Portfolio'' as the identities and quantities of the
securities and other assets held by the Investment Company that will
form the basis for the Investment Company's calculation of net asset
value at the end of the business day. NYSE Arca Equities Rule
8.600(d)(2)(B)(i) requires that the Disclosed Portfolio will be
disseminated at least once daily and will be made available to all
market participants at the same time.
\9\ A mutual fund is required to file with the Commission its
complete portfolio schedules for the second and fourth fiscal
quarters on Form N-SAR under the 1940 Act, and is required to file
its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end
of the quarter. Form N-Q requires funds to file the same schedules
of investments that are required in annual and semi-annual reports
to shareholders. These forms are available to the public on the
Commission's Web site at www.sec.gov.
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For each series of Managed Portfolio Shares, an estimated value,
defined in the proposed rules as the ``Portfolio Indicative Value,''
(``PIV'') that reflects an estimated intraday value of a fund's
portfolio will be disseminated. The PIV will be based upon all of a
fund's holdings as of the close of the prior business day and will be
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Exchange's Core Trading Session (normally,
9:30 a.m. to 4:00 p.m., Eastern Time). The dissemination of the PIV
will allow investors to determine the estimated intra-day value of the
underlying portfolio of a series of Managed Portfolio Shares on a daily
basis and will provide a close estimate of that value throughout the
trading day. The PIV should not be viewed as a ``real-time'' update of
the NAV per share of each fund because the PIV 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. Unlike the PIV, which will be
based on consolidated last sale information, the NAV per share will be
based on the closing price on the primary market for each portfolio
security. If there is no closing price for a particular portfolio
security, such as when it [sic] the subject of a trading halt, a fund
will use fair value pricing. That fair value pricing will be carried
over to the next day's PIV until the first trade in that stock is
reported.
The Exchange, after consulting with various Lead Market Makers that
trade ETFs on the Exchange, believes that market makers will be able to
make efficient and liquid markets priced near the PIV as long as an
accurate PIV is disseminated every 15 seconds and market makers have
knowledge of a fund's means of achieving its investment objective, even
without daily disclosure of a fund's underlying portfolio. The Exchange
believes that market makers will employ risk-management techniques such
as ``statistical arbitrage'', which is currently used throughout the
financial services industry, to make efficient markets in exchange-
traded products.\10\ This ability should permit market makers to make
efficient markets in an issue of Managed Portfolio Shares without
knowledge of a fund's underlying portfolio.
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\10\ Statistical arbitrage enables a trader to construct an
accurate proxy for another instrument, allowing it to hedge the
other instrument or buy or sell the instrument when it is cheap or
expensive in relation to the proxy. Statistical analysis permits
traders to discover correlations based purely on trading data
without regard to other fundamental drivers. These correlations are
a function of differentials, over time, between one instrument or
group of instruments and one or more other instruments. Once the
nature of these price deviations have been quantified, a universe of
securities is searched in an effort to, in the case of a hedging
strategy, minimize the differential. Once a suitable hedging proxy
has been identified, a trader can minimize portfolio risk by
executing the hedging basket. The trader then can monitor the
performance of this hedge throughout the trade period making
correction [sic] where warranted.
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The Exchange understands that traders use statistical analysis to
derive correlations between different sets of instruments to identify
opportunities to buy or sell one set of instruments when it is
mispriced relative to the others. For Managed Portfolio Shares, market
makers will initially use the knowledge of a fund's means of achieving
its investment objective, as described in the applicable fund
registration statement, to construct a hedging proxy for a fund to
manage a market maker's quoting risk in connection with trading fund
shares. Market makers will then conduct statistical arbitrage between
their hedging proxy (for example, the Russell 1000 Index) and shares of
a fund, buying and selling one against the other over the course of the
trading day,[sic] They will evaluate how their proxy performed in
comparison to the price of a fund's shares, and use that analysis as
well as knowledge of risk metrics, such as volatility and turnover, to
enhance their proxy calculation to make it a more efficient hedge.
Market makers have indicated to the Exchange that, after the first
few days of trading, there will be sufficient data to run a statistical
analysis which will lead to spreads being tightened substantially
around the PIV. This is similar to certain other existing exchange
traded products (for example, ETFs that invest
[[Page 10851]]
in foreign securities that do not trade during U. S. trading hours), in
which spreads may be generally wider in the early days of trading and
then narrow as market makers gain more confidence in their real-time
hedges.
Description of the Funds and the Trust
The Shares of each Fund will be issued by Precidian ETFs 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.\11\ The investment adviser to the Trust will be
Precidian Funds LLC (the ''Adviser''). JPMorgan Chase Bank, N.A. (the
``Transfer Agent'', ``Administrator'', or ``Custodian'') will serve as
the Funds' transfer agent, administrator and custodian. Foreside Fund
Services, LLC (``Distributor'') will serve as the distributor of the
Shares.
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\11\ The Trust will be registered under the 1940 Act. On January
22, 2014, the Trust filed a registration statement on Form N-1A
under the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a),
and under the 1940 Act relating to the Funds (File Nos. 333-171987
and 811-22524) (the ``Registration Statement''). The Trust filed an
Application for an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14116), dated July 18, 2013 (``Exemptive
Application''). The Shares will not be listed on the Exchange until
an order (``Exemptive Order'') under the 1940 Act has been issued by
the Commission with respect to the Exemptive Application.
Investments made by the Funds will comply with the conditions set
forth in the Exemptive Order. The description of the operation of
the Trust and the Funds herein is based, in part, on the
Registration Statement and the Exemptive Application.
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As noted above, proposed Commentary .05 to Rule 8.900 provides
that, if the investment adviser to the investment company issuing
Managed Portfolio Shares is affiliated with a broker-dealer, such
investment adviser shall erect a ``fire wall'' between the investment
adviser and the broker-dealer with respect to access to information
concerning the composition and/or changes to such investment company
portfolio.\12\ In addition, proposed Commentary .05 further requires
that personnel who make decisions on the open-end fund's portfolio
composition must be subject to procedures designed to prevent the use
and dissemination of material nonpublic information regarding the open-
end fund's portfolio. Proposed Commentary .05 to Rule 8.900 is similar
to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 5.2(j)(3);
however, Commentary .05 in connection with the establishment of a
``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not registered as a broker-dealer or affiliated with a broker-dealer.
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\12\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel will be
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
violations, 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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In the event (a) the Adviser or any sub-adviser becomes registered
as a 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 the portfolio, and will be subject to procedures designed to
prevent the use and dissemination of material non-public information
regarding such portfolio.
The portfolio for each Fund will consist primarily of stocks in the
Russell 3000 Index and shares issued by other exchange-traded funds
(``ETFs'') that invest primarily in shares of issuers in the Russell
3000 Index (which consists of stocks included in the Russell 1000 Index
and the Russell 2000 Index).\13\ All exchange-listed equity securities
in which the Funds will invest will be listed and traded on U.S.
national securities exchanges.
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\13\ For purposes of this filing, ETFs include Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Equities
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca
Equities Rule 8.600). All ETFs will be listed and traded on a U.S.
national securities exchange. The Funds will invest in the
securities of ETFs registered under the 1940 Act consistent with the
requirements of Section 12(d)(1) of the 1940 Act, or any rule,
regulation or order of the Commission or interpretation thereof.
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Description of the Funds
The ActiveShares\SM\ Large Cap Fund
According to the Registration Statement, the Fund's investment
objective will be long-term capital appreciation. The Fund will seek to
achieve its objective by taking long and possibly short positions in
equity securities or groups of equities that the Fund's portfolio
managers believe will provide long term capital appreciation. The Fund
normally will invest at least 80% of its net assets (plus borrowings
for investment purposes) in stocks included in the Russell 1000 Index
and ETFs that primarily invest in stocks in the Russell 1000 Index.
The Fund will target an overall net equity market exposure of
between 70% to 130%. However, at times the portfolio managers may
reduce market exposure to less than 70%.
The Fund will purchase securities that the portfolio managers
believe are undervalued and sell short securities that the portfolio
managers believe are overvalued. Under normal market conditions,\14\
the Fund's net long equity market exposure will not exceed 130% and its
net short equity market exposure will not exceed 30%; however, the
portfolio managers may at times exceed these percentages. The Fund may
hold a substantial portion of its total assets in cash or cash
equivalents when it holds significant short positions.\15\
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\14\ The terms ``normally'' and ``under normal market
conditions'' include, but are not limited to, the absence of extreme
volatility or trading halts in the equity 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.
\15\ According to the Registration Statement, with respect to
each of the Funds, selling securities short will allow a Fund to
more fully exploit insights into securities that a Fund's portfolio
managers expect to underperform. Short sales generally involve the
sale of a security that a Fund does not own in hopes of purchasing
the same security at a later date at a lower price. To make delivery
to the buyer, a Fund may borrow the security. If so, a Fund is
obligated to return the security to the lender, which is
accomplished by a later purchase of the security by a Fund.
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The Fund may use ETFs to manage the Fund's overall equity market
and sector exposures. In particular, the portfolio managers may take
long and short positions in ETFs to increase/decrease equity market/
sector exposures in place of using individual equity securities. The
ETFs in which the Fund will invest are registered investment companies
that seek to track the performance of an underlying index. These
underlying indexes include not only broad-based market indexes but
[[Page 10852]]
more specific indexes as well, including those relating to particular
sectors, markets, regions or industries.
The Fund will use a variety of proprietary and non-proprietary
[sic] analytical methodologies including ``bottom-up'' fundamental
analysis, macro-economic data, technical analysis, and quantitative
analysis to determine the ratio of long to short positions. It also
will use these tools to determine whether a particular stock or group
of stocks is under-valued or over-valued and, therefore, whether to
purchase or sell those securities. In reviewing companies, the Fund
will apply the characteristics identified above on a case-by-case basis
as the order of importance varies depending on the type of business or
industry and the company being reviewed.
The ActiveShares\SM\ Mid-Cap Fund
According to the Registration Statement, the Fund's investment
objective will be long-term capital appreciation. The Fund will seek to
achieve its objective by taking long and possibly short positions in
equity securities or groups of equities that the Fund's portfolio
managers believe will provide long term capital appreciation. The Fund
will invest primarily in securities included in the Russell 3000 Index
and ETFs that primarily invest in stocks in the Russell 3000 Index.
The Fund will target an overall net equity market exposure of
between 70% to 130%. However, at times the Fund's portfolio managers
may reduce market exposure to less than 70%.
The Fund will purchase securities that the portfolio managers
believe are undervalued and sell short securities that the portfolio
managers believe are overvalued. Under normal market conditions, the
Fund's net long equity market exposure will not exceed 130% and its net
short equity market exposure will not exceed 30%; however, the
portfolio managers may at times exceed these percentages. The Fund may
hold a substantial portion of its total assets in cash or cash
equivalents when it holds significant short positions.
The Fund may use ETFs to manage the Fund's overall equity market
and sector exposures. In particular, the Fund's portfolio managers may
take long and short positions in ETFs to increase/decrease equity
market/sector exposures in place of using individual equity securities.
The ETFs in which the Fund will invest are registered investment
companies that seek to track the performance of an underlying index.
These underlying indexes include not only broad-based market indexes
but more specific indexes as well, including those relating to
particular sectors, markets, regions or industries.
The Fund will use a variety of proprietary and non-propriety [sic]
analytical methodologies including ``bottom-up'' fundamental analysis,
macro-economic data, technical analysis, and quantitative analysis to
determine the ratio of long to short positions. It also will use these
tools to determine whether a particular stock or group of stocks is
under-valued or over-valued and, therefore, whether to purchase or sell
those securities. In reviewing companies, the Fund will apply the
characteristics identified above on a case-by-case basis as the order
of importance varies depending on the type of business or industry and
the company being reviewed.
Other Investments
While each Fund, under normal market conditions, will invest
primarily in stocks included in the Russell 3000 Index and ETFs, as
described above, each Fund may invest its remaining assets in other
securities and financial instruments, as described below.
According to the Registration Statement, each Fund may enter into
repurchase agreements. A repurchase agreement is an instrument under
which the purchaser (i.e., a Fund) acquires the security and the seller
agrees, at the time of the sale, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield
during the purchaser's holding period. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller
secured by the securities transferred to the purchaser.
Each Fund 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. Generally the effect of such
transactions is that the Fund can recover all or most of the cash
invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while in many cases the Fund is able to
keep some of the interest income associated with those securities.
Each Fund may invest a portion of its assets in high-quality money
market instruments on an ongoing basis rather than in other
investments, when it would be more efficient or less expensive for the
Fund to do so, or as cover for other financial instruments held by a
Fund, for liquidity purposes, or to earn interest. Money market
instruments in which a Fund may invest include: (1) Short-term
obligations issued by the U.S. government; (2) negotiable certificates
of deposit (``CDs''), fixed time deposits and bankers' acceptances of
U.S. and foreign banks and similar institutions; (3) 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 Ratings Group, Inc., a
division of The McGraw-Hill Companies, Inc., or, if unrated, of
comparable quality as determined by the Adviser; \16\ and (4) money
market mutual funds.
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\16\ In determining whether a security is of ``comparable
quality,'' the Adviser will consider, for example, whether the
issuer 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.
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Each Fund may invest in the securities of other investment
companies (including money market funds) to the extent allowed by law.
Investment Restrictions
A Fund may not, with respect to 75% of its total assets, purchase
securities of any issuer (except securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities or shares of
investment companies) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer; or (ii) acquire
more than 10% of the outstanding voting securities of any one issuer
(and for purposes of this policy, the issuer of the underlying security
will be deemed to be the issuer of any respective depositary receipt.)
\17\
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\17\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
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A Fund may not invest 25% or more of its total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This limitation
does not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or shares of
investment companies. A Fund will not invest 25% or more of its total
assets in any investment company that so concentrates.\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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Each Fund may invest up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at
[[Page 10853]]
the time of investment),\19\ consistent with Commission guidance. Each
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 a Fund's
net assets are invested in illiquid assets. Illiquid assets 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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\19\ 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).
\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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According to the Registration Statement, each Fund will seek to
qualify for treatment as a Regulated Investment Company (``RIC'') under
the Internal Revenue Code.\21\
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\21\ 26 U.S.C. 851.
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The Shares of each Fund will conform to the initial and continued
listing criteria under proposed Rule 8.900. The Funds will not invest
in options, futures, forwards or swaps.
Each Fund's investments will be consistent with its investment
objective and will not be used to enhance leverage. While a Fund may
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X,
-2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S. equity
securities.
Creations and Redemptions
Placement of Purchase Orders
Each Fund will issue Shares through the Distributor on a continuous
basis at NAV. The Exchange represents that the issuance of Shares will
operate in a manner substantially similar to that of other ETFs and, in
particular, certain fixed-income ETFs that issue shares solely for
settlement in cash. However, Shares may be issued in any amount rather
than only in a specified block size.
Each Fund will issue Shares only at the NAV per Share next
determined after an order in proper form is received. The Trust will
sell and redeem Shares on each such day and will not suspend the right
of redemption or postpone the date of payment or satisfaction upon
redemption for more than seven days, other than as provided by Section
22(d) of the 1940 Act (each such day, a ``Business Day'').
Shares may be purchased from a Fund by any Depository Trust Company
(``DTC'') Participant for its own account or for the account of a
customer. Purchase orders will not be limited to any specified size but
may be in any whole share amount. Since Shares will be paid for in
cash, settlement will be through the normal continuous net settlement
process. The Distributor will furnish acknowledgements to those placing
such orders that the orders have been accepted, but the Distributor may
reject any order which is not submitted in proper form, as described in
a Fund's prospectus or Statement of Additional Information (``SAI'').
Purchases of Shares will be settled in cash for an amount equal to the
applicable NAV per Share purchased plus applicable transaction fees, as
discussed below.
The NAV of each Fund is expected to be determined once each
Business Day at a time determined by the Trust's Board of Directors
(``Board''), currently anticipated to be as of the close of the regular
trading session on the New York Stock Exchange (``NYSE'') (ordinarily
4:00 p.m. Eastern time) (the ``Valuation Time''). Each Fund will
establish a cut-off time (``Order Cut-Off Time'') for purchase orders
in proper form. To initiate a purchase of Shares, a DTC participant
must submit to the Distributor an irrevocable order to purchase such
Shares after the most recent prior Valuation Time but not later than
the Order Cut-Off Time. The Order Cut-Off Time for a Fund may be its
Valuation Time, or may be prior to the Valuation Time if the Board
determines that an earlier Order Cut-Off Time for purchase of Shares is
necessary and is in the best interests of Fund shareholders. It is
anticipated that the Funds may adopt Order Cut-Off Times prior to their
Valuation Time in order to make arrangements for any securities
borrowing transactions consistent with a Fund's investment strategy
that may be necessary in light of creation of Shares and in a manner
consistent with orderly portfolio management. An early Order Cut-Off
Time will allow the Adviser to net creations and redemptions and
facilitate borrowing securities in an efficient manner.
Transaction Fees
The Trust may impose purchase or redemption transaction fees
(``Transaction Fees'') in connection with the purchase or redemption of
Shares from the Funds. The exact amounts of any such Transaction Fees
will be determined by the Adviser but will not exceed 2%. The purpose
of the Transaction Fees is to protect the continuing shareholders
against possible dilutive transactional expenses, including operational
processing and brokerage costs, associated with establishing and
liquidating portfolio positions, including short positions, in
connection with the purchase and redemption of Shares. The Adviser
believes that imposing Transaction Fees will best respond to market
needs and help to defray certain costs that would otherwise be borne by
the Trust, such as custodian transaction fees and various other Fund
overhead costs and fund accounting costs.
From time to time and for such periods as the Adviser in its sole
discretion may determine, the Transaction Fees for the purchase or
redemption of Shares may be increased, decreased or otherwise modified.
Such Transaction Fees will be limited to amounts that will have been
determined by the Adviser to be appropriate and will take into account
transaction and operational processing costs associated with the recent
purchases and sales of the equity securities held by the Trust. In all
cases, such Transaction Fees will be limited in accordance with then-
existing requirements of the Commission applicable to management
investment companies offering redeemable securities.
Purchases of Shares--Secondary Market
Only DTC Participants and their customers will be able to acquire
Shares at NAV directly from a Fund through the Distributor. The entire
required cash payment must be transferred in the manner set forth in a
Fund's SAI by the specified time on the third DTC settlement day
following the day it is transmitted (the ``Transmittal Date''). These
investors and others will also be able to purchase Shares in secondary
market transactions at prevailing market prices. Each Fund will reserve
the right to reject any purchase order at any time.
[[Page 10854]]
Redemption
Beneficial Owners may sell their Shares in the secondary market.
Alternatively, investors that own enough Shares to constitute a
Redemption Unit (currently, 50,000 Shares) or multiples thereof may
redeem those Shares through the Distributor, which will act as the
Trust's agent for redemption. The size of a Redemption Unit will be
subject to change. Redemption orders for Redemption Units or multiples
thereof must be placed by or through an Authorized Participant. A
Beneficial Owner that is an individual, a trust exclusively for the
benefit of an individual or group of related family members or a tax
deferred retirement plan directed by an individual would be treated as
a ``Retail Owner''. Any entity other than a trust or retirement plan
exclusively for the benefit of individuals would be treated as an
institutional investor. Retail Investors that wish to redeem Shares in
less than Redemption Unit size may redeem those Shares directly from
the Fund as described below under ``Retail Redemption Facility.''
Authorized Participant Redemption
The Shares may be redeemed to a Fund in Redemption Unit size or
multiples thereof as described below. Redemption orders of Redemption
Units must be placed by or through an Authorized Participant (``AP
Redemption Order''). Each Fund will establish an Order Cut-Off Time for
redemption orders of Redemption Units in proper form. Redemption Units
of the Fund will be redeemable at their NAV per Share next determined
after receipt of a request for redemption by the Trust in the manner
specified below before the Order Cut-Off Time. To initiate an AP
Redemption Order, an Authorized Participant must submit to the
Distributor an irrevocable order to redeem such Redemption Unit after
the most recent prior Valuation Time but not later than the Order Cut-
Off Time. The Order Cut-Off Time for a Fund may be its Valuation Time,
or may be prior to the Valuation Time if the Board determines that an
earlier Order Cut-Off Time for redemption of Redemption Units is
necessary and is in the best interests of Fund shareholders. An earlier
Order Cut-Off Time is primarily necessary because of the redemption
process for the Funds. It is contemplated that Authorized Participants
will instruct the trustee of its blind trust to liquidate redemption
securities in market on close orders on the date of redemption so that
Authorized Participants can realize redemption proceeds as close to the
Fund's NAV on the redemption date as possible. In order to allow the
Adviser sufficient time to identify the redemption securities, transfer
the redemption basket of portfolio securities to the blind trusts and
permit the trustee adequate time to process liquidation transactions in
accordance with the Authorized Participant's instructions, it will
likely be necessary to employ an Order Cut-Off Time prior to that time
to allow such actions to take place. It is anticipated that all Funds
will adopt Order Cut-Off Times for redemptions prior to their Valuation
Time in order to facilitate the timely identification and notice to the
trustee of the blind trusts (as described below) of securities to be
redeemed in-kind.
Consistent with the provisions of Section 22(e) of the 1940 Act and
Rule 22e-2 thereunder, the right to redeem will not be suspended, nor
payment upon redemption delayed, except for: (1) Any period during
which the NYSE is closed other than customary weekend and holiday
closings, (2) any period during which trading on the NYSE is
restricted, (3) any period during which an emergency exists as a result
of which disposal by a Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a Fund to determine
its NAV, and (4) for such other periods as the Commission may by order
permit for the protection of shareholders.
Redemptions other than Retail Redemptions will occur primarily in-
kind, although redemption payments may also be made partly or wholly in
cash.\22\ The Participant Agreement signed by each Authorized
Participant will require establishment of a blind trust to receive
distributions of securities in-kind upon redemption.\23\ Each
Authorized Participant will be required to appoint the Custodian as
trustee of its blind trust in order to facilitate orderly processing of
redemptions. While the Fund will generally distribute securities in-
kind, the Adviser may determine from time to time that it is not in the
Fund's best interests to distribute securities in-kind, but rather to
sell securities and/or distribute cash. For example, the Adviser may
distribute cash to facilitate orderly portfolio management in
connection with rebalancing or transitioning a portfolio in line with
its investment objective, or if there is substantially more creation
than redemption activity during the period immediately preceding a
redemption request, or as necessary or appropriate in accordance with
applicable laws and regulations. In this manner, the Fund can use in-
kind redemptions to reduce the unrealized capital gains that may, at
times, exist in a Fund by distributing low cost lots of each security
that a Fund needs to dispose of to maintain its desired portfolio
exposures. Shareholders of a Fund would benefit from the in-kind
redemptions through the reduction of the unrealized capital gains in a
Fund that would otherwise have to be realized and, eventually,
distributed to shareholders.
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\22\ It is anticipated that any portion of a Fund's NAV
attributable to appreciated short positions will be paid in cash, as
securities sold short are not susceptible to in-kind settlement. The
value of other positions not susceptible to in-kind settlement may
also be paid in cash.
\23\ The terms of each blind trust will be set forth as an
exhibit to the applicable Participant Agreement, which will be
signed by each Authorized Participant. The terms of the blind trust
will provide that the trust be formed under either New York or
Massachusetts State law; the Custodian will act as trustee of the
blind trusts; and the trustee will be paid by the Authorized
Participant a fee negotiated by the Adviser on behalf of Authorized
Participants.
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The redemption basket will consist of the same securities for all
Authorized Participants on any given day subject to the Adviser's
ability to make minor adjustments to address odd lots, fractional
shares, tradeable sizes or other situations.
After receipt of an AP Redemption Order, the Custodian will
typically deliver securities to the blind trust (which securities are
determined by the Adviser) with a value approximately equal to the
value of the Shares \24\ tendered for redemption at the Cut-Off time.
The Custodian will make delivery of the securities by appropriate
entries on its books and records transferring ownership of the
securities to the blind trust, subject to delivery of the Shares
redeemed. The trustee of the blind trust will in turn liquidate, hedge
or otherwise manage the securities based on instructions from the
Authorized Participant.\25\ If the trustee is instructed
[[Page 10855]]
to sell all securities received at the close on the redemption date,
the trustee will pay the liquidation proceeds net of expenses plus or
minus any cash balancing amount to the Authorized Participant through
DTC.\26\ The redemption securities that the blind trust receives may
mirror the portfolio holdings of a Fund pro rata or, if the Adviser
determines to reduce one or more portfolio exposures through an in-kind
distribution, may constitute only a portion of the holdings that would
not be proportionate to the overall portfolio holdings of a Fund. To
the extent a Fund distributes portfolio securities through an in-kind
distribution to more than one blind trust for the benefit of that
trust's Authorized Participant, each Fund expects to distribute a pro
rata portion of the portfolio securities selected for distribution to
each redeeming Authorized Participant.
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\24\ If the NAV of the Shares redeemed differs from the value of
the securities delivered to the applicable blind trust, the Fund or
the blind trust will pay a cash balancing amount to compensate for
the difference between the value of the securities delivered and the
NAV.
\25\ Because an Authorized Participant would not know the
holdings of its blind trust, it is anticipated that such
instructions would be generic standing instructions to the trustee.
Although an Authorized Participant could, in its sole discretion,
provide different standing instructions, it is expected that, in
order to realize proceeds from a redemption at a value as close as
possible to the redemption's NAV, all Authorized Participants will
likely instruct the trustee of the blind trust to sell all
securities received in kind as redemption proceeds at the close of
the market on the date of redemption. For this reason, an Order Cut-
Off Time for redemptions will be necessary so that the Adviser is
able to identify securities to be redeemed in-kind to the Custodian
prior to the close of the market on the redemption date.
\26\ Under applicable provisions of the Internal Revenue Code,
the Authorized Participant is expected to be deemed a ``substantial
owner'' of the blind trust because it receives distributions from
the blind trust. As a result, all income, gain or loss realized by
the blind trust will be directly attributed to the Authorized
Participant. In a redemption, the Authorized Participant will have a
basis in the distributed securities equal to the fair market value
at the time of the distribution and any gain or loss realized on the
sale of those Shares will be taxable income to the Authorized
Participant.
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The Adviser would be free to select redemption securities that do
not represent an exact slice of a Fund's portfolio on any given day, so
long as each Authorized Participant redeeming on a given day receives
the same set of redemption securities on such day. Authorized
Participants will advise the Fund of any securities they are restricted
from receiving. If the Authorized Participant would receive a security
that it is restricted from receiving, the Fund will deliver cash equal
to the value of that security.
The Adviser might choose to select redemption securities that do
not represent an exact slice of a Fund's portfolio in order to
effectively implement changes to a Fund's portfolio composition, take
advantage of tax strategies or address corporate actions. The Adviser
represents that this freedom will benefit Beneficial Owners because the
Adviser can use redemption events to liquidate unwanted positions
without incurring brokerage charges or taxable gains. To address odd
lots, fractional shares, tradeable sizes or other situations where
dividing securities is not practical or possible, the Adviser may make
minor adjustments to the pro rata portion of portfolio securities
selected for distribution to each redeeming Authorized Participant on
such Business Day.
The Trust will accept an AP Redemption Order in proper form. An AP
Redemption Order is subject to acceptance by the Trust and must be
preceded or accompanied by an irrevocable commitment to deliver the
requisite number of Shares. At the time of settlement, an Authorized
Participant will initiate a delivery of the Shares versus subsequent
payment against the proceeds, if any, of the sale of portfolio
securities distributed to the applicable blind trust plus or minus any
cash balancing amounts, and less the expenses of liquidation. The
Trust, on behalf of a Fund, will maintain a security interest in the
assets of a blind trust and, under applicable documentation, will be
entitled to such assets in the event an Authorized Participant fails to
make timely delivery of redeemed Shares.
Retail Redemption Facility
Retail Investors may submit orders to redeem Shares at NAV directly
with a Fund as described below (``Retail Redemption Facility''). Retail
Investors will be able to place orders to redeem Shares in less than
Redemption Unit size by instructing their broker to submit an order to
redeem Shares directly from the Fund (``Retail Redemption Order''). The
Retail Redemption Order will be submitted to the ``Redemption Agent''
by the Retail Investor's broker if the broker is a DTC Participant or
by its clearing firm if it is not a DTC Participant. Redemption
proceeds in connection with any Retail Redemption Order will be
distributed in cash. Retail Investors may decide to redeem their Shares
for cash if they want to make sure they receive the NAV and do not want
to risk selling their Shares in the secondary market at a discount.
Investors that are not Retail Investors can only redeem with the Fund
in Redemption Unit size or larger.
On each Business Day, a Fund will process all Retail Redemption
Orders received at the NAV of the Fund next calculated following
submission of the Retail Redemption Order in proper form. The date the
Retail Redemption Order is received in proper form will be the
redemption date with respect to those Shares (the ``Redemption Date'').
Each Fund will establish a cut-off time for Retail Redemption Orders in
proper form, which may be earlier than the time of calculation of the
NAV in order to facilitate the timely submission of such orders to the
Redemption Agent for processing the order at NAV on each applicable
Redemption Date. All instructions from Retail Investors to their broker
to submit a Retail Redemption Order in proper form will be processed by
the Redemption Agent and submitted through DTC as long as it is
received prior to the cut-off time, resulting in an aggregated
redemption order received by the Transfer Agent from DTC on that
Business Day. Any redemption instructions submitted by a DTC
Participant on behalf of Retail Investors and received in proper form
by the Transfer Agent/Redemption Agent shall be irrevocable. Only
Retail Redemption Orders for an amount of Shares smaller than a
Redemption Unit will be considered in proper form.
The date of payment upon redemption will not exceed seven days
after the Redemption Date, other than as provided by Section 22(d) of
the 1940 Act. The cash proceeds from any Retail Redemption Order
received are generally expected to be delivered through DTC to the
applicable DTC Participant's account at DTC. The DTC Participant will
in turn deposit the proceeds in the Beneficial Owner's account or the
account of the financial institution carrying the account of the
Beneficial Owner.
Net Asset Value
The NAV per Share of a Fund will be computed by dividing the value
of the net assets of a Fund (i.e., the value of its total assets less
total liabilities) by the total number of Shares of a Fund outstanding,
rounded to the nearest cent. Expenses and fees, including, without
limitation, the management, administration and distribution fees, will
be accrued daily and taken into account for purposes of determining
NAV. Interest and investment income on the Trust's assets accrue daily
and will be included in the Fund's total assets. The NAV per Share for
a Fund will be calculated by the Administrator and determined as of the
close of the regular trading session on the New York Stock Exchange
(``NYSE'') (ordinarily 4:00 p.m., E.T.) on each day that the NYSE is
open. The NAV that is published will be rounded to the nearest cent;
however, for purposes of determining the price of Shares in creations
and redemption, the NAV will be calculated to five decimal places. The
Shares of the Funds will not be priced on days on which the NYSE is
closed for trading.
Shares of exchange-listed equity securities will be valued at
market value, which will generally be determined using the last
reported official closing or last trading price on the exchange or
market on which the securities are primarily traded at the
[[Page 10856]]
time of valuation. Repurchase and reverse repurchase agreements will be
valued based on price quotations or other equivalent indications of
value provided by a third-party pricing service. Money market
instruments (as described above) will be valued based on price
quotations or other equivalent indications of value provided by a
third-party pricing service.
When last sale prices and market quotations are not readily
available, are deemed unreliable or do not reflect material events
occurring between the close of local markets and the time of valuation,
investments will be valued using fair value pricing as determined in
good faith by the Adviser under procedures established by and under the
general supervision and responsibility of the Trust's Board of
Trustees. Investments that may be valued using fair value pricing
include, but are not limited to: (1) Securities that are not actively
traded; (2) securities of an issuer that becomes bankrupt or enters
into a restructuring; and (3) securities whose trading has been halted
or suspended.
The frequency with which each Fund's investments will be valued
using fair value pricing will primarily be a function of the types of
securities and other assets in which the respective Fund will invest
pursuant to its investment objective, strategies and limitations. If
the Funds invest in open-end management investment companies registered
under the 1940 Act (other than ETFs), they may rely on the NAVs of
those companies to value the shares they hold of them. Those companies
may also use fair value pricing under some circumstances.
Valuing the Funds' investments using fair value pricing involves
the consideration of a number of subjective factors and thus the prices
for those investments may differ from current market valuations.
Accordingly, fair value pricing could result in a difference between
the prices used to calculate NAV and the prices used to determine a
Fund's Portfolio Indicative Value (``PIV''), as described below, which
could result in the market prices for Shares deviating from NAV.
Availability of Information
The Funds' Web site (www.precidianfunds.com), which will be
publicly available prior to the public offering of Shares, will include
a form of the prospectus for each Fund that may be downloaded. The
Funds' Web site will include additional quantitative information
updated on a daily basis, including, for each 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 (the
``Bid/Ask Price''),\27\ 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.
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\27\ The Bid/Ask Price of a 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 a Fund's NAV. The records relating to
Bid/Ask Prices will be retained by each Fund and its service
providers.
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As noted above, a mutual fund is required to file with the
Commission its complete portfolio schedules for the second and fourth
fiscal quarters on Form N-SAR under the 1940 Act, and is required to
file its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end of
the quarter. Form N-Q requires funds to file the same schedules of
investments that are required in annual and semi-annual reports to
shareholders. The Trust's SAI and each Fund's shareholder reports will
be available free upon request from the Trust. These documents and
forms 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. Updated price information for the securities
included in the Russell 1000, Russell 2000 and Russell 3000 Indexes,
and for other U.S. exchange-listed equity securities is available
through major market data vendors or securities exchanges trading such
securities. Information relating to Russell 1000, Russell 2000 and
Russell 3000 Index components is available at www.russell.com. The
intraday, closing and settlement prices of money market instruments (as
described above), repurchase agreements and reverse repurchase
agreements will be readily available from published or other public
sources, or major market data vendors such as Bloomberg and Thomson
Reuters. The NAV of any investment company security investment will be
readily available on the Web site of the relevant investment company
and from major market data vendors. Quotation and last sale information
for the Shares 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 8.900(c)(3) and as
described further below, will be widely disseminated by one or more
major market data vendors at least every 15 seconds during the
Exchange's Core Trading Session.
Dissemination of the Portfolio Indicative Value
The PIV, which is approximate [sic] value of each Fund's
investments on a per Share basis, will be disseminated every 15 seconds
during the Exchange's Core Trading Session. The PIV should not be
viewed as a ``real-time'' update of NAV because the PIV may not be
calculated in the same manner as NAV, which is computed once per day.
An independent third party calculator will calculate the PIV for
each Fund during the Exchange's Core Trading Session by dividing the
``Estimated Fund Value'' (as described below) as of the time of the
calculation by the total number of outstanding Shares of that Fund.
``Estimated Fund Value'' is the sum of the estimated amount of cash
held in a Fund's portfolio, the estimated amount of accrued interest
owed to a Fund and the estimated value of the securities held in the
Fund's portfolio, minus the estimated amount of a Fund's liabilities.
The Funds will provide the independent third party calculator with
information to calculate the PIV, but the Funds will not be involved in
the actual calculation of the PIV.\28\
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\28\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available PIVs
published on CTA or other data feeds. Dissemination of the PIV will
allow investors to determine the value of the underlying portfolio
of a Fund throughout the trading day.
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Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes will be included in the Registration Statement. All terms
relating to the Funds that are referred to, but not defined in, this
proposed rule change are defined 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 Funds.\29\ Trading in Shares of the
[[Page 10857]]
Funds 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) If the PIV applicable to a Fund's Shares is not being disseminated
as required; (2) the extent to which trading is not occurring in the
securities and/or the financial instruments comprising the holdings of
a Fund; or (3) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares will be subject to NYSE Arca Equities
Rule 8.900(d)(2)(C), which sets forth circumstances under which Shares
of the Funds may be halted.
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\29\ See NYSE Arca Equities Rule 7.12.
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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 a.m. to 8 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.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.900. The Exchange represents
that, for initial and/or continued listing, each Fund will be in
compliance with Rule 10A-3 under the Act,\30\ as provided by NYSE Arca
Equities Rule 5.3. A minimum of 100,000 Shares of each Fund will be
outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares of
each Fund that the NAV per Share of each Fund will be calculated daily
and will be made available to all market participants at the same time.
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\30\ See 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\31\ 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 federal securities laws applicable to trading on
the Exchange.
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\31\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. 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.
FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, underlying stocks and ETFs with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading such securities from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, underlying stocks and ETFs
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement.\32\
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\32\ For a list of the current members of ISG, see
www.isgportal.org.
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The Funds' Adviser will make available to FINRA and the Exchange
the portfolio holdings of each Fund in order to facilitate the
performance of the surveillances referred to above.
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
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: (1) The procedures for purchases and redemptions of Shares
and the differing rights of Retail Investors and others to redeem
shares; (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 PIV will not be calculated or publicly disseminated; (4) how
information regarding the PIV 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 Funds are 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 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 Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\33\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\34\ in particular, in that it
is 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
a national market system, and, in general, to protect investors and the
public interest.
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\33\ 15 U.S.C. 78f(b).
\34\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed Rule 8.900 is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Managed Portfolio
Shares provide specific initial and continued listing criteria required
to be met by such securities. Proposed Rule 8.900(d) sets forth initial
and continued listing criteria applicable to Managed Portfolio Shares.
Proposed Rule 8.900(d)(1) provides that, for each series of Managed
Portfolio Shares, the Corporation will establish a minimum number of
Managed Portfolio Shares required to be outstanding at the time of
commencement of trading. In addition, the Corporation will obtain a
representation from the issuer of each series of Managed Portfolio
Shares that the NAV per share for the series will be calculated daily
and that the NAV will be made available to all market participants at
the same time. Proposed Rule 8.900(d)(2) provides that each
[[Page 10858]]
series of Managed Portfolio Shares will be listed and traded subject to
application of the specified continued listing criteria, as described
above. Proposed Rule 8.900(d)(2)(A) provides that the PIV for Managed
Portfolio Shares will be widely disseminated by one or more major
market data vendors at least every 15 seconds during the Exchange's
Core Trading Session. Proposed Rule 8.900(d)(2)(C) provides that, if
the PIV of a series of Managed Portfolio Shares is not being
disseminated as required, the Corporation may halt trading during the
day in which the interruption to the dissemination of the PIV occurs.
If the interruption to the dissemination of the PIV persists past the
trading day in which it occurred, the Corporation will halt trading no
later than the beginning of the trading day following the interruption.
If a series of Managed Portfolio Shares is trading on the Corporation
pursuant to UTP, the Corporation will halt trading in that series as
specified in Rule 7.34(a). In addition, if the Exchange becomes aware
that the NAV with respect to a series of Managed Portfolio Shares is
not disseminated to all market participants at the same time, it will
halt trading in such securities until such time as the NAV is available
to all market participants. Proposed Commentary .05 to NYSE Arca
Equities Rule 8.900 provides that, if the investment adviser to the
Investment Company issuing Managed Portfolio Shares is affiliated with
a broker-dealer, such investment adviser shall erect a ``fire wall''
between the investment adviser and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
Investment Company portfolio. Personnel who make decisions on the
Investment Company's portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable Investment Company
portfolio.
With respect to the proposed listing and trading of Shares of the
Funds, 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
8.900. Price information for the exchange-listed equity securities held
by the Funds will be available through major market data vendors or
securities exchanges listing and trading such securities. All exchange-
listed equity securities held by the Funds will be listed on national
securities exchanges. The listing and trading of such securities is
subject to rules of the exchanges on which they are listed and traded,
as approved by the Commission. The Funds will primarily hold securities
in the Russell 3000 Index or ETFs that invest primarily in the Russell
3000 Index. Further, the Funds will not invest in options, futures or
swaps. A Fund's investments will be consistent with its respective
investment objective and will not be used to enhance leverage. The
Funds will not invest in non-U.S. issues. FINRA, on behalf of the
Exchange, will communicate as needed regarding trading in the Shares
and underlying stocks and ETFs 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 such securities from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, underlying stocks and ETFs
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement.
The Exchange, after consulting with various Lead Market Makers that
trade ETFs on the Exchange, believes that market makers will be able to
make efficient and liquid markets priced near the PIV as long as an
accurate PIV is disseminated every 15 seconds and market makers have
knowledge of a fund's means of achieving its investment objective, even
without daily disclosure of a fund's underlying portfolio. The Exchange
believes that market makers will employ risk-management techniques such
as ``statistical arbitrage'', which is currently used throughout the
financial services industry, to make efficient markets in exchange
traded products.\35\ This ability should permit market makers to make
efficient markets in Fund Shares without knowledge of a fund's
underlying portfolio.
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\35\ See note 10, supra.
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The Exchange understands that traders use statistical analysis to
derive correlations between different sets of instruments to identify
opportunities to buy or sell one set of instruments when it is
mispriced relative to the others. For Managed Portfolio Shares, market
makers will initially use the knowledge of a fund's means of achieving
its investment objective, as described in the applicable fund
registration statement, to construct a hedging proxy for a fund to
manage a market maker's quoting risk in connection with trading fund
shares. Market makers will then conduct statistical arbitrage between
their hedging proxy (for example, the Russell 1000 Index) and shares of
a fund, buying and selling one against the other over the course of the
trading day. Eventually, at the end of each day, they will evaluate how
their proxy performed in comparison to the price of a fund's shares,
and use that analysis as well as knowledge of risk metrics, such as
volatility and turnover, to enhance their proxy calculation to make it
a more efficient hedge.
Market makers have indicated to the Exchange that, after the first
few days of trading, there will be sufficient data to run a statistical
analysis which will lead to spreads being tightened substantially
around PIV. This is similar to certain other existing exchange traded
products (for example, ETFs that invest in foreign securities that do
not trade during U.S. trading hours), in which spreads may be generally
wider in the early days of trading and then narrow as market makers
gain more confidence in their real-time hedges.
The Lead Market Makers also indicated that, as with some other new
exchange-traded products, spreads may be generally wider in the early
days of trading and would tend to narrow as market makers gain more
confidence in the accuracy of their hedges and their ability to adjust
these hedges in real-time relative to the published PIV and gain an
understanding of the applicable market risk metrics such as volatility
and turnover, and as natural buyers and sellers enter the market. Other
relevant factors cited by Lead Market Makers were that a fund's
investment objectives are clearly disclosed in the applicable
prospectus, the existence of quarterly portfolio disclosure, and the
ability to create shares in any size.
The Commission's concept release regarding ``Actively Managed
Exchange-Traded Funds'' highlighted several issues that could impact
the Commission's willingness to authorize the operation of an actively-
managed ETF, including whether effective arbitrage of the ETF shares
exists.\36\ The Concept Release identifies the transparency of a fund's
portfolio and the liquidity of the securities in a fund's portfolio as
central to effective arbitrage. However, certain existing ETFs with
portfolios of foreign securities have shown their ability to trade
efficiently in the secondary market at approximately their NAV even
though they do not provide opportunities for riskless
[[Page 10859]]
arbitrage transactions during much of the trading day.\37\ Such ETFs
have been shown to have pricing characteristics very similar to ETFs
that can be arbitraged in this manner. For example, index-based ETFs
containing securities that trade during different trading hours than
the ETF, such as ETFs that hold Asian stocks, have demonstrated
efficient pricing characteristics notwithstanding the inability of
market professionals to engage in ``riskless arbitrage'' with respect
to the underlying portfolio for most, or even all, of the U.S. trading
day when Asian markets are closed. Pricing for shares of such ETFs is
efficient because market professionals are still able to hedge their
positions with offsetting, correlated positions in derivative
instruments during the entire trading day.
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\36\ See Investment Company Act Release No. 25258 (November 8,
2001) (the ``Concept Release'').
\37\ The Adviser represents that the mechanics of arbitrage and
hedging differ. Prior Rule 10a-1 and Regulation T under the Act both
describe arbitrage as either buying and selling the same security in
two different markets or buying and selling two different
securities, one of which is convertible into the other. This is also
known as a ``riskless arbitrage'' transaction in that the
transaction is risk free since it generally consists of buying an
asset at one price and simultaneously selling that same asset at a
higher price, thereby generating a profit on the difference.
Hedging, on the other hand, involves managing risk by purchasing or
selling a security or instrument that will track or offset the value
of another security or instrument. Arbitrage and hedging are both
used to manage risk; however, they involve different trading
strategies.
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The real-time dissemination of a fund's PIV, together with the
right of Authorized Participants to create and redeem each day at the
NAV, will be sufficient for market participants to value and trade
shares in a manner that will not lead to significant deviations between
the shares' Bid/Ask Price and NAV. In addition, with respect to Shares
of the Funds, the Retail Redemption Facility will permit retail
shareholders holding amounts smaller than a Redemption Unit to redeem
at NAV on any day the Exchange is open in the event there is any
negative variance between the NAV of a Fund's Shares and the secondary
market price of Shares at the Valuation Time.
The pricing efficiency with respect to trading a series of Managed
Portfolio Shares will not generally rest on the ability of market
participants to arbitrage between the shares and a fund's portfolio,
but rather on the ability of market participants to assess a fund's
underlying value accurately enough throughout the trading day in order
to hedge positions in shares effectively. Professional traders will buy
shares that they perceive to be trading at a price less than that which
will be available at a subsequent time, and sell shares they perceive
to be trading at a price higher than that which will be available at a
subsequent time. It is expected that, as part of their normal day-to-
day trading activity, market makers assigned to shares by the Exchange,
off-exchange market makers, firms that specialize in electronic
trading, hedge funds and other professionals specializing in short-
term, non-fundamental trading strategies will assume the risk of being
``long'' or ``short'' shares through such trading and will hedge such
risk wholly or partly by simultaneously taking positions in correlated
assets \38\ or by netting the exposure against other, offsetting
trading positions--much as such firms do with existing ETFs and other
equities. Disclosure of a fund's investment objective and principal
investment strategies in its prospectus and SAI, along with the
dissemination of the PIV every 15 seconds, should permit professional
investors to engage easily in this type of hedging activity.\39\
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\38\ Price correlation trading is used throughout the financial
industry. It is used to discover both trading opportunities to be
exploited, such as currency pairs and statistical arbitrage, as well
as for risk mitigation such as dispersion trading and beta hedging.
These correlations are a function of differentials, over time,
between one or multiple securities pricing. Once the nature of these
price deviations have been quantified, a universe of securities is
searched in an effort to, in the case of a hedging strategy,
minimize the differential. Once a suitable hedging basket has been
identified, a trader can minimize portfolio risk by executing the
hedging basket. The trader then can monitor the performance of this
hedge throughout the trade period, making corrections where
warranted.
\39\ With respect to trading in Shares of the Funds, market
participants manage risk in a variety of ways. It is expected that
market participants will be able to determine how to trade Shares at
levels approximating the PIV without taking undue risk by gaining
experience with how various market factors (e.g., general market
movements, sensitivity of the PIV to intraday movements in interest
rates or commodity prices, etc.) affect PIV, and by finding hedges
for their long or short positions in Shares using instruments
correlated with such factors. The Adviser expects that market
participants will initially determine the PIV's correlation to a
major large capitalization equity benchmark with active derivative
contracts, such as the Russell 1000 Index, and the degree of
sensitivity of the PIV to changes in that benchmark. For example,
using hypothetical numbers for illustrative purposes, market
participants should be able to determine quickly that price
movements in the Russell 1000 Index predict movements in a Fund's
PIV 95% of the time (an acceptably high correlation) but that the
PIV generally moves approximately half as much as the Russell 1000
Index with each price movement. This information is sufficient for
market participants to construct a reasonable hedge--buy or sell an
amount of futures, swaps or ETFs that track the Russell 1000 equal
to half the opposite exposure taken with respect to Shares. Market
participants will also continuously compare the intraday performance
of their hedge to a Fund's PIV. If the intraday performance of the
hedge is correlated with the PIV to the expected degree, market
participants will feel comfortable they are appropriately hedged and
can rely on the PIV as appropriately indicative of a Fund's
performance.
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With respect to trading of Shares of the Funds, the ability of
market participants to buy and sell Shares at prices near the PIV is
dependent upon their assessment that the PIV is a reliable, indicative
real-time value for a Fund's underlying holdings. Market participants
are expected to accept the PIV as a reliable, indicative real-time
value because (1) the PIV will be calculated and disseminated based on
a Fund's actual portfolio holdings (rather than a proxy portfolio), (2)
the securities in which the Funds plan to invest are generally highly
liquid and actively traded and therefore generally have accurate real
time pricing available, and (3) market participants will have a daily
opportunity to evaluate whether the PIV at or near the close of trading
is indeed predictive of the actual NAV. Because there is less risk of
variability between the current PIV and the NAV nearer to the Valuation
Time, it is expected that the bid/ask spread for Shares will initially
tend to be less as the market approaches the close and market
participants have a very high degree of certainty that they can trade
at a level that reflects the current value of a Fund's holdings. It is
also expected, however, that market participants will quickly be able
to determine, after gaining experience with how various market factors
(e.g., general market movements, sensitivity or correlations of the PIV
to intraday movements in interest rates or commodity prices, other
benchmarks, etc.) affect PIV, how best to hedge long or short positions
taken in Shares in a manner that will permit them to provide a Bid/Ask
Price for Shares that is near to the PIV throughout the day. The
ability of market participants to accurately hedge their positions
should serve to minimize any divergence between the secondary market
price of the Shares and the PIV, as well as create liquidity in the
Shares.
The real-time dissemination of a Fund's PIV, together with the
ability of Authorized Participants to create and redeem each day at the
NAV, will be crucial for market participants to value and trade Shares
in a manner that will not lead to significant deviations between the
Shares' Bid/Ask Price and NAV.\40\ In addition, the Retail Redemption
Facility will permit retail shareholders holding amounts smaller than a
Redemption Unit to redeem at NAV on any day the Exchange is open in the
event there is any negative variance between NAV of a Fund's
[[Page 10860]]
Shares and the secondary market price of Shares at the Valuation Time.
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\40\ The statements in the Statutory Basis section of this
filing relating to pricing efficiency, arbitrage, and activities of
market participants, including market makers and Authorized
Participants, are based on representations by the Adviser and review
by the Exchange.
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In a typical index-based ETF, it is necessary for Authorized
Participants to know what securities must be delivered in a creation or
will be received in a redemption. For Managed Portfolio Shares,
however, Authorized Participants do not need to know the securities
comprising the portfolio of a Fund since creations are for cash and
redemptions are handled through the blind trust mechanism. The use of
cash for creations, and in-kind redemption through a blind trust, will
preserve the integrity of the active investment strategy and eliminate
the potential for ``free riding'', while still providing investors with
the advantages of the ETF structure.
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 an
issue of Managed Portfolio Shares that the NAV per share of a fund will
be calculated daily and that the NAV and will be made available to all
market participants at the same time. Investors can also obtain a
fund's SAI, shareholder reports, and its Form N-CSR and Form N-SAR. A
fund's SAI and shareholder reports will be available free upon request
from the applicable fund, 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. In addition, with respect to the Funds, a large amount of
information will be publicly available regarding the Funds and the
Shares, thereby promoting market transparency. Quotation and last sale
information for the Shares will be available via the CTA high-speed
line. Information regarding the intra-day value of the Shares of the
Fund, which is the PIV as defined in proposed NYSE Arca Equities Rule
8.900(c)(3), will be widely disseminated every 15 seconds throughout
the Exchange's Core Trading Session by one or more major market data
vendors. The Web site for the Funds will include a form of the
prospectus for the Funds that may be downloaded, and additional data
relating to NAV and other applicable quantitative information, updated
on a daily basis. Moreover, 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.
Trading in Shares of a 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 will be
subject to NYSE Arca Equities Rule 8.900(d)(2)(C), which sets forth
circumstances under which Shares of the Funds may be halted. In
addition, as noted above, investors will have ready access to the PIV,
and quotation and last sale information for the Shares. The Shares will
conform to the initial and continued listing criteria under proposed
Rule 8.900. The Funds will not invest in options, futures, forwards or
swaps. Each Fund's investments will be consistent with its investment
objective and will not be used to enhance leverage. While a Fund may
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X,
-2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S. equity
securities.
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 actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or 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 PIV 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. The Exchange believes the
proposed rule change would permit listing and trading of another type
of actively-managed ETF that has characteristics different from
existing actively-managed and index ETFs, and would introduce
additional competition among various ETF products to the benefit of
investors.
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 up to 90 days after
publication (i) as the Commission may designate 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-2014-10 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-2014-10. 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
[[Page 10861]]
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 Number SR-NYSEArca-2014-10 and should
be submitted on or before March 19, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04130 Filed 2-25-14; 8:45 am]
BILLING CODE 8011-01-P