[Federal Register Volume 79, Number 114 (Friday, June 13, 2014)]
[Notices]
[Pages 33964-33973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-13819]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72347; File No. SR-NYSEArca-2014-20]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment Nos. 3 and 5 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment Nos. 3 and 5, Relating to the Listing and Trading
of Shares of Reality Shares DIVS ETF Under NYSE Arca Equities Rule
8.600
June 9, 2014.
On February 25, 2014, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade
shares of Reality Shares Isolated Dividend Growth ETF under NYSE Arca
Equities Rule 8.600. On March 7, 2014, the Exchange filed Amendment No.
2 to the proposed rule change, which amended and replaced the proposed
rule change in its entirety.\3\ The proposed rule change, as modified
by Amendment No. 2, was published for comment in the Federal Register
on March 17, 2014.\4\ The Commission received no comments on
[[Page 33965]]
the proposal. On April 23, 2014, pursuant to Section 19(b)(2) of the
Act,\5\ the Commission designated a longer period within which to
either approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\6\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 was filed on March 6, 2014 and withdrawn on
March 7, 2014.
\4\ See Securities Exchange Act Release No. 71686 (March 11,
2014), 79 FR 14761.
\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 72000 (April 23, 2014),
79 FR 24032 (April 29, 2014). The Commission determined that it was
appropriate to designate a longer period within which to take action
on the proposed rule change so that it has sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated June 13, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
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Pursuant to Section 19(b)(1) of the Act\7\ and Rule 19b-4
thereunder,\8\ notice is hereby given that, on May 27, 2014 and June 5,
2014, the Exchange filed with the Commission Amendment Nos. 3 and 5,
respectively, to the proposed rule change, as described in Sections I
and II below, which Sections have been prepared by the Exchange.\9\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment Nos. 3 and 5, from
interested persons.
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\7\ 15 U.S.C.78s(b)(1).
\8\ 17 CFR 240.19b-4.
\9\ Amendment No. 3 replaces SR-NYSEArca-2014-20, as previously
amended by Amendment No. 2, and supersedes such filing in its
entirety. Amendment No. 4 was filed on June 4, 2014 and withdrawn on
June 5, 2014. Amendment No. 5 reflects a change to the name of the
fund from ``Reality Shares Isolated Dividend Growth ETF'' to
``Reality Shares DIVS ETF.''
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Additionally, this order institutes proceedings under Section
19(b)(2)(B) of the Act \10\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment Nos. 3
and 5, as discussed in Section III below. The institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved, nor does it
mean that the Commission will ultimately disapprove the proposed rule
change. Rather, as described in Section III, below, the Commission
seeks and encourages interested persons to provide additional comment
on the proposed rule change to inform the Commission's analysis of
whether to approve or disapprove the proposed rule change.
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\10\ 15 U.S.C. 78s(b)(2)(B).
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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 of the following
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): Reality
Shares DIVS ETF. The text of the proposed rule change is available on
the Exchange's Web site at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
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\11\ on the Exchange: Reality
Shares DIVS ETF (the ``Fund''). \12\ The Shares of the Fund will be
offered by the Reality Shares ETF Trust (formerly, the ERNY Financial
ETF Trust) (the ``Trust''). The Trust will be registered with the
Commission as an open-end management investment company.\13\ Reality
Shares Advisors, LLC (formerly, ERNY Financial Advisors, LLC) will
serve as the investment adviser to the Fund (the ``Adviser''). ALPS
Distributors, Inc. (the ``Distributor'') will be the principal
underwriter and distributor of the Fund's Shares. The Bank of New York
Mellon (the ``Administrator,'' ``Transfer Agent'' or ``Custodian'')
will serve as administrator, custodian and transfer agent for the
Fund.\14\
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\11\ 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.
\12\ The Commission approved NYSE Arca Equities Rule 8.600 and
has previously approved listing and trading on the Exchange of a
number 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); 60460 (August 7, 2009), 74 FR 41468 (August 17,
2009) (SR-NYSEArca-2009-55) (order approving listing and trading of
Dent Tactical ETF); 63076 (October 12, 2010), 75 FR 63874 (October
18, 2010) (SR-NYSEArca-2010-79) (order approving listing and trading
of Cambria Global Tactical ETF); 64643 (June 10, 2011) 76 FR 35062
(June 15, 2011) (SR-NYSEArca-2011-21) (order approving listing and
trading of WisdomTree Global Real Return Fund); 69397 (April 18,
2013) 78 FR 24276 (April 24, 2013) (SR-NYSEArca-2013-18) (order
approving listing and trading of fourteen actively-managed funds of
the iShares Trust); 69591 (May 16, 2013) 78 FR 30372 (May 22, 2013)
(SR-NYSEArca-2013-33) (order approving listing and trading of the
International Bear ETF).
\13\ The Trust will be registered under the 1940 Act. On
November 12, 2013, the Trust filed a registration statement on Form
N-1A under the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C.
77a), and under the 1940 Act relating to the Fund, as amended by
Pre-Effective Amendment Number 1, filed with the Commission on
February 6, 2014 (File Nos. 333-192288 and 811-22911) and Pre-
Effective Amendment Number 2, filed with the Commission on May 1,
2014 (File Nos. 333-192288 and 811-22911) (the ``Registration
Statement''). The description of the operation of the Trust and the
Fund herein is based, in part, on the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the 1940 Act. Investment Company Act Release No.
30552 (June 10, 2013) (``Exemptive Order''). The Trust filed an
Application for an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14146), on April 5, 2013, as amended on May
10, 2013 (together, the ``Exemptive Application''). Investments made
by the Fund will comply with the conditions set forth in the
Exemptive Application and the Exemptive Order.
\14\ This Amendment No. 3 to SR-NYSEArca-2014-20 replaces SR-
NYSEArca-2014-20 as amended by Amendment No. 2 to SR-NYSEArca-2014-
20 and supersedes such filing in its entirety. See supra note 9.
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As described in more detail below, the Fund will seek to produce
long-term capital appreciation by attempting to isolate the value of
dividends paid by a portfolio of U.S., European and Japanese large
capitalization companies.
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 of and/or
changes to such investment company portfolio. 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
[[Page 33966]]
open-end fund's portfolio.\15\ Commentary .06 to Rule 8.600 is similar
to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 5.2(j)(3);
however, Commentary .06 in connection with the establishment of a
``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not registered as a broker-dealer and is not affiliated with any
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes
registered as a 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, they will implement a fire
wall with respect to their relevant personnel or broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio.
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\15\ 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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Principal Investments
According to the Registration Statement, the Fund is actively
managed by the Adviser and seeks long-term capital appreciation by
using proprietary trading strategies designed to isolate and capture
the growth in the level of dividends expected to be paid on a portfolio
of large-capitalization equity securities listed for trading in the
U.S., Europe and Japan, while attempting to minimize the Fund's
exposure to the price fluctuations associated with these
securities.\16\ The Adviser believes that, over time, the level of
expected dividends reflected in the Fund's portfolio will be highly
correlated to the level of actual dividends paid on such large
capitalization securities.
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\16\ There is no guarantee that either the level of overall
dividends paid by such companies will grow over time, or that the
Fund's investment strategies will capture such growth. The Fund will
include appropriate risk disclosure in its offering documents
disclosing both of these risks.
The Adviser considers U.S. large capitalization companies to be
those with market capitalizations within the range of market
capitalizations of the companies included in the S&P 500 Index. The
Adviser considers European large capitalization companies to be
those with market capitalizations within the range of market
capitalizations of the companies included in the Euro Stoxx 50
Index. The Adviser considers Japanese large capitalization companies
to be those with market capitalizations within the range of market
capitalizations of the companies included in the Nikkei 225 Index.
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Under normal market conditions,\17\ the Fund will invest
substantially all of its assets in (i) a combination of exchange-listed
options contracts on large capitalization equity indexes and exchange-
listed option contracts on exchange traded funds (``ETFs'') \18\
designed to track the performance of large capitalization equity
securities listed for trading in the U.S., Europe or Japan, as well as
(ii) derivatives, including swaps, exchange-listed futures contracts
and forward contracts, designed to capture the growth of the level of
dividends expected to be paid on large capitalization equity securities
listed for trading in the U.S., Europe and Japan. In addition to the
investments described above, the Fund may also buy and sell over-the
counter (``OTC'') options on indexes of large-capitalization U.S.,
European and Japanese equity securities listed for trading in the U.S.,
Europe and Japan, such as the S&P 500 Index, the Euro Stoxx 50 Index
and the Nikkei 225 Index, and listed and OTC options on the securities,
or any group of securities, issued by large capitalization U.S.,
European and Japanese companies.\19\
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\17\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
\18\ 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 the Fund may invest in
inverse ETFs, it may not invest in leveraged or inverse leveraged
(e.g., 2X, -2X, 3X or -3X) ETFs.
\19\ The Fund will transact only with OTC options dealers that
have in place an International Swaps and Derivatives Association
(``ISDA'') agreement with the Fund.
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The Fund will buy (i.e., hold a ``long'' position in) and sell
(i.e., hold a ``short'' position in) put and call options. A put option
gives the purchaser of the option the right to sell, and the issuer of
the option the obligation to buy, the underlying security or instrument
on a specified date or during a specified period of time. A call option
on a security gives the purchaser of the option the right to buy, and
the writer of the option the obligation to sell, the underlying
security or instrument on a specified date or during a specified period
of time. The Fund will invest in a combination of put and call options
designed to allow the Fund to isolate its exposure to the growth of the
level of dividends expected to be paid on a portfolio of securities
issued by large capitalization companies listed for trading in the
United States, Europe and Japan, while minimizing the Fund's exposure
to changes in the trading price of such securities. The Fund may invest
up to 80% of its assets through options transactions.
The prices of index and ETF options reflect the market trading
prices of the securities included in the applicable index or securities
held by the applicable ETF, as well as market expectations regarding
the level of dividends to be paid on such indexes or ETFs during the
term of the option. A significant portion of the Fund's portfolio
holdings will consist of multiple corresponding near-term and long-term
put and call option combinations on the same reference assets (e.g.,
options on the S&P 500 Index or options on S&P 500 ETFs) with the same
strike price. Because option prices reflect both stock price and
dividend expectations, they can be used in combination to isolate
either price exposure or dividend expectations. The use of near-term
and long-term put and call option combinations on the same reference
asset with the same strike price, but with different maturities, is
designed to gain exposure to the level of dividends expected to be paid
on a portfolio of large-capitalization equity securities listed for
trading in the U.S., Europe and Japan, while attempting to minimize the
Fund's exposure to the price fluctuations associated with these
securities.
Once established, this portfolio construction of option
combinations will accomplish two goals. First, the use
[[Page 33967]]
of corresponding buy or sell positions on near and long-term options at
the same strike price is designed to neutralize underlying stock price
movements. In other words, the corresponding ``buy'' and ``sell''
positions on the same reference asset are designed to net against each
other and eliminate the impact that changes to the stock price of the
reference asset would otherwise have on the value of the Fund Shares.
Second, by minimizing the impact of price fluctuations through the
construct of the near- and long-term contract combinations, the
strategy is designed to isolate market expectations for dividends
implied between expiration dates of the near-term and long-term option
contracts.
The Fund may invest in exchange-listed futures contracts and
forward contracts based on indexes of large-capitalization U.S.,
European and Japanese equity securities listed for trading in the U.S.,
Europe or Japan, such as the S&P 500 Index, the Euro Stoxx 50 Index and
the Nikkei 225 Index, and the securities, or any group of securities,
issued by large capitalization U.S., European and Japanese companies. A
listed futures contract is a standardized contract traded on a
recognized exchange in which two parties agree to exchange either a
specified financial asset or the cash equivalent of said asset at a
specified future date and price. A forward contract involves the
obligation to purchase or sell either a specified financial asset or
the cash equivalent of said asset at a future date at a price set at
the time of the contract. The Fund's use of listed futures contracts
and forward contracts will be designed to allow the Fund to isolate its
exposure to the growth of the level of the dividends expected to be
paid on a portfolio of securities of large capitalization U.S.,
European and Japanese companies, while minimizing the Fund's exposure
to changes in the trading price of such securities. As with option
contracts, the prices of equity index futures contracts and forward
contracts reflect the market trading prices of the securities included
in the applicable index, as well as market expectations regarding the
level of dividends to be paid on such indexes during the term of such
futures or forward contract. Therefore, as with option contracts, long
and short positions in near-dated and far-dated futures and forward
contracts can be used in combination to isolate either price exposure
or dividend expectations. For example, as with option contracts, the
use of long and short positions in near-dated and far-dated futures and
forward contracts can be used to gain exposure to the level of
dividends expected to be paid on a portfolio of securities, while
attempting to minimize the Fund's exposure to the price fluctuations
associated with such securities. In addition, the Fund may invest in
listed dividend futures contracts. Listed dividend futures contracts
are available for certain indices (such as EURO STOXX 50 Index Dividend
Futures and Nikkei 225 Dividend Index Futures). These futures contracts
provide direct exposure to the level of implied dividends in the
designated index, without exposure to the price of the securities
included in the index. The Fund also may invest in Eurodollar futures
contracts to manage or hedge exposure to interest rate fluctuations.
The Fund may invest up to 80% of its assets through futures contracts
and forward transactions.
The Fund may enter into dividend and total return swap transactions
(including equity swap transactions) based on indexes of large-
capitalization U.S., European and Japanese equity securities listed for
trading in the U.S., Europe and Japan, such as the S&P 500 Index, the
Euro Stoxx 50 Index and the Nikkei 225 Index, and securities, or any
group of securities, issued by large capitalization U.S., European and
Japanese companies.\20\ In a typical swap transaction, one party agrees
to make periodic payments to another party (``counterparty'') based on
the change in market value or level of a specified rate, index, or
asset. In return, the counterparty agrees to make periodic payments to
the first party based on the return of a different specified rate,
index, or asset. Swap transactions are usually done on a net basis, the
Fund receiving or paying only the net amount of the two payments. In a
typical dividend swap transaction, the Fund would pay the swap
counterparty a premium and would be entitled to receive the value of
the actual dividends paid on the subject index during the term of the
swap contract. In a typical total return swap, the Fund might exchange
long or short exposures to the return of the underlying securities or
an underlying index to isolate the value of the dividends paid on the
underlying securities or index constituents. The Fund also may engage
in interest rate swap transactions. In a typical interest rate swap
transaction one stream of future interest payments is exchanged for
another. Such transactions often take the form of an exchange of a
fixed payment for a variable payment based on a future interest rate.
The Fund intends to use interest rate swap transactions to manage or
hedge exposure to interest rate fluctuations. The Fund may invest up to
80% of its assets through swap transactions.\21\
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\20\ The Fund will transact only with swap dealers that have in
place an ISDA agreement with the Fund.
\21\ Where practicable, the Fund intends to invest in swaps
cleared through a central clearing house (``Cleared Swaps'').
Currently, only certain of the interest rate swaps in which the Fund
intends to invest are Cleared Swaps, while the dividend and total
return swaps (including equity swaps) in which the Fund may invest
are currently not Cleared Swaps.
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The Fund will attempt to limit counterparty risk by entering into
non-cleared swap, forward and option contracts only with counterparties
the Adviser believes are creditworthy and by limiting the Fund's
exposure to each counterparty. The Adviser will monitor the
creditworthiness of each counterparty and the Fund's exposure to each
counterparty on an ongoing basis.\22\
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\22\ The Fund will seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser will
evaluate each approved counterparty using various methods of
analysis, such as, for example, the counterparty's liquidity in the
event of default, the counterparty's reputation, the Adviser's past
experience with the counterparty, and the counterparty's share of
market participation.
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The Fund's investments in swaps, futures contracts, forward
contracts and options will be consistent with the Fund's investment
objective and with the requirements of the 1940 Act.\23\
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\23\ To limit the potential risk associated with such
transactions, the Fund will segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Trust's Board of Trustees and in accordance with
the 1940 Act (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations arising from
such transactions. These procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, the Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of the Fund, including the Fund's
use of derivatives, may give rise to leverage, causing the Fund to
be more volatile than if it had not been leveraged. To mitigate
leveraging risk, the Adviser will segregate or ``earmark'' liquid
assets or otherwise cover the transactions that may give rise to
such risk.
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Other Investments
In addition to the investments described above, the Fund may invest
up to 20% of its net assets in high-quality, short-term debt securities
and money market instruments.\24\ Debt securities and money market
[[Page 33968]]
instruments include shares of fixed income or money market mutual
funds, commercial paper, certificates of deposit, bankers' acceptances,
U.S. Government securities (including securities issued or guaranteed
by the U.S. government or its authorities, agencies, or
instrumentalities), repurchase agreements \25\ and bonds that are rated
BBB or higher.
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\24\ The Fund may invest in shares of money market mutual funds
to the extent permitted by the 1940 Act.
\25\ The Fund may enter into repurchase agreements with banks
and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by a fund from a securities dealer or
bank subject to resale at an agreed upon price on a later date. The
acquiring fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the
fund is delayed or prevented from exercising its rights to dispose
of the collateral securities.
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The Fund will not purchase the securities of issuers conducting
their principal business activity in the same industry if, immediately
after the purchase and as a result thereof, the value of the Fund's
investments in that industry would equal or exceed 25% of the current
value of the Fund's total assets, provided that this restriction does
not limit the Fund's: (i) Investments in securities of other investment
companies, (ii) investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or (iii)
investments in repurchase agreements collateralized by U.S. Government
securities.\26\
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\26\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser,
consistent with Commission guidance.\27\ The 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 the 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.\28\
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\27\ 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).
\28\ 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 1933 Act).
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The Fund may buy and sell individual large-capitalization equity
securities listed for trading in the U.S., Europe and Japan.
The Fund may invest in the securities of other investment companies
(including money market funds) to the extent permitted under the 1940
Act.
The Fund will be classified as a ``non-diversified'' investment
company under the 1940 Act.\29\
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\29\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
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The Fund intends to qualify for and to elect treatment as a
separate regulated investment company (``RIC'') under Subchapter M of
the Internal Revenue Code.\30\
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\30\ 26 U.S.C. 851 et seq.
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The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns. The Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based
securities benchmark index (as defined in Form N-1A).\31\ The Trust's
Exemptive Order does not place any limit on the amount of derivatives
in which the Fund can invest (other than adherence to the requirements
of the 1940 Act and the rules thereunder).
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\31\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
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Creation and Redemption of Shares
According to the Registration Statement, the Fund will issue and
redeem Shares only in Creation Units at the net asset value (``NAV'')
next determined after receipt of an order on a continuous basis every
business day. Creation Unit sizes are 25,000 Shares or more per
Creation Unit. The Creation Unit size for the Fund may change.
The consideration for purchase of a Creation Unit of the Fund
generally will consist of either (i) the in-kind deposit of a
designated portfolio of securities (the ``Deposit Securities'') per
each Creation Unit and the ``Cash Component'' (defined below), computed
as described below or (ii) the cash value of the Deposit Securities
(``Deposit Cash'') and the Cash Component, computed as described below.
Because non-exchange traded derivatives are not eligible for in-kind
transfer, they will be substituted with an amount of cash of equal
value (i.e., Deposit Cash) when the Fund processes purchases of
Creation Units in-kind. Specifically, the Fund will not accept OTC
options, forward contracts, dividend swap transactions, total return
swap transactions and interest rate swap transactions as Deposit
Securities. When accepting purchases of Creation Units for cash, the
Fund may incur additional costs associated with the acquisition of
Deposit Securities that would otherwise be provided by an in-kind
purchaser. Together, the Deposit Securities or Deposit Cash, as
applicable, and the Cash Component constitute the ``Fund Deposit,''
which represents the minimum initial and subsequent investment amount
for a Creation Unit of the Fund. The ``Cash Component'' is an amount
equal to the difference between the NAV of the Shares (per Creation
Unit) and the market value of the Deposit Securities or Deposit Cash,
as applicable. The Cash Component serves the function of compensating
for any differences between the NAV per Creation Unit and the market
value of the Deposit Securities or Deposit Cash, as applicable.
A portfolio composition file, to be sent via the National
Securities Clearing Corporation (``NSCC''), will be made available on
each business day, prior to the opening of business on the Exchange
(currently 9:30 a.m., Eastern time) containing a list of the names and
the required number of shares of each security in the Deposit
Securities to be included in the current Fund Deposit for the Fund
(based on information about the Fund's portfolio at the end of the
previous business day). In addition, on each business day, the
estimated Cash Component, effective through and including the previous
business day, will be made available through NSCC.
The Fund Deposit is applicable for purchases of Creation Units of
the Fund until such time as the next-announced Fund Deposit is made
available. In accordance with the Exemptive Order, the Fund reserves
the right to accept a
[[Page 33969]]
nonconforming Fund Deposit. In addition, the composition of the Deposit
Securities may change as, among other things, corporate actions and
investment decisions by the Adviser are implemented for the Fund's
portfolio.
All purchase orders must be placed by or through an ``Authorized
Participant''. An Authorized Participant must be either a broker-dealer
or other participant in the Continuous Net Settlement System
(``Clearing Process'') of the NSCC or a participant in The Depository
Trust Company (``DTC'') with access to the DTC system, and must execute
an agreement with the Distributor that governs transactions in the
Fund's Creation Units. In-kind portions of purchase orders will be
processed through the Clearing Process when it is available.
Fund Shares may be redeemed only in Creation Units at their NAV
next determined after receipt of a redemption request in proper form by
the Fund through the Distributor and only on a business day. The Fund,
through the NSCC, will make available immediately prior to the opening
of business on the Exchange on each business day, the list of the names
and quantities of the Fund's portfolio securities that will be
applicable (subject to possible amendment or correction) to redemption
requests received in proper form on that day (``Fund Securities'').
Redemption proceeds for a Creation Unit will be paid either in-kind or
in cash or a combination thereof, as determined by the Trust. With
respect to in-kind redemptions of the Fund, redemption proceeds for a
Creation Unit will consist of Fund Securities plus cash in an amount
equal to the difference between the NAV of the Shares being redeemed,
as next determined after a receipt of a request in proper form, and the
value of the Fund Securities (the ``Cash Redemption Amount''). In the
event that the Fund Securities have a value greater than the NAV of the
Shares, a compensating cash payment equal to the differential will be
required to be made by or through an Authorized Participant by the
redeeming shareholder. Notwithstanding the foregoing, at the Trust's
discretion, an Authorized Participant may receive the corresponding
cash value of the securities in lieu of the in-kind securities
representing one or more Fund Securities.\32\ Because non-exchange
traded derivatives are not eligible for in-kind transfer, they will be
substituted with an amount of cash of equal value when the Fund
processes redemptions of Creation Units in-kind. Specifically, the Fund
will transfer the corresponding cash value of OTC options, forward
contracts, dividend swap transactions, total return swap transactions
and interest rate swap transactions in lieu of in-kind securities. In
accordance with the Exemptive Order, the Fund also reserves the right
to distribute to the Authorized Participant non-conforming Fund
Securities.
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\32\ The Adviser represents that, to the extent the Trust
effects the redemption of Shares in cash, such transactions will be
effected in the same manner for all Authorized Participants.
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The right of redemption may be suspended or the date of payment
postponed: (i) For any period during which the New York Stock Exchange
(``NYSE'') is closed (other than customary weekend and holiday
closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency
exists as a result of which disposal of the Shares or determination of
the Fund's NAV is not reasonably practicable; or (iv) in such other
circumstances as permitted by the Commission.
For an order involving a Creation Unit to be effectuated at the
Fund's NAV on a particular day, it must be received by the Distributor
by or before the deadline for such order (``Order Cut-Off Time''). The
Order Cut-Off Time for creation and redemption orders for the Fund is
generally expected to be 4:00 p.m. Eastern Time. Orders for creation or
redemption of Creation Units for cash generally must be submitted by
4:00 p.m. Eastern Time. A standard creation or redemption transaction
fee (as applicable) will be imposed to offset transfer and other
transaction costs that may be incurred by the Fund.
Detailed descriptions of the Fund's procedures for creating and
redeeming Shares, transaction fees and expenses, dividends,
distributions, taxes, risks, and reports to be distributed to
beneficial owners of the Shares can be found in the Registration
Statement or on the Web site for the Fund (which will be publicly
available prior to the public offering of Shares), as applicable.
Determination of Net Asset Value
The Fund will calculate its NAV by: (i) Taking the current market
value of its total assets; (ii) subtracting any liabilities; and (iii)
dividing that amount by the total number of Shares outstanding. The
Fund will calculate NAV once each business day as of the regularly
scheduled close of trading on the NYSE (normally, 4:00 p.m., Eastern
Time) as described in its Registration Statement.
In calculating the Fund's NAV per Share, the Fund's investments
will be valued in accordance with procedures approved by the Trust's
Board of Trustees. These procedures, which may be changed by the
Trust's Board of Trustees from time to time, generally require
investments to be valued using market valuations. A market valuation
generally means a valuation (i) obtained from an exchange, an
independent pricing service, or a major market maker (or dealer), (ii)
based on a price quotation or other equivalent indication of value
supplied by an exchange, an independent pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. The Trust
may use various independent pricing services, or discontinue the use of
any independent pricing service, as determined by the Trust's Board of
Trustees from time to time.
The Trust will generally value exchange-listed equity securities
(which include common stocks and ETFs) and exchange-listed options on
such securities at market closing prices. Market closing price is
generally determined on the basis of last reported sales prices, or if
no sales are reported, based on the midpoint between the last reported
bid and ask. The Trust will generally value listed futures at the
settlement price determined by the applicable exchange. Non-exchange-
traded derivatives, such as forwards, OTC options and swap
transactions, will normally be valued on the basis of quotations or
equivalent indication of value supplied by an independent pricing
service or major market makers or dealers. Investment company
securities (other than ETFs) will be valued at NAV. Debt securities and
money market instruments generally will be valued based on prices
provided by independent pricing services, which may use valuation
models or matrix pricing to determine current value. The Trust
generally will use amortized cost to value debt securities and money
market instruments that have a remaining maturity of 60 days or less.
In the event that current market valuations are not readily
available or the Trust or Adviser believes such valuations do not
reflect current market value, the Trust's procedures require that a
security's fair value be determined.\33\ In determining such
[[Page 33970]]
value the Trust or the Adviser may consider, among other things, (i)
price comparisons among multiple sources, (ii) a review of corporate
actions and news events, and (iii) a review of relevant financial
indicators (e.g., movement in interest rates, market indices, and
prices from the Fund's index providers). In these cases, the Fund's NAV
may reflect certain portfolio securities' fair values rather than their
market prices. Fair value pricing involves subjective judgments and it
is possible that the fair value determination for a security is
materially different than the value that could be realized upon the
sale of the security.
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\33\ The Trust's Board of Trustees has established Fair Value
Procedures, in accordance with the 1940 Act, governing the valuation
of any portfolio investments for which market quotations or prices
are not readily available. The Fund has implemented procedures
designed to prevent the use and dissemination of material, non-
public information regarding valuation of any portfolio investments.
---------------------------------------------------------------------------
Availability of Information
The Fund's Web site, www.realityshares.com, which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's Web
site will include additional quantitative information updated on a
daily basis, including, for the Fund, (1) the prior business day's
reported closing price, NAV and mid-point of the bid/ask spread at the
time of calculation of such NAV (the ``Bid/Ask Price''),\34\ 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
Fund will disclose on its Web site the Disclosed Portfolio (as such
term is defined in NYSE Arca Equities Rule 8.600(c)(2)) that will form
the basis for the Fund's calculation of NAV at the end of the business
day.\35\
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\34\ The Bid/Ask Price of the Fund will be determined using the
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
\35\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the 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.
---------------------------------------------------------------------------
On a daily basis, the Fund will disclose on the Fund's Web site the
following information regarding each portfolio holding, as applicable
to the type of holding: Ticker symbol, CUSIP number or other
identifier, if any; a description of the holding (including the type of
holding, such as the type of swap); the identity of the security,
commodity, index or other asset or instrument underlying the holding,
if any; for options, the option strike price; quantity held (as
measured by, for example, par value, notional value or number of
shares, contracts or units); maturity date, if any; coupon rate, if
any; effective date, if any; market value of the holding; and the
percentage weighting of the holding in the Fund's portfolio. The Web
site information will be publicly available at no charge.
In addition, a portfolio composition file, which includes the
security names and share quantities required to be delivered in
exchange for the Fund's Shares, together with estimates and actual cash
components, will be publicly disseminated daily prior to the opening of
the NYSE via NSCC. The portfolio composition file will represent one
Creation Unit of Shares of the Fund.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's
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
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the Consolidated Tape Association
(``CTA'') high-speed line. In addition, the Portfolio Indicative Value
(``PIV'') as defined in NYSE Arca Equities Rule 8.600(c)(3), will be
widely disseminated at least every 15 seconds during the Core Trading
Session by one or more major market data vendors.\36\ The dissemination
of the PIV, together with the Disclosed Portfolio, will allow investors
to determine the value of the underlying portfolio of the Fund on a
daily basis and will provide a close estimate of that value throughout
the trading day. The intra-day, closing and settlement prices of the
portfolio securities and other Fund investments, including ETFs,
futures and exchange-traded equities and options, will also be readily
available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, and, with respect to OTC options, swaps and forwards, from
third party pricing sources, or on-line information services such as
Bloomberg or Reuters. Price information regarding investment company
securities other than ETFs will be available from on-line information
services and from the Web site for the applicable investment company
security. The intra-day, closing and settlement prices of debt
securities and money market instruments will be readily available from
published and other public sources or on-line information services.
---------------------------------------------------------------------------
\36\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available PIVs
taken from the CTA or other data feeds.
---------------------------------------------------------------------------
Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statement. All terms relating
to the Fund that are referred to, but not defined in, this proposed
rule change are defined in the Registration Statement.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\37\ Trading in Shares of the 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. 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 the 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 the Fund may be
halted.
---------------------------------------------------------------------------
\37\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------
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
[[Page 33971]]
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 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, the Fund will be in
compliance with Rule 10A-3 \38\ under the Act, as provided by NYSE Arca
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund will be
outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares
that the NAV per Share will be calculated daily and that the NAV and
the Disclosed Portfolio as defined in NYSE Arca Equities Rule
8.600(c)(2) will be made available to all market participants at the
same time.
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\38\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\39\ 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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\39\ 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, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts with
other markets and other entities that are members of the ISG, and
FINRA, on behalf of the Exchange, may obtain trading information
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, exchange-listed equity
securities, ETFs, futures contracts and exchange-traded options
contracts from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.\40\ FINRA, on behalf of the Exchange, is able to
access, as needed, trade information for certain fixed income
securities held by the Fund reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE'').
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\40\ 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 the 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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Not more than 10% of the assets of the Fund in the aggregate
invested in exchange-traded equity securities shall consist of equity
securities whose principal market is not a member of ISG or is a market
with which the Exchange does not have a comprehensive surveillance
sharing agreement. Furthermore, not more than 10% of the net assets of
the Fund in the aggregate invested in futures contracts or exchange-
traded options shall consist of futures contracts or options whose
principal market is not a member of ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin will discuss the
following: (1) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (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 the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m. 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) \41\ 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.
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\41\ 15 U.S.C. 78f(b)(5).
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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 Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange. The Adviser is
not registered as a broker-dealer and is not affiliated with any
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes
registered as a 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, they will implement a fire
wall with respect to their relevant personnel or broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to
[[Page 33972]]
prevent the use and dissemination of material non-public information
regarding such portfolio. The Fund may hold up to an aggregate amount
of 15% of its net assets in illiquid assets (calculated at the time of
investment), including Rule 144A securities deemed illiquid by the
Adviser. FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts with
other markets and other entities that are members of the ISG, and
FINRA, on behalf of the Exchange, may obtain trading information
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, exchange-listed equity
securities, ETFs, futures contracts and exchange-traded options
contracts from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. FINRA, on behalf of the Exchange, is able to access,
as needed, trade information for certain fixed income securities held
by the Fund reported to FINRA's TRACE. Not more than 10% of the assets
of the Fund in the aggregate invested in exchange-traded equity
securities shall consist of equity securities whose principal market is
not a member of ISG or is a market with which the Exchange does not
have a comprehensive surveillance sharing agreement. Furthermore, not
more than 10% of the net assets of the Fund in the aggregate invested
in futures contracts or exchange-traded options shall consist of
futures contracts or options whose principal market is not a member of
ISG or is a market with which the Exchange does not have a
comprehensive surveillance sharing agreement.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. 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, the Fund will disclose on its Web site the
Disclosed Portfolio that will form the basis for the Fund's calculation
of NAV at the end of the business day. Information regarding market
price and trading volume of the Shares will be continually available on
a real-time basis throughout the day on brokers' computer screens and
other electronic services, and quotation and last sale information will
be available via the CTA high-speed line. The intra-day, closing and
settlement prices of the portfolio securities and other Fund
investments, including ETFs, futures and exchange-traded equities and
options, will also be readily available from the national securities
exchanges trading such securities, automated quotation systems,
published or other public sources, and, with respect to OTC options,
swaps and forwards, from third party pricing sources, or on-line
information services such as Bloomberg or Reuters. Price information
regarding investment company securities other than ETFs will be
available from on-line information services and from the Web site for
the applicable investment company security. The intra-day, closing and
settlement prices of debt securities and money market instruments will
be readily available from published and other public sources or on-line
information services. The Web site for the Fund will include the
prospectus for the 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. Trading in Shares of the 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 the Fund may be halted. In addition, as noted above,
investors will have ready access to information regarding the Fund's
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale
information for the 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
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange. FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts with
other markets and other entities that are members of the ISG, and
FINRA, on behalf of the Exchange, may obtain trading information
regarding trading in the Shares, exchange-listed equity securities,
ETFs, futures contracts and exchange-traded options contracts from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, exchange-listed equity
securities, ETFs, futures contracts and exchange-traded options
contracts from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. FINRA, on behalf of the Exchange, is able to access,
as needed, trade information for certain fixed income securities held
by the Fund reported to FINRA's TRACE. Not more than 10% of the assets
of the Fund in the aggregate invested in exchange-traded equity
securities shall consist of equity securities whose principal market is
not a member of ISG or is a market with which the Exchange does not
have a comprehensive surveillance sharing agreement. Furthermore, not
more than 10% of the net assets of the Fund in the aggregate invested
in futures contracts or exchange-traded options shall consist of
futures contracts or options whose principal market is not a member of
ISG or is a market with which the Exchange does not have a
comprehensive surveillance sharing agreement.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees. In
addition, as noted above, investors will have ready access to
information regarding the Fund's holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale information for the Shares. The
Fund's investments will be consistent with its investment objective and
will not be used to provide multiple returns of a benchmark or to
produce
[[Page 33973]]
leveraged returns. The Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (i.e., 2Xs and
3Xs) of the Fund's primary broad-based securities benchmark index (as
defined in Form N-1A).
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 an
additional type of actively-managed exchange-traded product 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. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-NYSEArca-2014-20 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \42\ to determine whether the proposed rule
change, as modified by Amendment Nos. 3 and 5 thereto, should be
approved or disapproved. Institution of such proceedings is appropriate
at this time in view of the legal and policy issues raised by the
proposed rule change, as discussed below. As noted above, institution
of proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described below, the Commission seeks and encourages interested persons
to provide comments on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change, as modified by Amendment Nos. 3 and 5.
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\42\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\43\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \44\
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\43\ Id.
\44\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended by Amendment Nos. 3 and 5, is consistent with
Section 6(b)(5) of the Act or any other provision of the Act, or the
rules and regulations thereunder. Although there do not appear to be
any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\45\
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\45\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by July 7, 2014. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by July 18,
2014.
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-2014-20 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-2014-20. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2014-20 and should
be submitted on or before July 7, 2014. Rebuttal comments should be
submitted by July 18, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13819 Filed 6-12-14; 8:45 am]
BILLING CODE 8011-01-P