[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24789-24798]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09924]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72028; File No. SR-NYSEArca-2014-42]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of Shares
of Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-
Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration
12-Month ETF Under NYSEArca Equities Rule 8.600
April 25, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on April 14, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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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 list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares \4\ on the Exchange: Schwab
Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF;
Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month
ETF (each a ``Fund'' and collectively, the ``Funds''). 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.
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\4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment 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), 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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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares \5\ on the
[[Page 24790]]
Exchange: Schwab Active Short Duration Income ETF; Schwab
TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and
Schwab TargetDuration 12-Month ETF (each a ``Fund'' and collectively,
the ``Funds'').\6\
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\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment 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), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\6\ The Commission has previously approved listing and trading
on the Exchange of actively managed funds 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); 66321 (February 3, 2012), 77 FR 6850 (February 9,
2012) (SR-NYSEArca-2011-95) (order approving listing and trading of
PIMCO Total Return Exchange Traded Fund); 66670 (March 28, 2012), 77
FR 20087 (April 3, 2012) (SR-NYSEArca-2012-09) (order approving
listing and trading of PIMCO Global Advantage Inflation-Linked Bond
Strategy Fund).
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Each Fund is a series of the Schwab Strategic 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.\7\ Each Fund will be advised by Charles Schwab Investment
Management, Inc. (``CSIM'' or the ``Adviser'').
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\7\ The Trust is registered under the 1940 Act. On November 21,
2012, the Trust filed with the Commission a registration statement
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a)
(``Securities Act'') and the 1940 Act relating to the Schwab Active
Short Duration Income ETF (File Nos. 333-160595 and 811-22311) (the
``Short Duration Registration Statement''). In addition, on August
1, 2013, the Trust filed with the Commission a registration
statement on Form N-1A under the Securities Act and the 1940 Act for
the Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month
ETF; and Schwab TargetDuration 12-Month ETF (File Nos. 333-160595
and 811-22311) (the ``TargetDuration Registration Statement'' and,
together with the Short Duration Registration Statement, the
``Registration Statements''). The description of the operation of
the Trust and each Fund herein is based, in part, on the
Registration Statements. In addition, the Commission has issued an
order granting certain exemptive relief to the Adviser (as defined
herein) under the 1940 Act. See Investment Company Act Release No.
30606 (July 23, 2013) (File No. 812-14009) (``Exemptive Order'').
Each Fund will be offered in reliance upon the Exemptive Order
issued to the Adviser.
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Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund 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.\8\ In addition,
Commentary .06 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. CSIM is not a
broker-dealer but is affiliated with a broker-dealer, Charles Schwab &
Co., Inc., and 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 portfolios. In the
event (a) the 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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\8\ 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 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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Schwab Active Short Duration Income ETF \9\
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\9\ The Adviser represents that the name of the Fund will be
changed to the Schwab TargetDuration 6-Month ETF prior to
commencement of listing and trading of Shares of the Fund on the
Exchange. Such change will be reflected in an amendment to the Short
Duration Registration Statement.
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Principal Investments
According to the Short Duration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\10\ to invest at least 90% of its net assets \11\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments, as
described below. The short-term fixed income securities in which the
Fund may invest include corporate and commercial debt instruments; \12\
privately-issued securities; \13\ mortgage-backed and asset-backed
securities; \14\ variable- and floating-rate fixed income securities;
repurchase agreements; \15\ money market
[[Page 24791]]
instruments, including, but not limited to certificates of deposit,
commercial paper, promissory notes and asset-backed commercial paper;
obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\16\ including exchange-
traded funds (``ETFs''),\17\ that invest in securities similar to those
in which the Fund may invest directly, and (3) cash and cash
equivalents. All of these investments will be denominated in U.S.
dollars, including those that are issued by foreign issuers.
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\10\ With respect to each of the Funds, the term ``under normal
circumstances'' includes, but is not limited to, the absence of
extreme volatility or trading halts in the fixed income markets or
the financial markets generally; events or circumstances causing a
disruption in market liquidity or orderly markets; 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.
\11\ Each Fund's 90% investment policy may be satisfied by the
investments outlined in a Fund's ``Principal Investments'' section.
Certain ``Non-Principal Investments'' of each Fund, as discussed
below, may also be considered within a Fund's 90% investment policy
to the extent they are investment grade short-term fixed income
securities. See note 58.
\12\ The Adviser expects that under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances
that have at least $100,000,000 par amount outstanding in developed
countries and at least $200,000,000 par amount outstanding in
emerging market countries.
\13\ Privately-issued securities are generally issued under Rule
144A of the Securities Act.
\14\ Each Fund's investments in each of the following security
types will be limited to 10% of a Fund's net assets: (1) Non-agency
residential mortgage-backed securities, (2) non-agency commercial
mortgage-backed securities and (3) non-agency asset-backed
securities. Each Fund's aggregate investments in the following
security types will be limited to 20% of a Fund's net assets: (1)
Non-agency residential mortgage-backed securities, (2) non-agency
commercial mortgage-backed securities, and (3) non-agency asset-
backed securities. As noted for each Fund, at least 90% of a Fund's
net assets will be, under normal circumstances, invested in U.S.
dollar denominated fixed income securities. All fixed income
securities, including mortgage-backed and asset-backed securities,
purchased by a Fund will be rated A- or higher. Neither high-yield
asset-backed securities nor high-yield mortgage-backed securities
are included in a Fund's principal investment strategies. The
liquidity of a security, especially in the case of asset-backed and
mortgage-backed debt securities, is a factor in each Fund's security
selection process. Asset-backed securities backed by a specific
industry receivable are classified into distinct industries based on
the underlying credit and liquidity structures. Asset-backed
commercial paper programs backed by multiple industry receivables
are classified within a multi-industry category. Each Fund will
limit investments in each identified industry individually and to
the multi-industry category to less than 25% of its net assets.
\15\ Repurchase agreements are instruments under which a buyer
acquires ownership of certain securities (usually U.S. government
securities) from a seller who agrees to repurchase the securities at
a mutually agreed-upon time and price, thereby determining the yield
during the buyer's holding period. The period to maturity for
repurchase agreements is generally short (from overnight to one
week), although it may be longer. In addition, the securities
collateralizing a repurchase agreement may have longer maturity
periods.
\16\ Each Fund may invest in other investment companies to the
extent permitted by Section 12(d)(1) of the 1940 Act and rules
thereunder and/or any applicable exemption under the 1940 Act with
respect to such investments.
\17\ For purposes of this proposed rule change, 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). The ETFs all will be listed and traded in
the U.S. on registered exchanges. While each Fund may invest in
inverse ETFs, a Fund will not invest in leveraged (e.g., 2X or 3X)
or leveraged inverse ETFs.
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All fixed income securities purchased by the Fund will be rated A-
or higher by Standard & Poor's Corporation (``S&P'') and/or an
equivalent rating by another Nationally Recognized Statistical Rating
Organization (``NRSRO'') such as Fitch Inc. (``Fitch'') or Moody's
Investor Services, Inc. (``Moody's''), or, if unrated, determined by
the Adviser to be of equivalent quality.\18\
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\18\ In determining whether a security is of ``equivalent
quality,'' the Adviser may consider various factors, including but
not limited to: 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; and other structural analysis.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than six months.\19\ The Adviser may adjust
the Fund's duration within the stated limit based on current or
anticipated changes in interest rates.
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\19\ Duration measures the price sensitivity of a security to
interest rate changes. The longer the duration, the more sensitive
the portfolio will be to a change in interest rates.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
twelve months (1 year). For most security types, the security's final
maturity date (the date on which the final principal payment of the
security is scheduled to be paid) will be used to determine the Fund's
portfolio maturity.\20\ The Fund will not purchase any security with a
maturity, or for securitized investments, the security's weighted
average life, of more than twenty-four months (2 years) from the date
of acquisition. The Adviser may adjust the Fund's maturity within the
stated limit based on current and anticipated changes in interest
rates.
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\20\ For securitized investments such as asset-backed and
mortgage-backed securities, the security's weighted average life
(the weighted average time to receipt of all principal payments)
will be used to determine a Fund's portfolio maturity while for
securities with embedded demand features, such as puts or calls,
either the security's demand date or the final maturity date,
depending on interest rates, yields and other market conditions,
will be used.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\21\
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\21\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02
governing fixed income based Investment Company Units. Under normal
circumstances, each Fund's portfolio will meet the following
criteria: (i) Components that in the aggregate account for at least
65% of the weight of the index or portfolio must each have a minimum
original principal amount outstanding of $100 million or more (in
contrast to the requirement in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02(a)(3) that 75% of the weight of the index or
portfolio meet such requirement); (ii) no component fixed-income
security (excluding Treasury Securities, government-sponsored entity
and other exempted securities) will represent more than 30% of the
weight of the portfolio, and the five highest weighted component
fixed income securities (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will not in the
aggregate account for more than 65% of the weight of the portfolio);
and (iii) the portfolio (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will include
securities from a minimum of 13 non-affiliated issuers. Each Fund
will not be required to meet the requirements of NYSE Arca Equities
Rule 5.2(j)(3), Commentary .02(a)(3) (which relates to convertible
security index components and removal of such components from an
index or portfolio once the convertible security converts to the
underlying security), and Commentary .02(a)(6) (which relates to
reporting, numerical, or other enumerated requirements applicable to
issuers of index component securities).
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Schwab TargetDuration 2-Month ETF Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek current income consistent
with preservation of capital and daily liquidity.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\22\ to invest at least 90% of its net assets \23\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \24\ privately-issued securities; \25\
mortgage-backed and asset-backed securities; \26\ variable- and
floating-rate fixed income securities; repurchase agreements; \27\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\28\ including ETFs,\29\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
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\22\ See note 10, supra.
\23\ See note 11, supra.
\24\ See note 12, supra.
\25\ See note 13, supra.
\26\ See note 14, supra.
\27\ See note 15, supra.
\28\ See note 16, supra.
\29\ See note 17, supra.
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All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\30\
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\30\ See note 18, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than two months.\31\ The Adviser may adjust
the Fund's duration within the stated limit based on current
[[Page 24792]]
and anticipated changes in interest rates.
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\31\ See note 19, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than four
months. For most security types, the security's final maturity date
(the date on which the final principal payment of the security is
scheduled to be paid) will be used to determine the Fund's portfolio
maturity.\32\ The Fund will not purchase any security with a maturity,
or for securitized investments, the security's weighted average life,
of more than eighteen months (1.5 years) from the date of acquisition.
The Adviser may adjust the Fund's maturity within the stated limit
based on current and anticipated changes in interest rates.
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\32\ See note 20, supra.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\33\
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\33\ See note 21, supra.
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Schwab TargetDuration 9-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek a high level of current
income consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\34\ to invest at least 90% of its net assets \35\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \36\ privately-issued securities; \37\
mortgage-backed and asset-backed securities; \38\ variable- and
floating-rate fixed income securities; repurchase agreements,\39\ money
market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\40\ including ETFs,\41\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
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\34\ See note 10, supra.
\35\ See note 11, supra.
\36\ See note 12, supra.
\37\ See note 13, supra.
\38\ See note 14, supra.
\39\ See note 15, supra.
\40\ See note 16, supra.
\41\ See note 17, supra.
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All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\42\
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\42\ See note 18, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than nine months.\43\ The Adviser may adjust
the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
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\43\ See note 19, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
eighteen months (1.5 years). For most security types, the security's
final maturity date (the date on which the final principal payment of
the security is scheduled to be paid) will be used to determine the
Fund's portfolio maturity.\44\ The Fund will not purchase any security
with a maturity, or for securitized investments, the security's
weighted average life, of more than thirty months (2.5 years) from the
date of acquisition. The Adviser may adjust the Fund's maturity within
the stated limit based on current and anticipated changes in interest
rates.
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\44\ See note 20, supra.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\45\
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\45\ See note 21, supra.
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Schwab TargetDuration 12-Month ETF
Principal Investments
According to the TargetDuration Registration Statement, the
investment objective of the Fund is to seek maximum current income
consistent with preservation of capital.
To pursue its goal, it is the Fund's policy, under normal
circumstances,\46\ to invest at least 90% of its net assets \47\ in a
portfolio of investment grade short-term fixed income securities issued
by U.S. and foreign issuers and other short-term investments. The fixed
income securities in which the Fund may invest include corporate and
commercial debt instruments; \48\ privately-issued securities,\49\
mortgage-backed and asset-backed securities; \50\ variable- and
floating-rate fixed income securities; repurchase agreements; \51\
money market instruments, including, but not limited to certificates of
deposit, commercial paper, promissory notes and asset-backed commercial
paper; obligations issued by the U.S. government and its agencies and
instrumentalities, including but not limited to, obligations that are
not guaranteed by the U.S. Treasury, such as those issued by Fannie Mae
and Freddie Mac; and bank notes and similar demand deposits. To gain
exposure to short-term fixed income securities, the Fund may invest in
other short-term investments including (1) money market funds
(including funds that are managed by the Adviser or one of its
affiliates), (2) other investment companies,\52\ including ETFs,\53\
that invest in securities similar to those in which the Fund may invest
directly, and (3) cash and cash equivalents. All of these investments
will be denominated in U.S. dollars, including those that are issued by
foreign issuers.
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\46\ See note 10, supra.
\47\ See note 11, supra.
\48\ See note 12, supra.
\49\ See note 13, supra.
\50\ See note 14, supra.
\51\ See note 15, supra.
\52\ See note 16, supra.
\53\ See note 17, supra.
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All fixed income securities purchased by the Fund will be rated A-
or higher by S&P and/or an equivalent rating by another NRSRO such as
Fitch or Moody's, or, if unrated, determined by the Adviser to be of
equivalent quality.\54\
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\54\ See note 18, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio
[[Page 24793]]
duration of less than twelve months (1 year).\55\ The Adviser may
adjust the Fund's duration within the stated limit based on current and
anticipated changes in interest rates.
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\55\ See note 19, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity of all the securities held in the portfolio) of less than
twenty-four months (2 years). For most security types, the security's
final maturity date (the date on which the final principal payment of
the security is scheduled to be paid) will be used to determine the
Fund's portfolio maturity.\56\ The Fund will not purchase any security
with a maturity, or for securitized investments, the security's
weighted average life, of more than thirty-six months (3 years) from
the date of acquisition. The Adviser may adjust the Fund's maturity
within the stated limit based on current and anticipated changes in
interest rates.
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\56\ See note 20, supra.
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The Fund is an actively-managed fund that does not seek to track
the performance of a specific index. The Exchange notes, however, that
the Fund's portfolio, under normal circumstances, will meet certain
criteria similar to those applicable to index-based, fixed income
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3),
Commentary .02.\57\
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\57\ See note 21, supra.
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Non-Principal Investments \58\
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\58\ Certain investments have been identified as ``Non-Principal
Investments'' within the Registration Statements given the limited
extent to which these investments are expected to comprise of [sic]
each Fund's portfolio. These non-principal investments, however, may
be considered within a Fund's 90% investment policy to the extent
they are investment grade short-term fixed income securities.
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According to the Registration Statements, as part of each Fund's
non-principal investment strategies, a Fund may invest in other
securities such as Build America Bonds,\59\ capital and trust preferred
securities,\60\ fixed income securities with put features, sinking
funds \61\ and zero-coupon, step-coupon, and pay-in-kind
securities.\62\ Also as part of each Fund's non-principal investment
strategies, a Fund may borrow money in accordance with the 1940 Act as
outlined in a Fund's Registration Statement.
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\59\ According to the Registration Statements, Build America
Bonds offer an alternative form of financing to state and local
governments whose primary means for accessing the capital markets
has historically been through the issuance of tax-free municipal
bonds. Issuance of Build America Bonds ceased on December 31, 2010.
Outstanding Build America Bonds will continue to be eligible for the
federal interest rate subsidy, which continues for the life of the
bonds.
\60\ According to the Registration Statements, capital
securities are certain subordinated securities and generally rank
senior to common stock and preferred stock in an issuer's capital
structure, but have a lower security claim than the issuer's
corporate bonds. Trust preferred securities have the characteristics
similar to other capital securities. They are issued by a special
purpose trust subsidiary backed by subordinated debt of the
corporate parent.
\61\ According to the Registration Statements, sinking funds are
generally established by bond issuers to set aside a certain amount
of money to cover timely repayment of bondholders' principal raised
through a bond issuance. By creating a sinking fund, the issuer is
able to spread repayment of principal to numerous bondholders while
reducing reliance on its then current cash flows. A sinking fund
also may allow the issuer to annually repurchase certain of its
outstanding bonds from the open market or repurchase certain of its
bonds at a call price named in a bond's sinking fund provision. This
call provision allows bonds to be prepaid or called prior to a
bond's maturity.
\62\ According to the Registration Statements, zero-coupon,
step-coupon, and pay-in-kind securities are fixed income securities
that do not make regular cash interest payments throughout the
period prior to maturity. Zero-coupon and step-coupon securities are
sold at a deep discount to their face value. A zero-coupon security
pays no interest to its holders during its life. Step-coupon
securities are debt securities that, instead of having a fixed
coupon for the life of the security, have coupon or interest
payments that may increase or decrease to predetermined rates at
future dates. Pay-in-kind securities pay interest through the
issuance of additional securities. To continue to qualify as a
``regulated investment company'' or ``RIC'' under the Internal
Revenue Code of 1986, as amended, and avoid a certain excise tax,
each Fund may be required to distribute a portion of such discount
and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in
order to generate cash to meet these distribution requirements.
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A Fund may not hold more than 15% of its net assets in illiquid
assets, including Rule 144A securities \63\ except for Rule 144A
securities deemed liquid by the Adviser, based on criteria for
liquidity established by the Board, consistent with Commission
guidance.\64\ 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 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.\65\
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\63\ Rule 144A securities are securities which, while privately
placed, are eligible for purchase and resale pursuant to Rule 144A
of the Securities Act.
\64\ 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).
\65\ 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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Furthermore, a Fund may not concentrate investments in a particular
industry or group of industries, as concentration is defined under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.\66\
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\66\ According to the Registration Statements, the Commission
has defined concentration as investing 25% or more of an investment
company's total assets in an industry or group of industries, with
certain exceptions such as with respect to investments in
obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities, or tax-exempt obligations of state
or municipal governments and their political subdivisions. See,
e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40
FR 54241 (November 21, 1975).
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Each Fund will not invest in options, futures, swaps or other
derivatives or in non-U.S. equity securities. A Fund's investments will
be consistent with its investment objective and will not be used to
enhance leverage.
Creation and Redemption of Shares
Each Fund will issue and redeem the Shares only in ``Creation
Units,'' which shall be aggregations of at least 25,000 Shares or more.
Only institutional investors, who have entered into an authorized
participant agreement (known as ``Authorized Participants''), may
purchase or redeem Creation Units of a Fund as set forth in the
Registration Statements. Creation Units will generally be issued and
redeemed in exchange for a specified basket of securities approximating
the holdings of a Fund (``Deposit Securities'') and a designated amount
of cash denominated in U.S. Dollars (the ``Cash Component''). Together,
the Deposit Securities and the Cash Component constitute the ``Fund
[[Page 24794]]
Deposit,'' which will represent the minimum initial and subsequent
investment amount for a Creation Unit of a Fund.
According to the Registration Statements, a Fund may accept a
basket of money market instruments, non-U.S. currency or cash
denominated in U.S. dollars that differs from the composition of the
published basket. A Fund may permit or require the consideration for
Creation Units to consist solely of cash or non-U.S. currency. A Fund
may permit or require the substitution of an amount of cash denominated
in U.S. Dollars (i.e., a ``cash in lieu'' amount) to be added to the
Cash Component to replace any Deposit Security.
The identity and amount of Deposit Securities and Cash Component
for a Fund may change as the composition of the Fund's portfolio
changes and as rebalancing adjustments and corporate action events are
reflected from time to time by CSIM with a view to the investment
objective of a Fund.
Shares of each Fund may be redeemed only in Creation Units at their
net asset value (``NAV'') and only on a day the NYSE Arca is open for
business (normally from 9:30 a.m. until 4:00 p.m. Eastern time, each a
``Business Day''). According to the Registration Statements, Fund
securities received on redemption will generally correspond pro rata,
to the extent practicable, to the securities in a Fund's portfolio.
Fund securities received on redemption may not be identical to Deposit
Securities that are applicable to creations of Creation Units.
Net Asset Value
According to the Registration Statements, each Fund will calculate
its NAV at the close of the regular trading session of each Business
Day using the values of the respective Fund's portfolio securities.
In valuing their securities, each Fund will use market quotes or
official closing prices if they are readily available. In cases where
quotes are not readily available, a Fund may value securities based on
fair values developed using methods approved by the Funds' Board of
Trustees (as discussed below). When valuing fixed income securities
with remaining maturities of more than 60 days, each Fund will use the
value of the security provided by independent pricing services. The
pricing services may value fixed income securities at an evaluated
price by employing methodologies that use actual market transactions,
broker-supplied valuations, or other methodologies designed to identify
the market value for such securities. When valuing fixed income
securities with remaining maturities of 60 days or less, each Fund may
use the security's amortized cost, which approximates the security's
market value.
Corporate and commercial debt instruments; privately-issued
securities; mortgage-backed and asset-backed securities; variable- and
floating-rate fixed income securities; repurchase agreements; money
market instruments; obligations issued by the U.S. government and its
agencies and instrumentalities; bank notes and similar demand deposits;
Build America Bonds; fixed income securities with put features; sinking
funds; over-the-counter capital and trust preferred securities; and
step-coupons will be valued based on price quotations or other
equivalent indications of value provided by a third-party pricing
service. Any such third-party pricing service may use a variety of
methodologies to value some or all of a Fund's debt securities to
determine the market price. For example, the prices of securities with
characteristics similar to those held by each Fund may be used to
assist with the pricing process. In addition, the pricing service may
use proprietary pricing models. A Fund's debt securities may be valued
at the mean between the last available bid and ask prices for such
securities or, if such prices are not available, at prices for
securities of comparable maturity, quality, and type. Short-term
securities for which market quotations are not readily available will
be valued at amortized cost, which approximates market value. ETFs and
exchange-traded capital and trust preferred 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 security is primarily traded at the time of
valuation. Investment company securities, including money market funds,
(other than ETFs) will be valued at NAV.
When market prices for securities are not ``readily available'' or
are unreliable, the securities will be valued at fair value. For
example, a Fund may fair value a security when a security is de-listed
or its trading is halted or suspended; when a security's primary
pricing source is unable or unwilling to provide a price; when a
security's primary trading market is closed during regular market
hours; or when a security's value is materially affected by events
occurring after the close of the security's primary trading market. By
fair valuing securities whose prices may have been affected by events
occurring after the close of trading, each Fund will seek to establish
prices that investors might expect to realize upon the current sales of
these securities. Each Fund's fair value methodologies seek to ensure
that the prices at which each Fund's Shares are purchased and redeemed
are fair and do not result in dilution of shareholder interest or other
harm to shareholders. Generally, when fair valuing a security, a Fund
will take into account all reasonably available information that may be
relevant to a particular valuation including, but not limited to,
fundamental analytical data regarding the issuer, information relating
to the issuer's business, recent trades or offers of the security,
general and specific market conditions and the specific facts giving
rise to the need to fair value the security. Each Fund will make fair
value determinations in good faith and in accordance with the fair
value methodologies included in the Board of Trustees' adopted
valuation procedures and in accordance with the 1940 Act.
Portfolio Indicative Value
The Portfolio Indicative Value (``PIV'') as defined in NYSE Arca
Equities Rule 8.600(c)(3) of Shares of each Fund will be widely
disseminated by one or more major market data vendors at least every
fifteen seconds during the Exchange's Core Trading Session. Such
approximate value generally will be determined by using current market
quotations and/or price quotations obtained from broker-dealers that
may trade in the portfolio securities held by a Fund. This approximate
value should not be viewed as a ``real-time'' update of the NAV per
Share of a Fund because the approximate value may not be calculated in
the same manner as the NAV, which is computed once a day, generally at
the end of the Business Day. The PIV will be based upon the current
value for the components of a Fund's Disclosed Portfolio, as defined in
NYSE Arca Equities Rule 8.600(c)(2).
Availability of Information
The Funds' Web site (www.schwabetfs.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
(www.schwabetfs.com/prospectus). 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
[[Page 24795]]
``Bid/Ask Price''),\67\ and a calculation of the premium and discount
of the Bid/Ask Price against the NAV, and (2) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid/Ask Price against the NAV, within appropriate ranges, for
each of the four previous calendar quarters. On each Business Day,
before commencement of trading in Shares in the Core Trading Session on
the Exchange, the Adviser will disclose on each Fund's Web site the
Disclosed Portfolio for each Fund as defined in NYSE Arca Equities Rule
8.600(c)(2) that will form the basis for a Fund's calculation of NAV at
the end of the Business Day.\68\
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\67\ The Bid/Ask Price of a Fund's Shares 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.
\68\ Under accounting procedures to be followed by each Fund,
trades made on the prior Business Day (``T'') generally will be
booked and reflected in NAV on the current Business Day (``T+1'').
Accordingly, each Fund will be able to disclose at the beginning of
the business day the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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Each Fund's portfolio holdings will be disclosed on its Web site
daily after the close of trading on the Exchange and prior to the
opening of trading on the Exchange the following day.
On a daily basis, the Adviser will disclose on behalf of each Fund
[sic] each portfolio security and other 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. In addition, intra-day and end-of-day prices
for all securities and other financial instruments held by each Fund
will be available through major market data vendors or broker-dealers
or on the exchanges on which they are traded.
In addition, a basket composition file disclosing each Fund's
Securities [sic], which includes 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. The basket represents
one Creation Unit of a Fund. Investors can also obtain the Trust's
Statement of Additional Information (``SAI''), each Fund's Shareholder
Report, and its Form N-CSR and Form N-SAR, filed twice a year. The
Trust's SAI and Shareholder Reports are available free upon request
from the Trust, and those documents and the Form N-CSR and Form N-SAR
may be viewed on-screen or downloaded from the Commission's Web site at
www.sec.gov. Information regarding market price and trading volume of
the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Information for the Shares regarding the previous day's
closing price and trading volume information will be published daily in
the financial section of newspapers or available via the respective
newspapers' Web sites and other such sources. Quotation and last sale
information for the Shares will be available via the Consolidated Tape
Association (``CTA'') high-speed line. Intra-day and closing price
information regarding corporate and commercial debt instruments;
privately-issued securities; mortgage-backed and asset-backed
securities; variable- and floating-rate fixed income securities;
repurchase agreements; money market instruments; obligations issued by
the U.S. government and its agencies and instrumentalities; bank notes
and similar demand deposits; Build America Bonds; fixed income
securities with put features; sinking funds; capital and trust
preferred securities; and step-coupons will be available from major
market data vendors. Price information for ETFs and exchange-traded
capital and trust preferred securities will be available from the
applicable exchange or major market data vendors. Price information for
other investment company securities (including money market funds) will
be available from major market data vendors. In addition, as noted
above, the PIV will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the Core Trading
Session.\69\ The dissemination of the PIV, together with the Disclosed
Portfolio, will allow investors to determine the value of the
underlying portfolio of each Fund on a daily basis and will provide a
close estimate of that value throughout the trading day.
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\69\ Currently, it is the Exchange's understanding that several
major market data vendors widely disseminate PIVs taken from CTA or
other data feeds.
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Additional information regarding the Trust and the Shares of each
Fund, including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statements.
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 a Fund.\70\ Trading in Shares of a Fund will
be halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares of a Fund inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of a Fund; or
(2) 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 8.600(d)(2)(D),
which sets forth circumstances under which Shares of a Fund may be
halted.
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\70\ See NYSE Arca Equities Rule 7.12, Commentary .04.
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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 4:00 a.m. to 8:00 p.m. Eastern Time 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 of each Fund will conform to the initial and continued
listing criteria under NYSE Arca Equities Rule 8.600. The Exchange
represents that, for initial and/or continued listing, each Fund will
be in compliance with Rule 10A-3 \71\ under the Act, 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 and
[[Page 24796]]
the Disclosed Portfolio will be made available to all market
participants at the same time.
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\71\ 17 CFR 240 10A-3.
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Surveillance
The Exchange represents that trading in the Shares of each Fund
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.\72\ 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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\72\ 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, ETFs, exchange-traded capital and
trust preferred securities, and other exchange-listed assets, as
applicable, 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
Shares, ETFs, exchange-traded capital and trust preferred securities,
and other exchange-listed assets, as applicable, from such markets and
other entities. In addition, the Exchange may obtain information
regarding trading in such Shares, ETFs, exchange-traded capital and
trust preferred securities, and other exchange-listed assets, as
applicable, from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.\73\ In addition, FINRA, on behalf of the Exchange,
is able to access, as needed, trade information for certain fixed
income securities held by each Fund reported to FINRA's Trade Reporting
and Compliance Engine (``TRACE'').
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\73\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for each Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares of each Fund. Specifically, the Bulletin will
discuss the following: (1) The procedures for purchases and redemptions
of Shares in Creation Units (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated 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 each Fund is subject
to various fees and expenses described in the Registration Statements.
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 of each Fund
will be calculated after 4:00 p.m. Eastern Time each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \74\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest. Each
Fund will not invest in non-U.S. equity securities. Each Fund will not
invest in leveraged or leveraged inverse ETFs. A Fund's investments
will be consistent with the Funds' investment objective and will not be
used to enhance leverage. Each Fund will, under normal market
circumstances, invest at least 90% of its net assets in a portfolio of
investment grade short-term fixed income securities issued by U.S. and
foreign issuers and other short-term investments as described above.
All debt securities purchased by each Fund will be rated A- or higher
by S&P and/or an equivalent rating by another NRSRO such as Fitch or
Moody's, or, if unrated, determined by the Adviser to be of equivalent
quality. Each Fund's investments in each of the following security
types will be limited to 10% of a Fund's net assets: (1) Non-agency
residential mortgage-backed securities, (2) non-agency commercial
mortgage-backed securities and (3) non-agency asset-backed securities.
Each Fund's aggregate investments in the following security types will
be limited to 20% of a Fund's net assets: (1) Non-agency residential
mortgage-backed securities, (2) non-agency commercial mortgage-backed
securities, and (3) non-agency asset-backed securities. A Fund may not
hold more than 15% of its net assets in illiquid assets, including Rule
144A securities except for Rule 144A securities deemed liquid by the
Adviser, based on criteria for liquidity established by the Board,
consistent with Commission guidance. The Adviser expects that under
normal market circumstances, each Fund will generally seek to invest in
corporate bond issuances that have at least $100,000,000 par amount
outstanding in developed countries and at least $200,000,000 par amount
outstanding in emerging market countries. Each Fund will not invest in
options, futures, swaps or other derivatives. Each Fund's portfolio,
under normal circumstances, will meet certain criteria similar to those
applicable to index-based, fixed income exchange-traded funds contained
in NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.\75\
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\74\ 15 U.S.C. 78f(b)(5).
\75\ See note 21, supra.
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares of each Fund in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.
Additionally, FINRA, on behalf of the Exchange, will communicate as
needed regarding trading in the Shares, ETFs, exchange-traded capital
and trust preferred
[[Page 24797]]
securities, and other exchange-listed assets, as applicable, with other
markets and other entities that are members of the ISG, and FINRA, on
behalf of the Exchange, may obtain trading information regarding
trading in such Shares, ETFs, exchange-traded capital and trust
preferred securities, and other exchange-listed assets, as applicable,
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in such Shares, ETFs, exchange-
traded capital and trust preferred securities, and other exchange-
listed securities, as applicable, from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by a Fund reported to FINRA's
TRACE.
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 Adviser is not a broker-dealer but is affiliated with a
broker-dealer and has represented that it has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the
portfolios. The Exchange will obtain a representation from the issuer
of the Shares of each Fund that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made
available to all market participants at the same time. In addition, a
large amount of information is publicly available regarding each Fund
and the respective Shares, thereby promoting market transparency. Each
Fund's portfolio holdings will be disclosed on its Web site daily after
the close of trading on the Exchange and prior to the opening of
trading on the Exchange the following day. Intra-day and end-of-day
prices for all securities or other financial instruments held by each
Fund will be available through major market data vendors or broker-
dealers or on the exchanges on which they are traded. Moreover, the PIV
will be widely disseminated by one or more major market data vendors at
least every 15 seconds during the Exchange's Core Trading Session. On
each Business Day, before commencement of trading in Shares in the Core
Trading Session on the Exchange, each Fund will disclose on the Funds'
Web site the Disclosed Portfolio that will form the basis for each
Fund's calculation of NAV at the end of the Business Day. Information
regarding market price and trading volume of the Shares of each Fund
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services, and
quotation and last sale information will be available via the CTA high-
speed line. The Web site for the Funds will include a form of the
prospectus for each Fund and additional data relating to NAV and other
applicable quantitative information. 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 of each Fund. Trading in Shares of
each 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, and 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. In addition, as noted above,
investors will have ready access to information regarding a Fund's
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale
information for the respective Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
additional types of actively-managed exchange-traded products 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 of each
Fund 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 each
Fund's holdings, the PIV, the Disclosed Portfolio for each Fund, and
quotation and last sale information for the Shares of each Fund.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of
additional types of actively-managed exchange-traded products that hold
fixed income securities and that will enhance competition among market
participants, to the benefit of investors and the marketplace.
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 (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-2014-42 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-42. 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
[[Page 24798]]
proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Section, 100 F Street
NE., Washington, DC 20549, on official business days between 10:00 a.m.
and 3:00 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of NYSE. 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-2014-42 and should
be submitted on or before May 22, 2014.
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\76\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09924 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P