[Federal Register Volume 79, Number 112 (Wednesday, June 11, 2014)]
[Notices]
[Pages 33619-33625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-13564]
[[Page 33619]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72336; File No. SR-NYSEArca-2014-42]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval 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
June 5, 2014.
I. Introduction
On April 14, 2014, 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
Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month
ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-
Month ETF (individually, ``Fund,'' and collectively, ``Funds'') under
NYSE Arca Equities Rule 8.600. The proposed rule change was published
for comment in the Federal Register on May 1, 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. 72028 (Apr. 25,
2014), 79 FR 24789 (``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 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.\4\ The
Funds will be advised by Charles Schwab Investment Management, Inc.
(``CSIM'' or ``Adviser''). The Exchange states that the Adviser is not
a broker-dealer but is affiliated with a broker-dealer, Charles Schwab
& Co., Inc. The Adviser has implemented and will maintain a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition of or changes to each respective
Fund's portfolio.\5\
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\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). According to the Exchange, on November 21,
2012, the Trust filed with the Commission a registration statement
on Form N-1A under the Securities Act of 1933 (``Securities Act'')
and the 1940 Act relating to the Schwab Active Short Duration Income
ETF (File Nos. 333-160595 and 811-22311) (``Short Duration
Registration Statement''). 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)
(``TargetDuration Registration Statement'' and, together with the
Short Duration Registration Statement, collectively, ``Registration
Statements''). In addition, the Exchange states that the Adviser
(defined herein) has obtained certain exemptive relief under the
1940 Act. See Investment Company Act Release No. 30606 (July 23,
2013) (File No. 812-14009). The Exchange states that each Fund will
be offered in reliance upon the Exemptive Order issued to the
Adviser.
\5\ See NYSE Arca Equities Rule 8.600, Commentary .06. 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, the adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or its broker-dealer
affiliate regarding access to information concerning the composition
of or changes to the portfolios, and it will be subject to
procedures designed to prevent the use and dissemination of
material, non-public information regarding the 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.
Schwab Active Short Duration Income ETF \6\
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\6\ The Adviser represents that the name of this 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. This 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,\7\ to invest at least 90% of its net assets \8\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in 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; \9\
privately-issued securities; \10\ mortgage-backed and asset-backed
securities; \11\ variable- and floating-rate fixed-income securities;
repurchase agreements; \12\ 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 or its agencies and instrumentalities,
[[Page 33620]]
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,\13\ including exchange-traded funds (``ETFs''),\14\ 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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\7\ 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.
\8\ 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 55, infra.
\9\ The Adviser expects that, under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances
in developed countries that have at least $100,000,000 par amount
outstanding and at least $200,000,000 par amount outstanding with
respect to corporate bond issuances in emerging market countries.
\10\ Privately-issued securities are generally issued under Rule
144A of the Securities Act.
\11\ 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 in
the multi-industry category to less than 25% of its net assets.
\12\ 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.
\13\ Each Fund may invest in other investment companies to the
extent permitted by Section 12(d)(1) of the 1940 Act and rules
thereunder or by any applicable exemption under the 1940 Act with
respect to such investments.
\14\ 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''); will have 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, will be of
equivalent quality, as determined by the Adviser.\15\
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\15\ 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 the 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.\16\ 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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\16\ 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.\17\ The Fund will not purchase any security with a
maturity--or, for securitized investments, a 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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\17\ 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.\18\
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\18\ 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 securities 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,\19\ to invest at least 90% of its net assets \20\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \21\ privately-issued securities; \22\
mortgage-backed and asset-backed securities; \23\ variable- and
floating-rate fixed-income securities; repurchase agreements; \24\
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 or 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,\25\ including
ETFs,\26\ 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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\19\ See note 7, supra.
\20\ See note 8, supra.
\21\ See note 9, supra.
\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.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\27\
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\27\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than two months.\28\ 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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\28\ See note 16, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity (which is the weighted average
maturity
[[Page 33621]]
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.\29\ The
Fund will not purchase any security with a maturity--or, for
securitized investments, a 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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\29\ See note 17, 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.\30\
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\30\ See note 18, 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,\31\ to invest at least 90% of its net assets \32\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \33\ privately-issued securities; \34\
mortgage-backed and asset-backed securities; \35\ variable- and
floating-rate fixed-income securities; repurchase agreements,\36\ 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 or 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,\37\ including
ETFs,\38\ 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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\31\ See note 7, supra.
\32\ See note 8, supra.
\33\ See note 9, supra.
\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.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\39\
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\39\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than nine months.\40\ 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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\40\ See note 16, 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.\41\ The Fund will not purchase any security
with a maturity--or, for securitized investments, a 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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\41\ See note 17, 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.\42\
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\42\ See note 18, 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,\43\ to invest at least 90% of its net assets \44\ in a
portfolio of investment-grade short-term fixed-income securities issued
by U.S. and foreign issuers and in other short-term investments. The
fixed-income securities in which the Fund may invest include corporate
and commercial debt instruments; \45\ privately-issued securities,\46\
mortgage-backed and asset-backed securities; \47\ variable- and
floating-rate fixed-income securities; repurchase agreements; \48\
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 or 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,\49\ including
ETFs,\50\ 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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\43\ See note 7, supra.
\44\ See note 8, supra.
\45\ See note 9, supra.
\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.
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All fixed-income securities purchased by the Fund will be rated A-
or higher by S&P; hold an equivalent rating by another NRSRO such as
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of
equivalent quality.\51\
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\51\ See note 15, supra.
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Under normal circumstances, the Fund will generally maintain a
portfolio duration of less than twelve months (1 year).\52\ 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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\52\ See note 16, supra.
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Additionally, under normal circumstances, the Fund generally
expects to maintain a portfolio maturity
[[Page 33622]]
(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.\53\ The Fund
will not purchase any security with a maturity--or, for securitized
investments, a 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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\53\ See note 17, 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.\54\
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\54\ See note 18, supra.
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Non-Principal Investments \55\
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\55\ Certain investments have been identified as ``Non-Principal
Investments'' within the Registration Statements given the limited
extent to which these investments are expected to constitute 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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As part of each Fund's non-principal investment strategies, a Fund
may invest in other securities such as Build America Bonds; \56\
capital and trust preferred securities; \57\ fixed-income securities
with put features; sinking funds; \58\ and zero-coupon, step-coupon,
and pay-in-kind securities.\59\ 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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\56\ 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.
\57\ 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
characteristics similar to other capital securities. They are issued
by a special purpose trust subsidiary backed by subordinated debt of
the corporate parent.
\58\ 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.
\59\ 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 pre-determined
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 to avoid excise tax, each Fund
may be required to distribute a portion of such discount value 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 \60\ except for Rule 144A
securities deemed liquid by the Adviser, based on criteria for
liquidity established by the Board, consistent with Commission
guidance.\61\ 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.
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\60\ Rule 144A securities are securities that, while privately
placed, are eligible for purchase and resale pursuant to Rule 144A
of the Securities Act.
\61\ 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).
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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.
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.
Additional information regarding the Trust, the Funds, and the
Shares of each Fund, 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 Statements, as applicable.\62\
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\62\ See Notice and Registration Statements, 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 \63\
and the rules and regulations thereunder applicable to a national
securities exchange.\64\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\65\
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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\63\ 15 U.S.C. 78f.
\64\ 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).
\65\ 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,\66\ 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
[[Page 33623]]
Rule 8.600(c)(3), of the Shares of each Fund will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Core Trading Session.\67\ On each day that the
Exchange is open for business (normally from 9:30 a.m. until 4:00 p.m.
Eastern Time) (``Business Day''), before commencement of the Core
Trading Session, the Adviser will disclose on each Fund's Web site the
Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2),
that will form the basis for each Fund's calculation of net asset value
(``NAV'') at the end of the Business Day.\68\ 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.\69\
A basket composition 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 or will be available via the
respective newspapers' Web sites and other such sources. 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 or 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. The Funds' Web site will
include a form of the prospectus for each Fund, which may be
downloaded, and additional data relating to NAV and other applicable
quantitative information.
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\66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\67\ According to the Exchange, several major market-data
vendors widely disseminate PIVs taken from CTA or other data feeds.
The Exchange further notes that the PIV's approximate value
generally will be determined by using current market quotations or
price quotations obtained from broker-dealers that may trade in the
portfolio securities held by a Fund. 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).
\68\ On a daily basis, the Adviser will disclose 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.
\69\ The Exchange represents that, 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 or 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.
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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 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.\70\ The Exchange may halt trading in the Shares if trading is not
occurring in the securities or the financial instruments constituting
the Disclosed Portfolio of a Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\71\ 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. 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.\72\ The Commission further notes that the Financial Industry
Regulatory Authority (``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,\73\ may obtain trading information
regarding trading in the 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 the Shares, ETFs,
exchange-traded capital and trust-preferred securities, and other
exchange-listed assets, as applicable, from markets and other entities
that are
[[Page 33624]]
members of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement.\74\ FINRA, on behalf of the Exchange,
is able to access, as needed, trade information reported to FINRA's
Trade Reporting and Compliance Engine (``TRACE'') for certain fixed-
income securities held by the Funds.
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\70\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\71\ 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.
\72\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\73\ 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.
\74\ 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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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 CSIM is not a broker-dealer but is affiliated
with a broker-dealer, Charles Schwab & Co., Inc., and that CSIM has
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition of or changes to the portfolios.\75\
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\75\ 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 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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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, that 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 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.
(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 continued listing, each Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\76\ as provided by
NYSE Arca Equities Rule 5.3.
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\76\ 17 CFR 240.10A-3.
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(6) The Adviser expects that, under normal market circumstances,
each Fund will generally seek to invest in corporate bond issuances in
developed countries that have at least $100,000,000 par amount
outstanding and at least $200,000,000 par amount outstanding with
respect to corporate bond issuances in emerging market countries.
(7) Each Fund's investments in each of the following security types
will be limited to 10% of a Fund's net assets: (a) Non-agency
residential-mortgage-backed securities; (b) non-agency commercial-
mortgage-backed securities; and (c) 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: (a) Non-agency residential-
mortgage-backed securities; (b) non-agency commercial-mortgage-backed
securities; and (c) non-agency asset-backed securities.
(8) 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.
(9) 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.\77\
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\77\ See note 18, supra.
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(10) 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.
(11) A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange.
(12) With respect to each of the Funds, the Fund's investments will
be consistent with the Fund's investment objective and will not be used
to enhance leverage. While each Fund may invest in inverse ETFs, a Fund
will not invest in leveraged (e.g., 2X or 3X) or leveraged inverse
ETFs.
(13) Each Fund will not invest in options, futures, swaps, or other
derivatives, or in non-U.S. equity securities.
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 \78\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\78\ 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,\79\ that the proposed rule change (SR-NYSEArca-2014-42) be, and it
hereby is, approved.
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\79\ 15 U.S.C. 78s(b)(2).
[[Page 33625]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
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\80\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13564 Filed 6-10-14; 8:45 am]
BILLING CODE 8011-01-P