[Federal Register Volume 79, Number 42 (Tuesday, March 4, 2014)]
[Notices]
[Pages 12257-12261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04682]
[[Page 12257]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71617; File No. SR-NYSEArca-2013-135]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change To List and Trade Shares of db-X
Ultra-Short Duration Fund and db-X Managed Municipal Bond Fund Under
NYSE Arca Equities Rule 8.600
February 26, 2014.
I. Introduction
On December 27, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the db-X Ultra-Short Duration Fund and db-X Managed
Municipal Bond Fund (each a ``Fund,'' and collectively ``Funds'') under
NYSE Arca Equities Rule 8.600. The proposed rule change was published
for comment in the Federal Register on January 15, 2014.\3\ The
Commission received no comments on the proposed rule change. This order
grants approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71269 (January 9,
2014), 79 FR 2725 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Funds
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing
and trading of Managed Fund Shares on the Exchange. Each Fund is a
series of the DBX ETF Trust (``Trust''), a statutory trust organized
under the laws of the State of Delaware and registered with the
Commission as an open-end management investment company.\4\ The Funds
will be managed by DBX Advisors LLC (``Adviser''). Deutsche Investment
Management Americas Inc. will be the investment sub-adviser for the
Funds (``Sub-Adviser''). ALPS Distributors, Inc. will be the Funds'
distributor (``Distributor''). The Bank of New York Mellon will be the
administrator, custodian and fund accounting and transfer agent for
each Fund. The Exchange states that the Adviser and Sub-Adviser are not
broker-dealers, but both the Adviser and Sub-Adviser are affiliated
with a broker-dealer, and each has implemented and will maintain a fire
wall with respect to such broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the respective
Fund's portfolio.\5\
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\4\ The Trust is registered under the 1940 Act. The Exchange
states that on December 19, 2012, the Trust filed with the
Commission an amendment to its registration statement on Form N-1A
under the Securities Act of 1933 (``Securities Act'') and the 1940
Act relating to the Funds (File Nos. 333-170122 and 811-22487)
(``Registration Statement''). The Trust has also filed an Amended
and Restated 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. 812-14004), dated October 29, 2013 (``Exemptive
Application''). See Investment Company Act Release No. 30770
(October 29, 2013), 78 FR 66086 (November 4, 2013). The Exchange
represents that 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. The
Exchange also represents that investments made by the Funds will
comply with the conditions set forth in the Exemptive Order.
\5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the
event (a) the Adviser or Sub-Adviser becomes a registered broker-
dealer or 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 portfolios, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolios.
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The Exchange has made the following representations and statements
in describing the Funds and their respective investment strategies,
including other portfolio holdings and investment restrictions.
db-X Ultra-Short Duration Fund--Principal Investments
The investment objective of the db-X Ultra-Short Duration Fund will
be to seek to provide current income consistent with total return.
Under normal market conditions,\6\ the Fund will seek to achieve its
investment objective by investing at least 65% of its net assets in
debt securities. Debt securities will include: (1) Debt securities of
U.S. and foreign government agencies and instrumentalities, and U.S.
Government obligations (including U.S. agency mortgage pass-through
securities, as described below); (2) U.S. and foreign corporate debt
securities, mortgage-backed and asset-backed securities, adjustable
rate loans that have a senior right to payment (``senior loans''),
money market instruments, and fixed and other floating-rate debt
securities; and (3) taxable municipal and tax-exempt municipal
bonds.\7\ Under normal market conditions, the Fund currently does not
intend to hold more than 10% of its total assets in non-U.S. dollar
denominated debt securities.
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\6\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the fixed income markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\7\ The Fund normally will target an average portfolio duration
(a measure of sensitivity to interest rate changes) of no longer
than one year.
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The Fund may invest in investment-grade (rated BBB- or higher by
Standard & Poor's Ratings Services, Inc. (``S&P'') and Fitch, Inc.
(``Fitch'') or Baa3 or higher by Moody's Investors Service, Inc.
(``Moody's'') or, if unrated, determined by the Fund's Adviser and/or
Sub-Adviser to be of comparable quality\8\) and non-investment grade
(rated BB+ or lower by S&P and Fitch or Ba1 or lower by Moody's or, if
unrated, determined by the Fund's Adviser and/or Sub-Adviser to be of
comparable quality) debt securities of U.S. and foreign issuers,
including issuers located in countries with new or emerging securities
markets.\9\ The Fund's investments in non-investment grade debt
securities, including non-investment grade senior loans and other non-
investment grade floating-rate debt securities, will be limited to 50%
of its total assets.
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\8\ In determining whether a security is of ``comparable
quality,'' the Adviser or Sub-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.
\9\ Generally, with respect to at least 75% of the Fund's
portfolio, a corporate bond of a developed market issuer must have
$100 million or more par amount outstanding to be considered as an
eligible investment and a corporate bond of an emerging market
issuer must have $200 million or more par amount outstanding to be
considered as an eligible investment.
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The senior loans in which the Fund will invest generally will be
loans rated by a Nationally Recognized Statistical Rating Organization
(``NRSRO'') registered with the Commission. However, the Fund also may
invest in senior loans that: (i) May not be rated by a NRSRO, or listed
on any national exchange; or (ii) are not secured by collateral.
The Fund may invest in mortgage-backed and asset-backed securities.
Mortgage-backed securities are mortgage-related securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
or
[[Page 12258]]
issued by non-government entities. Mortgage-related securities
represent pools of mortgage loans assembled for sale to investors by
various government agencies such as Government National Mortgage
Association (``GNMA'') and government-related organizations such as
Federal National Mortgage Association (``FNMA'') and Federal Home Loan
Mortgage Corporation (``FHLMC''), as well as by non-government issuers
such as commercial banks, savings and loan institutions, mortgage
bankers, and private mortgage insurance companies. Other asset-backed
securities are structured like mortgage-backed securities, but instead
of mortgage loans or interests in mortgage loans, the underlying assets
may include items such as motor vehicle installment sales or
installment loan contracts, leases of various types of real and
personal property, and receivables from credit card agreements and from
sales of personal property. Asset-backed securities typically have no
U.S. Government backing. The Fund will limit investments in mortgage-
backed and asset-backed securities issued or guaranteed by non-
government entities to 15% of the Fund's net assets.
The Fund may invest a portion of its assets in U.S. agency mortgage
pass-through securities. The term ``U.S. agency mortgage pass-through
security'' refers to a category of pass-through securities backed by
pools of mortgages and issued by one of several U.S. government-
sponsored enterprises: GNMA, FNMA, or FHLMC.
The Fund may invest a portion of its assets in various types of
U.S. Government obligations. U.S. Government obligations are a type of
bond. U.S. Government obligations include securities issued or
guaranteed as to principal and interest by the U.S. Government, its
agencies, or instrumentalities.\10\ Payment of principal and interest
on U.S. Government obligations (i) may be backed by the full faith and
credit of the United States (as with U.S. Treasury obligations and GNMA
certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with FNMA, FHLMC, and
Federal Home Loan Bank).
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\10\ U.S. Government obligations include, but are not limited
to, mortgage-backed and asset-backed securities that are issued or
guaranteed by the U.S. government, as well as U.S. agency mortgage
pass-through securities, as described above.
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db-X Managed Municipal Bond Fund--Principal Investments
The investment objective of the db-X Managed Municipal Bond Fund
will be to seek to provide current income consistent with total return.
Under normal market conditions,\11\ the Fund will invest at least
80% of net assets, plus the amount of any borrowings for investment
purposes, in securities issued by municipalities across the United
States (and including the Commonwealth of Puerto Rico and U.S.
territories such as the U.S. Virgin Islands and Guam) whose income is
free from regular federal income tax.
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\11\ See supra note 6.
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Although the Fund may adjust duration of its holdings over a wider
range, it generally intends to keep it between five and nine years.
The Fund may buy municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular
source) and general obligation bonds (which are typically backed by the
issuer's ability to levy taxes). They may also include municipal lease
obligations and investments representing an interest therein.
The Fund will normally invest at least 65% of total assets in
municipal securities of top credit quality (rated AAA+ through A- by
S&P and Fitch or Aaa1 through A3 by Moody's or, if unrated, determined
by the Fund's Adviser and/or Sub-Adviser to be of comparable quality).
The Fund may invest up to 10% of total assets in high yield debt
securities (commonly referred to as ``junk'' bonds) rated BB+ or lower
by S&P and Fitch or Ba1 or lower by Moody's or, if unrated, determined
by the Fund's Adviser and/or Sub-Adviser to be of comparable
quality.\12\
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\12\ See supra note 8.
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Other Investments
While each Fund, under normal market conditions, will invest
primarily in debt securities, each Fund may invest its remaining assets
in other securities and financial instruments, as described below.
The db-X Managed Municipal Bond Fund may invest a portion of its
assets in various types of U.S. Government obligations. U.S. Government
obligations are a type of bond. U.S. Government obligations include
securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies or instrumentalities. Payment of
principal and interest on U.S. Government obligations (i) may be backed
by the full faith and credit of the United States (as with U.S.
Treasury obligations and GNMA certificates) or (ii) may be backed
solely by the issuing or guaranteeing agency or instrumentality itself
(as with FNMA, FHLMC, and Federal Home Loan Bank).
The db-X Ultra-Short Duration Fund generally intends to use
interest rate swaps, and/or small amounts of currency forwards, which
are types of derivatives (a contract whose value is based on, for
example, indices, currencies, or securities) for duration management
(e.g., reducing the sensitivity of a Fund's portfolio to interest rate
changes). In addition, the Fund generally may use: (i) Credit default
swaps based on one or more issues of debt securities or on an index or
indexes of debt securities to increase the Fund's income, to gain
exposure to a bond issuer's credit quality characteristics without
directly investing in the bond, or to hedge the risk of default on
bonds held in the Fund's portfolio; and (ii) total return swaps based
on one or more issues of debt securities or on an index or indexes of
debt securities, or interest rate swaps, to seek to enhance potential
gains.
The db-X Managed Municipal Bond Fund generally may use interest
rate swaps or U.S. Treasury futures.
Investments in derivative instruments by the Funds will be made in
accordance with the 1940 Act and consistent with each Fund's investment
objective and policies. To limit the potential risk associated with
transactions in derivatives, the Funds will segregate or ``earmark''
assets determined to be liquid by the Adviser in accordance with
procedures established by the Trust's Board of Directors (``Board'')
and in accordance with the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its
obligations under derivative instruments. These procedures have been
adopted consistent with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Funds will include appropriate
risk disclosure in their offering documents, including leveraging risk.
Leveraging risk is the risk that certain transactions of the Funds,
including the Funds' use of derivatives, may give rise to leverage,
causing the Funds' Shares to be more volatile than if they had not been
leveraged.
The db-X Ultra Short-Duration Fund may invest in convertible
securities traded on an exchange or over-the counter (``OTC'').
Convertible securities include bonds, debentures, notes, preferred
stocks, and other securities that may be converted into a prescribed
amount of common stock or other equity securities at a specified price
and time. The holder of convertible securities is entitled to receive
interest paid or
[[Page 12259]]
accrued on debt, or dividends paid or accrued on preferred stock, until
the security matures or is converted.
Each Fund may invest in the securities of other investment
companies (including money market funds and exchange-listed ETFs) to
the extent permitted under the 1940 Act.
The Funds will not invest in leveraged or leveraged inverse ETFs.
Investment Restrictions
Each Fund will be classified as ``non-diversified'' under the 1940
Act.\13\
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\13\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
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Each Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,\14\
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 such Fund's net assets are
held 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.\15\
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\14\ 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).
\15\ 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).
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While each of the Funds will be actively-managed and not tied to an
index, under normal market conditions, each Fund's respective portfolio
will meet certain criteria for index-based, fixed income ETFs contained
in NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.\16\
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\16\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02
governing fixed income based Investment Company Units. The
requirements of Rule 5.2(j)(3), Commentary .02(a) include the
following: (i) Components that in the aggregate account for at least
75% of the weight of the index or portfolio must have a minimum
original principal amount outstanding of $100 million or more (Rule
5.2(j)(3), Commentary.02(a)(2)); (ii) no component fixed-income
security (excluding Treasury Securities and government-sponsored
entity securities) will represent more than 30% of the weight of the
index or portfolio, and the five highest weighted component fixed-
income securities will not in the aggregate account for more than
65% of the weight of the index or portfolio (Rule 5.2(j)(3),
Commentary.02(a)(4)); and (iii) an underlying index or portfolio
(excluding one consisting entirely of exempted securities) must
include securities from a minimum of 13 non-affiliated issuers (Rule
5.2(j)(3), Commentary.02(a)(5)). The db-X Managed Municipal Bond
Fund will meet the criteria in Rule 5.2(j)(3) as referenced above
except for the criteria in Rule 5.2(j)(3), Commentary .02(a)(2).
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With respect to qualification as a regulated investment company
(``RIC''), each Fund intends to maintain the required level of
diversification and otherwise conduct its operations so as to qualify
as a RIC for purposes of Subchapter M of the Internal Revenue Code of
1986, as amended.\17\
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\17\ 26 U.S.C. 851.
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With respect to each of the Funds, such Fund's investments will be
consistent with the Fund's investment objective.
The Funds will not invest in equity securities other than
convertible securities and securities issued by other investment
companies, including money market funds and ETFs. The Funds will not
invest in non-U.S. equity securities.
Additional information regarding the Trust, the Funds, and the
Shares, including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies,
distributions, and taxes, among other things, is included in the Notice
and Registration Statement, as applicable.\18\
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\18\ See Notice and Registration Statement, supra notes 3 and 4,
respectively.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act\19\
and the rules and regulations thereunder applicable to a national
securities exchange.\20\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Commission notes that the Funds and the Shares must
comply with the requirements of NYSE Arca Equities Rule 8.600 for the
Shares to be listed and traded on the Exchange.
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\19\ 15 U.S.C. 78f.
\20\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\22\ which sets forth Congress's finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated
Tape Association (``CTA'') high-speed line. In addition, the Portfolio
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), of
Shares of each Fund will be widely disseminated at least every 15
seconds during the Exchange's Core Trading Session by one or more major
market data vendors.\23\ On each business day, before commencement of
trading in Shares in the Core Trading Session on the Exchange, each
Fund will disclose on its Web site the Disclosed Portfolio, as defined
in NYSE Arca Equities Rule 8.600(c)(2), that will form the basis for
such Fund's calculation of net asset value (``NAV'') at the end of the
business day.\24\ NAV per Share of each Fund will be calculated as of
the close of the regular trading session on the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern Time) on each day the New York Stock
Exchange is open. A basket composition
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file disclosing each Fund's securities, which will include the security
names and share quantities required to be delivered in exchange for
Fund Shares, together with estimates and actual cash components, will
be publicly disseminated daily prior to the opening of the New York
Stock Exchange via the National Securities Clearing Corporation.
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. Intra-day and closing price information
regarding debt securities, including debt securities of U.S. and
foreign government agencies and instrumentalities, U.S. Government
obligations (including U.S. agency mortgage pass-through securities),
U.S. and foreign corporate debt securities, mortgage-backed and asset-
backed securities, senior loans, fixed and other floating-rate debt
securities, money market instruments, taxable municipal bonds, and tax-
exempt municipal bonds will be available from major market data
vendors. Price information regarding U.S. Treasury futures will be
available from the applicable exchange and from major market data
vendors. Price information regarding currency forwards will be
available from major market data vendors. Major market data vendors
provide intra-day and end-of-day prices for credit default swaps,
interest rate swaps, and total return swaps. Price information for
exchange-traded equity investments, including ETFs and exchange-traded
convertible securities, will be available from the applicable exchange
or major market data vendors. Price information for convertible
securities traded OTC and other investment company securities,
including money market funds, also will be available from major market
data vendors. Each Fund's Web site will include a form of the
prospectus for each respective Fund and additional data relating to NAV
and other applicable quantitative information.
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\22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\23\ According to the Exchange, several major market data
vendors widely disseminate Portfolio Indicative Values taken from
the CTA or other data feeds.
\24\ On a daily basis, the Adviser or Sub-Adviser will disclose
on the Funds' Web site for each portfolio security and financial
instrument of each Fund the following information: ticker symbol (if
applicable); name of security and financial instrument; number of
shares, if applicable, and dollar value of securities and financial
instruments held in the portfolio; and percentage weighting of the
security and financial instrument in the portfolio. The Web site
information will be publicly available at no charge.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that, with respect to each Fund, the
Exchange will obtain a representation from the issuer of the respective
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time.\25\ In addition, trading in the Shares
will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares of each Fund may be halted. The
Exchange may halt trading in the Shares if trading is not occurring in
the securities and/or the financial instruments comprising the
Disclosed Portfolio of a Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\26\ Further, the Commission notes that the
Reporting Authority that provides the Disclosed Portfolio of each Fund
must implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the portfolio.\27\ The Commission
notes that the Financial Industry Regulatory Authority (``FINRA''), on
behalf of the Exchange,\28\ will communicate as needed regarding
trading in the Shares, exchange-traded investment company securities,
exchange-traded convertible securities, and exchange-traded futures
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 in such
securities and financial instruments from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, exchange-traded investment company securities,
exchange-traded convertible securities, and exchange-traded futures
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement. FINRA, on behalf of the Exchange, is able to access, as
needed, trade information for certain fixed income securities held by
the Funds reported to FINRA's Trade Reporting and Compliance Engine
(``TRACE''). The Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees. The Exchange also states that the Adviser and Sub-Adviser
are not broker-dealers, but both the Adviser and Sub-Adviser are
affiliated with a broker-dealer, and each has implemented and will
maintain a fire wall with respect to such broker-dealer affiliate
regarding access to information concerning the composition and/or
changes to the respective Fund's portfolio.\29\
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\25\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\26\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing
additional considerations for the suspension of trading in or
removal from listing of Managed Fund Shares on the Exchange). 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 each Fund. Trading in Shares of either Fund will be
halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
\27\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\28\ The Exchange states that, while 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.
\29\ See supra note 5. An investment adviser to an open-end fund
is required to be registered under the Investment Advisers Act of
1940 (``Advisers Act''). As a result, the Adviser, Sub-Adviser, and
their related personnel are subject to the provisions of Rule 204A-1
under the Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of ethics that reflects
the fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares of each Fund will conform to the initial and
continued listing criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange represents that trading in the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and applicable federal securities laws and that these
procedures are adequate to properly monitor Exchange trading of
[[Page 12261]]
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and applicable federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin
of the special characteristics and risks associated with trading the
Shares. Specifically, the Information Bulletin will discuss the
following: (a) The procedures for purchases and redemptions of Shares
in Creation Units (and that Shares are not individually redeemable);
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due
diligence on its ETP Holders to learn the essential facts relating to
every customer prior to trading the Shares; (c) the risks involved in
trading the Shares during the Opening and Late Trading Sessions when an
updated Portfolio Indicative Value will not be calculated or publicly
disseminated; (d) how information regarding the Portfolio Indicative
Value is disseminated; (e) the requirement that ETP Holders deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and/or continued listing, each Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\30\ as provided by
NYSE Arca Equities Rule 5.3.
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\30\ 17 CFR 240.10A-3.
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(6) Each Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance.
(7) A minimum of 100,000 Shares of each Fund will be outstanding at
the commencement of trading on the Exchange.
(8) With respect to each of the Funds, such Fund's investments will
be consistent with the Fund's investment objective. Investments in
derivative instruments by the Funds will be made in accordance with the
1940 Act and consistent with each Fund's investment objective and
policies. To limit the potential risk associated with transactions in
derivatives, the Funds will segregate or ``earmark'' assets determined
to be liquid by the Adviser in accordance with procedures established
by the Trust's Board and in accordance with the 1940 Act (or, as
permitted by applicable regulation, enter into certain offsetting
positions) to cover its obligations under derivative instruments.
(9) The Funds will not invest in equity securities other than
convertible securities and securities issued by other investment
companies, including money market funds and ETFs. The Funds will not
invest in non-U.S. equity securities. The Funds will not invest in
leveraged or leveraged inverse ETFs.
This approval order is based on all of the Exchange's representations
and description of the Funds, including those set forth above and in
the Notice.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \31\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\31\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-NYSEArca-2013-135) be, and
it hereby is, approved.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04682 Filed 3-3-14; 8:45 am]
BILLING CODE 8011-01-P