[Federal Register Volume 79, Number 146 (Wednesday, July 30, 2014)]
[Notices]
[Pages 44236-44241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72665; File No. SR-NYSEArca-2014-59]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the AdvisorShares Athena High Dividend
ETF Under NYSE Arca Equities Rule 8.600
July 24, 2014.
I. Introduction
On May 20, 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
AdvisorShares Athena High Dividend ETF (``Fund'') under NYSE Arca
Equities Rule 8.600. The proposed rule change was published for comment
in the Federal Register on June 9, 2014.\3\ On July 23, 2014, the
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The
Commission received no comments on the proposal. This order approves
the proposed rule change, as modified by Amendment No. 1.
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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. 72298 (June 3,
2014), 79 FR 33024 (``Notice'').
\4\ In Amendment No. 1, the Exchange clarifies that the Fund's
investments in reverse repurchase agreements will not be used to
enhance leverage. Amendment No. 1 provides clarification to the
proposed rule change, and because it does not materially affect the
substance of the proposed rule change, or raise any unique or novel
regulatory issues, Amendment No. 1 does not require notice and
comment.
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II. Description of the Proposal
The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''), which governs
the listing and trading of Managed Fund Shares on the Exchange. The
Shares will be offered by AdvisorShares 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.\5\
AdvisorShares Investments, LLC (``Adviser'') will be the investment
adviser to the Fund, and AthenaInvest Advisors LLC (``Sub-Adviser'')
will be the Fund's sub-adviser and will provide day-to-day portfolio
management of the Fund.\6\ The Bank of New York Mellon
(``Administrator'') will serve as the administrator, custodian,
transfer agent and accounting agent for the Fund.
[[Page 44237]]
Foreside Fund Services, LLC will be the principal underwriter and
distributor of the Fund's Shares.
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\5\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). The Exchange states that on February 18, 2014,
the Trust filed with the Commission an amendment to its registration
statement on Form N-1A under the Securities Act of 1933 (15 U.S.C.
77a) (``Securities Act'') and under the 1940 Act relating to the
Fund (File Nos. 333-157876 and 811-22110) (``Registration
Statement''). In addition, according to the Exchange, the Commission
has issued an order granting certain exemptive relief to the Trust
under the 1940 Act. See Investment Company Act Release No. 29291
(May 28, 2010) (File No. 812-13677).
\6\ The Exchange represents that neither the Adviser nor the
Sub-Adviser is registered as a broker-dealer or is affiliated with a
broker-dealer. The Exchange states that in the event (a) the Adviser
or the Sub-Adviser becomes a registered broker-dealer or becomes
newly affiliated with a broker-dealer or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, such 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 portfolio, and the adviser or sub-adviser will
be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding the
portfolio.
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The Exchange has made the following representations and statements
in describing the Fund and its investment strategy, including other
portfolio holdings and investment restrictions.\7\
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\7\ The Commission notes that additional information regarding
the Fund, the Trust, and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, distributions, and taxes,
among other things, can be found in the Notice and the Registration
Statement, as applicable. See Notice, supra note 3, and Registration
Statement, supra note 5, respectively.
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A. Principal Investments (Under Normal Market Conditions) \8\
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\8\ The Exchange states that the term ``under normal market
conditions'' means, without limitation, 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.
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According to the Exchange, the Fund will seek long-term capital
appreciation. The Fund will invest substantially all of the Fund's
assets in (1) U.S. and foreign common stock of issuers of any
capitalization range, and (2) American Depositary Receipts (``ADRs''),
Global Depositary Receipts (``GDRs''), European Depositary Receipts
(``EDRs'') and International Depository Receipts (``IDRs'', and
together with ADRs, GDRs, and EDRs, ``Depositary Receipts'') that
provide investment exposure to global equity markets.\9\ Other than
unsponsored ADRs, all U.S. and foreign common stocks and Depositary
Receipts in which the Fund will invest will be exchange-traded.
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\9\ ADRs are U.S. dollar denominated receipts typically issued
by U.S. banks and trust companies that evidence ownership of
underlying securities issued by a foreign issuer. The underlying
securities may not necessarily be denominated in the same currency
as the securities into which they may be converted. The underlying
securities are held in trust by a custodian bank or similar
financial institution in the issuer's home country. The depositary
bank may not have physical custody of the underlying securities at
all times and may charge fees for various services, including
forwarding dividends and interest and corporate actions. Generally,
ADRs in registered form are equity securities designed for use in
domestic securities markets and are traded on exchanges or over-the-
counter in the U.S. GDRs, EDRs, and IDRs are similar to ADRs in that
they are certificates evidencing ownership of shares of a foreign
issuer; however, GDRs, EDRs, and IDRs may be issued in bearer form
and denominated in other currencies and are generally designed for
use in specific or multiple securities markets outside the U.S.
EDRs, for example, are designed for use in European securities
markets while GDRs are designed for use throughout the world. ADRs
may be purchased with and sold for U.S. dollars. ADRs may be
sponsored or unsponsored, but unsponsored ADRs will not exceed 10%
of the Fund's net assets. Not more than 10% of the net assets of the
Fund in the aggregate shall consist of equity securities whose
principal market is not a member of the Intermarket Surveillance
Group (``ISG'') or is a market with which the Exchange does not have
a comprehensive surveillance sharing agreement.
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The Exchange states that the Sub-Adviser will manage the Fund's
portfolio based on its patented Behavioral Portfolio Management
methodology. The Sub-Adviser will start by applying a quantitative
behavioral screen that narrows the equity universe to securities held
in large part by mutual funds the Sub-Adviser believes to be most
consistently pursuing their investment strategy. The Sub-Adviser then
will narrow this universe by a high dividend yield criteria and select
positions for the portfolio based on the highest combined ranking of
the two dimensions.
B. Other Fund Investments
The Exchange states that, while the Fund under normal market
conditions will invest substantially all of the Fund's assets in
exchange-traded U.S. and foreign common stocks and Depositary Receipts,
the Fund may invest in other securities and financial instruments, as
described below.
The Exchange represents that the Fund may purchase equity
securities (other than U.S. and foreign common stocks and Depositary
Receipts) traded in the U.S. on registered exchanges, which would
include preferred stock, rights, warrants, convertible securities,\10\
securities of master limited partnerships (``MLPs''),\11\ securities of
real estate investment trusts (``REITs''),\12\ and shares of closed-end
funds.\13\ The Fund may invest in affiliated and unaffiliated exchange-
traded funds (``ETFs'') \14\ and exchange-traded notes (``ETNs'').\15\
The Fund also may invest in the securities of exchange-traded pooled
investment vehicles (together with ETFs and ETNs, ``ETPs'') that are
not investment companies and are not required to comply with the
provisions of the 1940 Act. These pooled vehicles typically hold
commodities, such as gold or oil, currency, or other property that is
itself not a security.\16\
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\10\ Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the
underlying common stock (or cash or securities of equivalent value)
at a stated exchange ratio.
\11\ MLPs are limited partnerships in which the ownership units
are publicly traded.
\12\ REITs are pooled investment vehicles which invest primarily
in real estate or real estate related loans. REITs are generally
classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs.
\13\ A closed-end fund is a pooled investment vehicle that is
registered under the 1940 Act and whose shares are listed and traded
on U.S. national securities exchanges.
\14\ For purposes of this filing, ETFs include Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Equities
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca
Equities Rule 8.600). All the ETFs in which the Fund will invest
will be listed and traded on national securities exchanges. The Fund
will invest in the securities of ETFs registered under the 1940 Act
consistent with the requirements of Section 12(d)(1) of the 1940
Act, or any rule, regulation or order of the Commission or
interpretation thereof. The Fund will only make such investments in
conformity with the requirements of Regulation M of the Internal
Revenue Code of 1986, as amended (``Internal Revenue Code''). While
the Fund may invest in inverse ETFs, the Fund will not invest in
leveraged or inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
\15\ ETNs include securities listed and traded on the Exchange
under NYSE Arca Equities Rule 5.2(j)(6) (``Index-Linked
Securities''). ETNs are senior, unsecured, unsubordinated debt
securities issued by an underwriting bank that are designed to
provide returns that are linked to a particular benchmark less
investor fees. ETNs have a maturity date and, generally, are backed
only by the creditworthiness of the issuer.
\16\ Such pooled investment vehicles include Trust Issued
Receipts (as described in NYSE Arca Equities Rule 8.200); Commodity-
Based Trust Shares (as described in NYSE Arca Equities Rule 8.201);
Currency Trust Shares (as described in NYSE Arca Equities Rule
8.202); Commodity Index Trust Shares (as described in NYSE Arca
Equities Rule 8.203); and Trust Units (as described in NYSE Arca
Equities Rule 8.500).
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The Exchange states that on a day-to-day basis, the Fund may hold
money market instruments, cash, other cash equivalents, and ETPs that
invest in these and other highly liquid instruments. Further, the
Exchange represents that the Fund may invest in the securities of other
investment companies, including mutual funds and business development
companies (``BDCs''),\17\ to the extent that such an investment would
be consistent with the requirements of Section 12(d)(1) of the 1940
Act, or any rule, regulation, or order of the Commission or
interpretation thereof. The Fund will only make such investments in
conformity with the requirements of Subchapter M of the Internal
Revenue Code.
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\17\ A BDC is a less common type of exchange-traded closed-end
investment company that more closely resembles an operating company
than a typical investment company. BDCs generally focus on investing
in, and providing managerial assistance to, small, developing,
financially-troubled, private companies or other companies that may
have value that can be realized over time and with management
assistance.
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The Exchange represents that the Fund may invest in variable and
floating rate instruments, which involve certain obligations that may
carry variable or floating rates of interest, and may involve a
conditional or unconditional demand feature.\18\ The Fund may invest
[[Page 44238]]
in bank obligations, which would include certificates of deposit,
bankers' acceptances, and fixed time deposits.\19\ The Exchange also
states that the Fund may invest in municipal securities.
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\18\ The Exchange states that such instruments bear interest at
rates which are not fixed, but which vary with changes in specified
market rates or indices, and that the interest rates on these
securities may be reset daily, weekly, quarterly, or some other
reset period, and may have a set floor or ceiling on interest rate
changes. The Exchange states that a demand instrument with a demand
notice exceeding seven days may be considered illiquid if there is
no secondary market for such security.
\19\ Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period
of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are
``accepted'' by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate.
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The Exchange represents that the Fund may seek to invest in
corporate debt securities,\20\ including debt issued by domestic or
foreign companies of all kinds, and including those with small-, mid-,
and large-capitalizations. The Fund also may invest in corporate debt
securities representative of one or more high-yield bond or credit
derivative indices. The Exchange represents that the Fund may invest in
all grades of corporate debt securities, including below investment
grade (such debt may carry variable or floating rates of interest) and
unrated corporate debt securities.
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\20\ Corporate debt securities are typically fixed-income
securities issued by businesses to finance their operations. Notes,
bonds, debentures and commercial paper are the most common types of
corporate debt securities. The primary differences between the
different types of corporate debt securities are their maturities
and secured or unsecured status. Commercial paper has the shortest
term and is usually unsecured. Commercial paper is a short-term
obligation with a maturity ranging from one to 270 days issued by
banks, corporations and other borrowers. Such investments are
unsecured and usually discounted. The Fund may invest in commercial
paper rated A-1 or A-2 by Standard and Poor's Ratings Services
(``S&P'') or Prime-1 or Prime-2 by Moody's Investors Service, Inc.
(``Moody's'').
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The Fund may invest in non-investment-grade debt securities \21\
and unrated debt securities. The Exchange represents that the
creditworthiness of the issuer, as well as any financial institution or
other party responsible for payments on the security, will be analyzed
to determine whether to purchase unrated bonds.
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\21\ Non-investment-grade securities, also referred to as ``high
yield securities'' or ``junk bonds,'' are debt securities that are
rated lower than the four highest rating categories by a nationally
recognized statistical rating organization (for example, lower than
Baa3 by Moody's or lower than BBB- by S&P) or are determined to be
of comparable quality by the Fund's Sub-Adviser.
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The Exchange represents that the Fund may invest up to 10% of net
assets in asset-backed and commercial mortgaged-backed securities.\22\
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\22\ Asset-backed securities are securities backed by
installment contracts, credit-card receivables or other assets.
Commercial mortgage-backed securities are securities backed by
commercial real estate properties. Both asset-backed and commercial
mortgage-backed securities represent interests in ``pools'' of
assets in which payments of both interest and principal on the
securities are made on a regular basis.
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The Fund may also invest in inflation-indexed bonds.\23\ The Fund
may invest in U.S. government securities, including U.S. Treasury
securities. The Fund may invest in separately traded principal and
interest components of securities guaranteed or issued by the U.S.
government or its agencies, instrumentalities, or sponsored enterprises
if such components trade independently under the Separate Trading of
Registered Interest and Principal of Securities program (``STRIPS'') or
any similar program sponsored by the U.S. government.\24\ The Fund may
invest in U.S. Treasury zero-coupon bonds.\25\
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\23\ Inflation-indexed bonds are fixed income securities whose
principal value is periodically adjusted according to the rate of
inflation.
\24\ The Exchange states that STRIPS may be sold as zero coupon
securities.
\25\ The Exchange states that these securities are U.S. Treasury
bonds which have been stripped of their unmatured interest coupons,
the coupons themselves, and receipts or certificates representing
interests in such stripped debt obligations and coupons, and that
interest is not paid in cash during the term of these securities,
but is accrued and paid at maturity.
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The Fund may enter into repurchase agreements with financial
institutions, which may be deemed to be loans. The Exchange represents
that the Fund will follow certain procedures designed to minimize the
risks inherent in such agreements, including effecting repurchase
transactions only with large, well-capitalized, and well-established
financial institutions whose condition will be continually monitored by
the Sub-Adviser. In addition, the Exchange represents that the value of
the collateral underlying the repurchase agreements will always be at
least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. The Exchange states that the Fund
will not invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other illiquid
assets held by the Fund, would amount to more than 15% of the Fund's
net assets. The Fund may also enter into reverse repurchase agreements
as part of the Fund's investment strategy.\26\ The Exchange represents
that the Fund's investments in reverse repurchase agreements will not
be used to enhance leverage.\27\
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\26\ Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to
repurchase the same assets at a later date at a fixed price.
\27\ See supra note 4.
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C. Fund Investment Restrictions
The Fund will seek to qualify for treatment as a Regulated
Investment Company under the Internal Revenue Code.
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 or Sub-
Adviser,\28\ in accordance with Commission guidance. 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.
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\28\ In reaching liquidity decisions, the Adviser or Sub-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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The Fund may not, with respect to 75% of its total assets, purchase
securities of any issuer (except securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities or shares of
investment companies) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer; or acquire more
than 10% of the outstanding voting securities of any one issuer. For
purposes of this policy, the issuer of the underlying security will be
deemed to be the issuer of any respective depositary receipt.
The Fund may not invest 25% or more of its total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This limitation
does not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or shares of
investment companies. The Fund will
[[Page 44239]]
not invest 25% or more of its total assets in any investment company
that so concentrates.
The Exchange represents that the Fund will not invest in options,
futures, swaps or other derivatives. It further represents that the
Fund's investments will be consistent with the Fund's investment
objective and will not be used to enhance leverage.
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\29\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Exchange Act,\30\ which requires, among
other things, that the Exchange's rules be designed 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 Fund and the Shares must comply with the
requirements of NYSE Arca Equities Rule 8.600 to be listed and traded
on the Exchange.
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\29\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. See 15 U.S.C. 78c(f).
\30\ 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
Exchange Act,\31\ which sets forth Congress' 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 of the Fund,\32\ as defined in NYSE Arca Equities Rule
8.600(c)(3), will be widely disseminated by one or more major market
data vendors at least every 15 seconds during the Core Trading
Session.\33\ 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 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.\34\ In addition, a
basket composition file, which includes the security names and share
quantities (as applicable) 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 New York
Stock Exchange, LLC (``NYSE'') via the National Securities Clearing
Corporation. The Administrator will calculate the NAV and NAV per Share
of the Fund once each business day as of the regularly scheduled close
of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time).\35\
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 U.S.
exchange-listed equity securities, including common stocks, ETPs,
closed-end funds, exchange-traded pooled investment vehicles,
Depositary Receipts, MLPs, REITs, warrants, rights, preferred stocks,
BDCs and convertible securities will be available via the CTA high-
speed line, and will be available from the national securities exchange
on which they are listed. Information regarding unsponsored ADRs will
be available from major market data vendors. Intra-day and closing
price information relating to the fixed income investments of the Fund
will be available from major market data vendors. Price information
regarding investment company securities will be available from on-line
sources and from the Web site for the applicable investment company
securities. The Fund's Web site will include a form of the prospectus
for the Fund and additional data relating to NAV and other applicable
quantitative information.
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\31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\32\ According to the Exchange, the Portfolio Indicative Value
is based on current information regarding the value of the
securities and other assets in the Disclosed Portfolio. The
Portfolio Indicative Value should not be viewed as a ``real-time''
update of the NAV per Share of the Fund, which will be calculated
once per day.
\33\ The Exchange states that several major market data vendors
display or make widely available Portfolio Indicative Values taken
from the CTA or other data feeds.
\34\ On a daily basis, the Adviser will disclose on behalf of
the Fund on the Fund's Web site each portfolio security and other
financial instrument of the Fund the following information: Ticker
symbol (if applicable); name of security and financial instrument;
number of shares, if applicable; 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.
\35\ The NAV per Share of the Fund will be computed by dividing
the value of the net assets of the Fund (the value of its total
assets less total liabilities) by the total number of Shares of the
Fund outstanding. Expenses and fees will be accrued daily and taken
into account for purposes of determining NAV per Share. According to
the Exchange, price information for exchange-listed securities,
including common stocks, ETFs, ETNs, closed-end funds, exchange-
traded pooled investment vehicles, Depositary Receipts, MLPs, REITs,
warrants, rights, preferred stocks, BDCs and convertible 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 or, if no sale has occurred, at the last
quoted bid price on the primary market or exchange on which they are
traded. Other portfolio securities and assets for which market
quotations are not readily available or determined to not represent
the current fair value will be valued based on fair value as
determined in good faith in accordance with procedures adopted by
the Trust's Board of Trustees and in accordance with the 1940 Act.
Unsponsored ADRs will be valued on the basis of the market closing
price on the exchange where the stock of the foreign issuer that
underlies the ADR is listed. Investment company securities, other
than ETFs and BDCs, (including mutual funds), will be valued at NAV.
Domestic and foreign fixed income securities, including U.S.
government securities, repurchase agreements, reverse repurchase
agreement, variable and floating rate securities, bank obligations,
corporate debt securities, zero-coupon bonds, commercial paper,
inflation-indexes bonds, mortgage-backed securities and asset-backed
securities generally trade in the over-the-counter market rather
than on a securities exchange, and the Fund will generally value
these portfolio securities by relying on independent pricing
services. The Fund's pricing services will use valuation models or
matrix pricing to determine current value. In general, pricing
services use information with respect to comparable bond and note
transactions, quotations from bond dealers or by reference to other
securities that are considered comparable in such characteristics as
rating, interest rate, maturity date, option adjusted spread models,
prepayment projections, interest rate spreads and yield curves.
Matrix price is an estimated price or value for a fixed-income
security. Matrix pricing is considered a form of fair value pricing.
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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 Exchange will obtain a representation from the issuer of
the Shares that the NAV and the Disclosed Portfolio will be made
available to all market participants at the same time. Trading in the
Shares of the Fund will be halted if the circuit breaker parameters in
NYSE Arca Equities Rule 7.12 have been reached. Trading in the Shares
of the Fund may be halted because of other
[[Page 44240]]
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable,\36\ and trading in the Shares
will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets
forth additional circumstances under which trading in Shares of the
Fund may be halted. The Exchange represents that it has a general
policy prohibiting the distribution of material, non-public information
by its employees. Consistent with NYSE Arca Equities Rule
8.600(d)(2)(B)(ii), the Reporting Authority 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 Fund's portfolio. In addition, the Exchange
represents that neither the Adviser nor the Sub-Adviser is registered
as a broker-dealer or is affiliated with a broker-dealer.\37\ Prior to
the commencement of trading, the Exchange states that it will inform
its Equity Trading Permit Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
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\36\ These reasons 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. 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\ See supra note 6. The Exchange states that 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 Sub-Adviser and their related personnel are subject to
the provisions of Rule 204A-1 under the Advisers Act relating to
codes of ethics. This Rule requires investment advisers to adopt a
code of ethics that reflects the fiduciary nature of the
relationship to clients, as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Exchange represents that 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.\38\ The Exchange further 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. The Exchange states that the FINRA, on behalf
of the Exchange, will communicate as needed regarding trading in the
Shares and underlying exchange-traded assets, as applicable, with other
markets and other entities that are members of the ISG, and that FINRA,
on behalf of the Exchange, may obtain trading information regarding
trading in the Shares and underlying exchange-traded assets from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares and underlying exchange-
traded assets from markets and other entities that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement. The Exchange states that FINRA, on behalf of the
Exchange, is able to access, as needed, trade information for certain
fixed income securities held by the Fund that is reported to FINRA's
Trade Reporting and Compliance Engine.
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\38\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
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The Exchange represents that the Exchange deems the Shares to be
equity securities, thus 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 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) Trading in the Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and applicable
federal securities laws, and that these procedures are adequate to
properly monitor Exchange trading of 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 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 unit
aggregations (and that Shares are not individually redeemable); (b)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit 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
Equity Trading Permit 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, the Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\39\ as provided by
NYSE Arca Equities Rule 5.3.
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\39\ 17 CFR 240.10A-3.
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(6) The Fund's investments will be consistent with its respective
investment objective and will not be used to enhance leverage. While
the Fund may invest in inverse ETFs, the Fund will not invest in
leveraged or inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
(7) 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 Advisor or Sub-
Advisor, in accordance with Commission guidance.
(8) Other than unsponsored ADRs, all U.S. and foreign common stocks
and Depositary Receipts in which the Fund will invest will be exchange-
traded. Unsponsored ADRs will not exceed 10% of the Fund's net assets.
(9) Not more than 10% of the net assets of the Fund in the
aggregate shall consist of equity securities whose principal market is
not a member of the ISG or is a market with which the Exchange does not
have a comprehensive surveillance sharing agreement.
(10) The Fund may invest up to 10% of net assets in asset-backed
and commercial mortgaged-backed securities.
(11) The Fund will not invest in options, futures, swaps or other
derivatives.
[[Page 44241]]
(12) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice, and
the Exchange's description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act \40\ and the rules and regulations thereunder
applicable to a national securities exchange.
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\40\ 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
Exchange Act,\41\ that the proposed rule change (SR-NYSEArca-2014-59),
as modified by Amendment No. 1, be, and it hereby is approved.
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\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17879 Filed 7-29-14; 8:45 am]
BILLING CODE 8011-01-P