[Federal Register Volume 79, Number 165 (Tuesday, August 26, 2014)]
[Notices]
[Pages 50964-50971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-20208]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72882; File No. SR-NYSEArca-2014-58]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1
Thereto, Relating to Listing and Trading of Shares of PIMCO Short-Term
Exchange-Traded Fund and PIMCO Municipal Bond Exchange-Traded Fund
Under NYSE Arca Equities Rule 8.600
August 20, 2014.
I. Introduction
On June 25, 2014, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
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 the shares (``Shares'') of PIMCO
Short-Term Exchange-Traded Fund and PIMCO Municipal Bond Exchange-
Traded Fund (individually, ``Fund,'' and collectively, ``Funds'') under
NYSE Arca Equities Rule 8.600. The proposed rule change was published
for comment in the Federal Register on July 8, 2014.\3\ On July 16,
2014, NYSE Arca filed Amendment No. 1 to the proposal.\4\ The
Commission received no comments on the proposal. This order grants
approval of the proposed rule change, as modified by Amendment No. 1
thereto.
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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. 72509 (July 1,
2014), 79 FR 38605 (``Notice'').
\4\ In Amendment No. 1, the Exchange amended the proposed rule
change to: (a) clarify how certain Fund assets would be valued; and
(b) specify where price information can be obtained for certain Fund
holdings. Amendment No. 1 provided clarification to the proposed
rule change, and because it does not materially affect the substance
of the proposed rule change or raise novel or unique regulatory
issues, Amendment No. 1 is not subject to notice and comment.
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.600, which governs the listing and trading of Managed
Fund Shares on the Exchange. The Shares will be offered by PIMCO ETF
Trust (``Trust''). The Trust is registered with the Commission as an
investment company.\5\ The Funds are series of the Trust.
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\5\ According to the Exchange, the Trust filed an amendment to
its registration statement on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940 (``1940 Act'') relating
to the Funds (File Nos. 333-155395 and 811-22250) (``Registration
Statement''). In addition, the Exchange notes that the Trust has
obtained certain exemptive relief under the 1940 Act. See Investment
Company Act Release No. 28993 (November 10, 2009) (File No. 812-
13571).
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The investment manager to the Funds will be Pacific Investment
Management Company LLC (``PIMCO'' or ``Adviser''). PIMCO Investments
LLC will serve as the distributor for the Funds. State Street Bank &
Trust Co. will serve as the custodian and transfer agent to the Funds.
The Exchange represents that, while the Adviser is not registered as a
broker-dealer, the Adviser is affiliated with a broker-dealer and will
implement a fire wall with respect to its broker-dealer affiliate
regarding access to information concerning the composition and changes
to the portfolio.\6\ The Exchange has made the following
representations and statements describing the Funds and their
respective investment strategies, including portfolio holdings and
investment restrictions.\7\
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\6\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The
Exchange represents that in the event (a) the 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, such
Adviser, new adviser, or new sub-adviser will implement a fire wall
with respect to its relevant personnel or its broker-dealer
affiliate, as applicable, regarding access to information concerning
the composition of and 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.
\7\ Additional information regarding the Trust, the Funds, and
the Shares, investment strategies, investment restrictions, risks,
net asset value (``NAV'') calculation, creation and redemption
procedures, fees, portfolio holdings, disclosure policies,
distributions, and taxes, among other information, is included in
the Notice and the Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 3 and 5, respectively.
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[[Page 50965]]
Characteristics of the Funds
In selecting investments for each Fund, PIMCO will develop an
outlook for interest rates, currency exchange rates and the economy,
analyze credit and call risks, and use other investment selection
techniques. The proportion of each Fund's assets committed to
investment in securities with particular characteristics (such as
quality, sector, interest rate, or maturity) will vary based on PIMCO's
outlook for the U.S. economy and the economies of other countries in
the world, the financial markets, and other factors.
With respect to each Fund, in seeking to identify undervalued
currencies, PIMCO may consider many factors, including but not limited
to, longer-term analysis of relative interest rates, inflation rates,
real exchange rates, purchasing power parity, trade account balances,
and current account balances, as well as other factors that influence
exchange rates such as flows, market technical trends, and government
policies. With respect to fixed income investing, PIMCO will attempt to
identify areas of the bond market that are undervalued relative to the
rest of the market. PIMCO will identify these areas by grouping fixed
income investments into sectors such as money markets, governments,
corporates, mortgages, asset-backed, and international. Sophisticated
proprietary software will then assist in evaluating sectors and pricing
specific investments. Once investment opportunities are identified,
PIMCO will shift assets among sectors depending upon changes in
relative valuations, credit spreads, and other factors.
Fixed Income Instruments
Among other investments described in more detail herein, each Fund
may invest in Fixed Income Instruments, which include:
Securities issued or guaranteed by the U.S. Government,
its agencies, or government-sponsored enterprises (``U.S. Government
Securities'');
corporate debt securities of U.S. and non-U.S. issuers,
including convertible securities and corporate commercial paper; \8\
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\8\ With respect to each of the Funds, while non-emerging
markets corporate debt securities (excluding commercial paper)
generally must have $100 million or more par amount outstanding and
significant par value traded to be considered as an eligible
investment for each of the Funds, at least 80% of issues of such
securities held by a Fund must have $100 million or more par amount
outstanding at the time of investment. See also infra note 22.
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mortgage-backed and other asset-backed securities; \9\
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\9\ Mortgage-related and other asset-backed securities include
collateralized mortgage obligations (``CMO''s), commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals, stripped
mortgage-backed securities, and other securities that directly or
indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. A to-be-announced
(``TBA'') transaction is a method of trading mortgage-backed
securities. In a TBA transaction, the buyer and seller agree upon
general trade parameters such as agency, settlement date, par
amount, and price. The actual pools delivered generally are
determined two days prior to the settlement date.
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inflation-indexed bonds issued both by governments and
corporations; \10\
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\10\ Inflation-indexed bonds (other than municipal inflation-
indexed bonds and certain corporate inflation-indexed bonds) are
fixed income securities whose principal value is periodically
adjusted according to the rate of inflation (e.g., Treasury
Inflation Protected Securities (TIPS)). Municipal inflation-indexed
securities are municipal bonds that pay coupons based on a fixed
rate, plus the Consumer Price Index for All Urban Consumers (CPI).
With regard to municipal inflation-indexed bonds and certain
corporate inflation-indexed bonds, the inflation adjustment is
reflected in the semi-annual coupon payment.
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structured notes, including hybrid or ``indexed''
securities and event-linked bonds; \11\
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\11\ The Funds may obtain event-linked exposure by investing in
``event-linked bonds'' or ``event-linked swaps'' or by implementing
``event-linked strategies.'' Event-linked exposure results in gains
or losses that typically are contingent upon, or formulaically
related to, defined trigger events. Examples of trigger events
include hurricanes, earthquakes, weather-related phenomena, or
statistics relating to such events. Some event-linked bonds are
commonly referred to as ``catastrophe bonds.'' If a trigger event
occurs, a Fund may lose all or a portion of its principal invested
in the bond or notional amount on a swap.
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bank capital and trust preferred securities; \12\
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\12\ There are two common types of bank capital: Tier I and Tier
II. Bank capital is generally, but not always, of investment grade
quality. According to the Exchange, Tier I securities often take the
form of trust preferred securities. Tier II securities are commonly
thought of as hybrids of debt and preferred stock, are often
perpetual (with no maturity date), callable, and, under certain
conditions, allow for the issuer bank to withhold payment of
interest until a later date. However, such deferred interest
payments generally earn interest.
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loan participations and assignments; \13\
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\13\ The Funds may invest in fixed- and floating-rate loans,
which investments generally will be in the form of loan
participations and assignments of portions of such loans.
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delayed funding loans and revolving credit facilities;
bank certificates of deposit, fixed time deposits, and
bankers' acceptances;
repurchase agreements on Fixed Income Instruments and
reverse repurchase agreements on Fixed Income Instruments;
debt securities issued by states or local governments and
their agencies, authorities, and other government-sponsored enterprises
(``Municipal Bonds'');
obligations of non-U.S. governments or their subdivisions,
agencies, and government-sponsored enterprises; and
obligations of international agencies or supranational
entities.
Use of Derivatives by the Funds
A Fund's investments in derivative instruments will be made in
accordance with the 1940 Act and consistent with each Fund's investment
objective and policies. With respect to each Fund, derivative
instruments will include forwards; \14\ exchange-traded and over-the-
counter (``OTC'') options contracts; exchange-traded futures contracts;
exchange-traded and OTC swap agreements; exchange-traded options on
futures contracts; and OTC options on swap agreements.\15\ Generally, a
derivative is a financial contract whose value depends upon, or is
derived from, the value of an underlying asset, reference rate, or
index, and may relate to stocks, bonds, interest rates, currencies or
currency exchange rates, commodities, and related indexes. A Fund may,
but is not required to, use derivative instruments for risk management
purposes or as part of its investment strategies.\16\
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\14\ Forwards are contracts to purchase or sell securities for a
fixed price at a future date beyond normal settlement time (forward
commitments).
\15\ In the future, in the event that there are exchange-traded
options on swaps, the Fund may invest in these instruments. See
Notice, supra, note 3 at 38607.
\16\ According to the Exchange, each Fund will seek, where
possible, to use counterparties whose financial status is such that
the risk of default is reduced; however, the risk of losses
resulting from default is still possible. PIMCO's Counterparty Risk
Committee evaluates the creditworthiness of counterparties on an
ongoing basis. In addition to information provided by credit
agencies, PIMCO credit analysts evaluate each approved counterparty
using various methods of analysis, including company visits,
earnings updates, the broker-dealer's reputation, PIMCO's past
experience with the broker-dealer, market levels for the
counterparty's debt and equity, the counterparty's liquidity, and
its share of market participation.
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According to the Exchange, each Fund will typically use derivative
instruments as a substitute for taking a position in the underlying
asset and/or as part of a strategy designed to reduce exposure to other
risks, such as interest rate or currency risk. A Fund may also use
derivative instruments to enhance returns. To limit the potential risk
associated with such transactions, a Fund will segregate or ``earmark''
assets determined to be liquid by PIMCO in accordance with procedures
established
[[Page 50966]]
by the Trust's Board of Trustees (``Board'') and in accordance with the
1940 Act (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under derivative
instruments. These procedures have been adopted consistent with Section
18 of the 1940 Act and related Commission guidance. In addition, each
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.\17\ The Exchange notes that
the markets for certain securities, or the securities themselves, may
be unavailable or cost prohibitive as compared to derivative
instruments, so suitable derivative transactions may be an efficient
alternative for a Fund to obtain the desired asset exposure.
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\17\ 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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PIMCO Short-Term Exchange-Traded Fund--Principal Investments
According to the Exchange, the PIMCO Short-Term Exchange-Traded
Fund will seek maximum current income, consistent with preservation of
capital and daily liquidity. This Fund will seek to achieve its
investment objective by investing under normal circumstances \18\ at
least 65% of its total assets in a diversified portfolio of Fixed
Income Instruments of varying maturities, and derivatives based on
Fixed Income Instruments. The average portfolio duration of the Fund
will vary based on PIMCO's forecast for interest rates and will
normally not exceed one year. In addition, the dollar weighted average
portfolio maturity of the Fund, under normal circumstances, is expected
not to exceed three years.
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\18\ With respect to each Fund, the term ``under normal
circumstances'' includes, but is not limited to, the absence of
extreme volatility or trading halts in the fixed income markets or
the financial markets generally; 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 invest primarily in
investment grade debt securities, but may invest up to 10% of its total
assets in high yield securities rated B or higher by Moody's, or
equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO
to be of comparable quality.\19\
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\19\ With respect to each Fund, securities rated Ba or lower by
Moody's, or equivalently rated by S&P or Fitch, are sometimes
referred to as ``high yield securities'' or ``junk bonds,'' while
securities rated Baa or higher are referred to as ``investment
grade.'' Unrated securities may be less liquid than comparably rated
securities and involve the risk that a Fund's portfolio manager may
not accurately evaluate the security's comparative credit rating. To
the extent that a Fund invests in unrated securities, a Fund's
success in achieving its investment objective may depend more
heavily on the portfolio manager's creditworthiness analysis than if
that Fund invested exclusively in rated securities. In determining
whether a security is of comparable quality, the Adviser will
consider, for example, whether the issuer of the security has issued
other rated securities; whether the obligations under the security
are guaranteed by another entity and the rating of such guarantor
(if any); whether and (if applicable) how the security is
collateralized; other forms of credit enhancement (if any); the
security's maturity date; liquidity features (if any); relevant cash
flow(s); valuation features; other structural analysis;
macroeconomic analysis; and sector or industry analysis.
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In furtherance of the Fund's 65% policy, or with respect to the
Fund's other investments, the Fund may invest in derivative
instruments, subject to applicable law and any other restrictions
described herein.
The Fund may invest up to 20% of its assets in mortgage-related and
other asset-backed securities, although this 20% limitation does not
apply to securities issued or guaranteed by Federal agencies and/or
U.S. government sponsored instrumentalities.
According to the Exchange, the Fund may invest in securities and
instruments that are economically tied to foreign (non-U.S.)
countries.\20\
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\20\ PIMCO will generally consider an instrument to be
economically tied to a non-U.S. country if the issuer is a foreign
government (or any political subdivision, agency, authority, or
instrumentality of such government), or if the issuer is organized
under the laws of a non-U.S. country. With respect to each Fund, in
the case of certain money market instruments, such instruments will
be considered economically tied to a non-U.S. country if either the
issuer or the guarantor of such money market instrument is organized
under the laws of a non-U.S. country. With respect to derivative
instruments, PIMCO will generally consider such instruments to be
economically tied to non-U.S. countries if the underlying assets are
foreign currencies (or baskets or indexes of such currencies), or
instruments or securities that are issued by foreign governments or
issuers organized under the laws of a non-U.S. country (or if the
underlying assets are certain money market instruments, if either
the issuer or the guarantor of such money market instruments is
organized under the laws of a non-U.S. country).
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The Fund may invest up to 10% of its total assets in securities
denominated in foreign currencies, and may invest beyond this limit in
U.S. dollar-denominated securities of foreign issuers.\21\ According to
the Exchange, the Fund will normally limit its foreign currency
exposure (from non-U.S. dollar-denominated securities or currencies) to
20% of its total assets. The Fund may invest up to 5% of its total
assets in securities and instruments that are economically tied to
emerging market countries.\22\
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\21\ According to the Exchange, the Fund may have greater
exposure (i.e., up to 20% of its total assets) to foreign currencies
through: (i) investments in securities denominated in such
currencies, and (ii) direct investments in foreign currencies,
including currency forwards. See Notice, supra, note 3 at 38607.
\22\ PIMCO will generally consider an instrument to be
economically tied to an emerging market country if the security's
``country of exposure'' is an emerging market country, as determined
by the criteria set forth in the Registration Statement.
Alternatively, such as when a ``country of exposure'' is not
available or when PIMCO believes the following tests more accurately
reflect to which country the security is economically tied, PIMCO
may consider an instrument to be economically tied to an emerging
market country if the issuer or guarantor is a government of an
emerging market country (or any political subdivision, agency,
authority, or instrumentality of such government), if the issuer or
guarantor is organized under the laws of an emerging market country,
or if the currency of settlement of the security is a currency of an
emerging market country. With respect to derivative instruments,
PIMCO will generally consider such instruments to be economically
tied to emerging market countries if the underlying assets are
currencies of emerging market countries (or baskets or indices of
such currencies), or instruments or securities that are issued or
guaranteed by governments of emerging market countries or by
entities organized under the laws of emerging market countries.
While emerging markets corporate debt securities (excluding
commercial paper) generally must have $200 million or more par
amount outstanding and significant par value traded to be considered
as an eligible investment for each of the Funds, at least 80% of
issues of such securities held by a Fund must have $200 million or
more par amount outstanding at the time of investment.
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The Fund may engage in foreign currency transactions on a spot
(cash) basis and forward basis, and invest in foreign currency futures
and exchange-traded and OTC options contracts.\23\ The Fund may enter
into these contracts to hedge against foreign exchange risk, to
increase exposure to a foreign currency, or to shift exposure to
foreign currency fluctuations from one currency to another. Suitable
hedging transactions may not be available in all circumstances, and
there can be no assurance that the Fund will engage in such
transactions at any given time or from time to time. The Fund may
purchase or sell securities on a when-issued, delayed delivery, or
forward
[[Page 50967]]
commitment basis and may engage in short sales.\24\
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\23\ The Fund will limit its investments in currencies to those
currencies with a minimum average daily foreign exchange turnover of
USD $1 billion as determined by the Bank for International
Settlements (``BIS'') Triennial Central Bank Survey. As of the most
recent BIS Triennial Central Bank Survey, at least 52 separate
currencies had minimum average daily foreign exchange turnover of
USD $1 billion. For a list of eligible currencies, see www.bis.org.
\24\ Each of the Funds may make short sales of securities: (i)
To offset potential declines in long positions in similar
securities; (ii) to increase the flexibility of the Fund; (iii) for
investment return; and (iv) as part of a risk arbitrage strategy.
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The Fund may, without limitation, seek to obtain market exposure to
the securities in which it primarily invests by entering into a series
of purchase and sale contracts or by using other investment techniques
(such as buy backs or dollar rolls).\25\
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\25\ A dollar roll is similar except that the counterparty is
not obligated to return the same securities as those originally sold
by the Fund but only securities that are ``substantially
identical.''
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PIMCO Short-Term Exchange-Traded Fund--Other (Non-Principal)
Investments
The PIMCO Short-Term Exchange-Traded Fund may invest up to 10% of
its total assets in preferred stock, convertible securities, and other
equity-related securities.\26\
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\26\ Convertible securities are generally preferred stocks and
other securities, including fixed income securities and warrants,
that are convertible into or exercisable for common stock at a
stated price or rate. Equity-related investments may include
investments in small-capitalization (``small-cap''), mid-
capitalization (``mid-cap''), and large-capitalization (``large-
cap'') companies. With respect to each Fund, a small-cap company
will be defined as a company with a market capitalization of up to
$1.5 billion, a mid-cap company will be defined as a company with a
market capitalization of between $1.5 billion and $10 billion, and a
large-cap company will be defined as a company with a market
capitalization above $10 billion. Not more than 10% of the net
assets of a Fund in the aggregate invested in exchange-traded equity
securities shall consist of equity securities, including stocks into
which a convertible security is converted, 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. Furthermore, not more than 10% of
the net assets of a Fund in the aggregate invested in futures
contracts or exchange-traded options contracts shall consist of
futures contracts or exchange-traded options contracts 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.
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The Fund may invest in variable and floating rate securities that
are not Fixed Income Instruments. The Fund may invest in floaters and
inverse floaters that are not Fixed Income Instruments and may engage
in credit spread trades.
The Fund may invest in trade claims,\27\ privately placed and
unregistered securities, and exchange-traded and OTC-traded structured
products, including credit-linked securities, commodity-linked notes,
and structured notes. The Fund may invest in Brady Bonds.
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\27\ Trade claims are non-securitized rights of payment arising
from obligations that typically arise when vendors and suppliers
extend credit to a company by offering payment terms for products
and services. If the company files for bankruptcy, payments on these
trade claims stop, and the claims are subject to compromise along
with the other debts of the company. Trade claims may be purchased
directly from the creditor or through brokers.
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The Fund may enter into repurchase agreements on instruments other
than Fixed Income Instruments, in addition to repurchase agreements on
Fixed Income Instruments mentioned above, in which the Fund purchases a
security from a bank or broker-dealer, which agrees to purchase the
security at the Fund's cost, plus interest within a specified time.
Repurchase agreements maturing in more than seven days and which may
not be terminated within seven days at approximately the amount at
which the Fund has valued the agreements will be considered illiquid
securities. The Fund may enter into reverse repurchase agreements on
instruments other than Fixed Income Instruments, in addition to reverse
repurchase agreements on Fixed Income Instruments mentioned above,
subject to the Fund's limitations on borrowings.\28\ The Fund will
segregate or ``earmark'' assets determined to be liquid by PIMCO in
accordance with procedures established by the Board to cover its
obligations under reverse repurchase agreements.
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\28\ With respect to each Fund, a reverse repurchase agreement
involves the sale of a security by the Fund and its agreement to
repurchase the instrument at a specified time and price.
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PIMCO Municipal Bond Exchange-Traded Fund--Principal Investments
According to the Exchange, the PIMCO Municipal Bond Exchange-Traded
Fund will seek high current income exempt from federal income tax,
consistent with preservation of capital; capital appreciation is a
secondary objective. This Fund will seek to achieve its investment
objective by investing under normal circumstances at least 80% of its
assets in debt securities (Municipal Bonds) whose interest is, in the
opinion of bond counsel for the issuer at the time of the issuance,
exempt from federal income tax. Municipal Bonds are generally issued by
or on behalf of states and local governments and their agencies,
authorities, and other instrumentalities. Municipal Bonds include
municipal lease obligations, municipal general obligation bonds,
municipal cash equivalents, and pre-refunded and escrowed to maturity
bonds. The Fund may invest in industrial development bonds, which are
Municipal Bonds issued by a government agency on behalf of a private
sector company and, in most cases, are not backed by the credit of the
issuing municipality. The Fund may also invest in securities issued by
entities whose underlying assets are Municipal Bonds.
The Fund may invest more than 25% of its total assets in bonds of
issuers in California and New York; may invest 25% of more of its total
assets in Municipal Bonds that finance education, health care, housing,
transportation, utilities, and other similar projects; and may invest
25% or more of its total assets in industrial development bonds. The
average portfolio duration of the Fund will normally vary from three to
twelve years based on PIMCO's forecast for interest rates.
According to the Exchange, the Fund will invest primarily in
investment grade debt securities, but may invest up to 10% of its total
assets in Municipal Bonds or private activity bonds that are high yield
securities rated Ba or higher by Moody's, or equivalently rated by S&P
or Fitch, or, if unrated, determined by PIMCO to be of comparable
quality.
The Fund may invest in residual interest bonds (``RIBs''), which
brokers create by depositing a Municipal Bond in a trust. The trust in
turn would issue a variable rate security and RIBs. The interest rate
for the variable rate security will be determined by the remarketing
broker-dealer, while the RIB holder will receive the balance of the
income from the underlying municipal bond.
In furtherance of the Fund's 80% policy the Fund may invest in
derivative instruments on Municipal Bonds, subject to applicable law
and any other restrictions described herein.
The Fund may, without limitation, seek to obtain market exposure to
the securities in which it primarily invests by entering into a series
of purchase and sale contracts or by using other investment techniques
(such as buy backs or dollar rolls). The Fund may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment
basis and may engage in short sales.
PIMCO Municipal Bond Exchange-Traded Fund--Other (Non-Principal)
Investments
According to the Exchange, the PIMCO Municipal Bond Exchange-Traded
Fund may invest up to 20% of its net assets in U.S. government
securities, money market instruments, ``private activity'' bonds, and/
or Fixed Income Instruments (other than Municipal Bonds), including
derivative instruments related to such instruments, subject to
applicable law and any other restrictions described herein.
[[Page 50968]]
The Fund may invest up to 10% of its total assets in preferred
stock, convertible securities, and other equity-related securities.
The Fund may invest in variable and floating rate securities. The
Fund may invest in floaters and inverse floaters and may engage in
credit spread trades.
The Fund may invest in trade claims, privately placed and
unregistered securities, and exchange-traded and OTC-traded structured
products, including credit-linked securities, commodity-linked notes,
and structured notes. The Fund may invest in Brady Bonds.
The Fund may enter into repurchase agreements on instruments other
than Fixed Income Instruments, in addition to repurchase agreements on
Fixed Income Instruments mentioned above, in which the Fund purchases a
security from a bank or broker-dealer, which agrees to purchase the
security at the Fund's cost, plus interest within a specified time.
Repurchase agreements maturing in more than seven days and which may
not be terminated within seven days at approximately the amount at
which the Fund has valued the agreements will be considered illiquid
securities. The Fund may enter into reverse repurchase agreements on
instruments other than Fixed Income Instruments, in addition to reverse
repurchase agreements on Fixed Income Instruments mentioned above,
subject to the Fund's limitations on borrowings.
Other Investments (Both Funds)
The Funds may invest without limit, for temporary or defensive
purposes, in U.S. debt securities, including taxable securities and
short-term money market securities, if PIMCO deems it appropriate to do
so. If PIMCO believes that economic or market conditions are
unfavorable to investors, PIMCO may temporarily invest up to 100% of a
Fund's assets in certain defensive strategies, including holding a
substantial portion of a Fund's assets in cash, cash equivalents, or
other highly rated short-term securities, including securities issued
or guaranteed by the U.S. government, its agencies, or
instrumentalities. The Funds may invest in, to the extent permitted by
Section 12(d)(1)(A) of the 1940 Act, other affiliated and unaffiliated
funds, such as open-end or closed-end management investment companies,
including other exchange-traded funds, provided that each of a Fund's
investment in units or shares of investment companies and other open-
end collective investment vehicles will not exceed 10% of that Fund's
total assets. Each Fund may invest in securities lending collateral in
one or more money market funds to the extent permitted by Rule 12d1-1
under the 1940 Act, including series of PIMCO funds.
Investment Restrictions (Both Funds)
Each Fund's investments, including investments in derivative
instruments, will be subject to all of the restrictions under the 1940
Act, including restrictions with respect to illiquid assets, that is,
the limitation that a 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. Each Fund will monitor
its respective portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of a Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
Each Fund will be diversified within the meaning of the 1940 Act.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue
Code. None of the Funds will concentrate its investments in a
particular industry, as that term is used in the 1940 Act, and as
interpreted, modified, or otherwise permitted by a regulatory authority
having jurisdiction from time to time. Each Fund's investments,
including derivatives, will be consistent with that Fund's investment
objective, and each Fund's use of derivatives may be used to enhance
leverage. However, each Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (i.e., 2Xs and
3Xs) of a Fund's broad-based securities market index (as defined in
Form N-1A).\29\
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\29\ According to the Exchange, each Fund's broad-based
securities market index will be identified in a future amendment to
the Registration Statement following a Fund's first full calendar
year of performance. See Notice, supra, note 3 at 38610.
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The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca
Equities Rule 8.600(d)(2)(B)(ii), each Fund's Reporting Authority will
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. The Exchange
represents that, for initial and/or continued listing, the Funds will
be in compliance with Rule 10A-3 under the Act,\30\ as provided by NYSE
Arca Equities Rule 5.3. A minimum of 100,000 Shares for each Fund will
be outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares of
each Fund that the NAV 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.
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\30\ 17 CFR 240.10A-3.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of Section 6 of the Act \31\ and the rules and regulations
thereunder applicable to a national securities exchange.\32\ In
particular, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act,\33\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission notes that
the Funds and the Shares must comply with the requirements of NYSE Arca
Rule 8.600 for the Shares to be listed and traded on the Exchange.
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\31\ 15 U.S.C. 78(f).
\32\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\33\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\34\ 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
[[Page 50969]]
will be available via the Consolidated Tape Association (``CTA'') high-
speed line.\35\ In addition, the Portfolio Indicative Value (``PIV''),
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.\36\ On each business day,
before commencement of trading in Shares in the Core Trading Session on
the Exchange, each of the Funds will disclose on the Trust's Web site
the Disclosed Portfolio, as defined in NYSE Arca Equities Rule
8.600(c)(2), that will form the basis for such Fund's calculation of
NAV at the end of the business day.\37\ The NAV of each of the Funds
will normally be determined as of the close of the regular trading
session on the Exchange (ordinarily 4:00 p.m. Eastern time) on each
business day.\38\ In addition, a basket composition file, which
includes the security names and share quantities, if applicable,
required to be delivered in exchange for a Fund's Shares, together with
estimates and actual cash components, will be publicly disseminated
daily prior to the opening of the Exchange via the National Securities
Clearing Corporation. Information regarding market price and volume of
the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Information regarding the previous day's closing price and
trading volume information for the Shares will be published daily in
the financial section of newspapers. Intra-day and closing price
information regarding exchange-traded equity securities, including
common stocks, preferred stocks, securities convertible into stocks,
closed-end funds, exchange traded funds, exchange-traded structured
products and other equity-related securities, will be available from
the exchange on which such securities are traded. Intra-day and closing
price information regarding exchange traded options (including options
on futures), exchange-traded swaps and futures will be available from
the exchange on which such instruments are traded. Intra-day and
closing price information regarding Fixed Income Instruments also will
be available from major market data vendors.\39\ Price information
relating to forwards, spot currency, OTC options, and swaps will be
available from major market data vendors. Price information regarding
RIBs, money market instruments, Brady Bonds, repurchase and reverse
repurchase agreements other than those included in Fixed Income
Instruments, private activity bonds, trade claims, privately placed and
unregistered securities, and OTC structured products will be available
from major market data vendors. Price information regarding other
investment company securities will be available from on-line
information services and from the Web site for the applicable
investment company security. The Trust's Web site will include a form
of the prospectus for each of the Funds and additional data relating to
NAV and other applicable quantitative information.
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\34\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\35\ See Notice, supra, note 3 at 38613.
\36\ According to the Exchange, several major market data
vendors display and/or make widely available PIVs taken from the CTA
or other data feeds.
\37\ On a daily basis, the Funds will disclose 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 a Fund's portfolio. The Web
site information will be publicly available at no charge.
\38\ The Exchange represents that for purposes of calculating
NAV, portfolio securities, and other assets for which market quotes
are readily available will be valued at market value. Market value
will generally be determined on the basis of last reported sales
prices, or if no sales are reported, based on quotes obtained from a
quotation reporting system, established market makers, or pricing
services. Fixed Income Instruments, including those to be purchased
under firm commitment agreements/delayed delivery basis, will
generally be valued on the basis of quotes obtained from brokers and
dealers or independent pricing services. Foreign fixed income
securities will generally be valued on the basis of quotes obtained
from brokers and dealers or pricing services using data reflecting
the earlier closing of the principal markets for those assets.
Short-term debt instruments having a remaining maturity of 60 days
or less will generally be valued at amortized cost, which
approximates market value. Derivatives will generally be valued on
the basis of quotes obtained from brokers and dealers or pricing
services using data reflecting the earlier closing of the principal
markets for those assets. Local closing prices will be used for all
instrument valuation purposes. Foreign currency-denominated
derivatives will generally be valued as of the respective local
region's market close. Exchange-traded equity securities will be
valued at the official closing price or the last trading price on
the exchange or market on which the security is primarily traded at
the time of valuation. If no sales or closing prices are reported
during the day, exchange-traded equity securities will generally be
valued at the mean of the last available bid and ask quotation on
the exchange or market on which the security is primarily traded, or
using other market information obtained from quotation reporting
systems, established market makers, or pricing services. Investment
company securities that are not exchange-traded will be valued at
NAV. Equity securities traded OTC will be valued based on price
quotations obtained from a broker-dealer who makes markets in such
securities or other equivalent indications of value provided by a
third-party pricing service. OTC options on swaps will be valued by
a third party pricing service. RIBs, money market instruments, trade
claims, privately placed and unregistered securities, structured
products, repurchase agreements, reverse repurchase agreements,
private activity bonds and other types of debt securities will
generally be valued on the basis of independent pricing services or
quotes obtained from brokers and dealers.
\39\ According to the Exchange, major market data vendors may
include, but are not limited to: Thomson Reuters, JPMorgan Chase
PricingDirect Inc., Markit Group Limited, Bloomberg, and Interactive
Data Corporation, among other major data vendors.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain
representation from the issuer of the Shares of each Fund that the NAV
per Share will be calculated daily and that the NAV and the Disclosed
Portfolio will be made available to all market participants at the same
time. The Exchange may halt trading in the Shares if trading is not
occurring in the securities or the financial instruments constituting
the Disclosed Portfolio of the Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\40\ In addition, trading in the Shares will be
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of the Fund may be halted. Further,
the Commission notes that the Reporting Authority that provides the
Disclosed Portfolio of each Fund must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material, non-public information regarding the actual components of the
portfolio.\41\ The Commission further notes that the Financial Industry
Regulatory Authority (``FINRA''), on behalf of the Exchange,\42\ will
[[Page 50970]]
communicate as needed regarding trading in the Shares, exchange-traded
equities, exchange-traded options, futures contracts, and options on
futures contracts with other markets or 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-traded equities,
exchange-traded options, futures contracts, and options on futures
contracts from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares,
exchange-traded equities, exchange-traded options, futures contracts,
and options on futures contracts from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\43\ FINRA, on behalf of
the Exchange, also 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. FINRA also can access data
obtained from the Municipal Securities Rulemaking Board relating to
municipal bond trading activity for surveillance purposes in connection
with trading in the Shares. The Exchange states that it has a general
policy prohibiting the distribution of material, non-public information
by its employees. The Exchange also states that the Adviser is not a
registered broker-dealer, but is affiliated with a broker-dealer and
will implement and maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition of or changes to the portfolios.\44\
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\40\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing
additional considerations for the suspension of trading in or
removal from listing of Managed Fund Shares on the Exchange). With
respect to trading halts, the Exchange may consider all relevant
factors in exercising its discretion to halt or suspend trading in
the Shares of each Fund. Trading in Shares of either Fund will be
halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
\41\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
\42\ The Exchange states that, while FINRA surveils trading on
the Exchange pursuant to a regulatory services agreement, the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
\43\ For a list of the current members of ISG, see http://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.
\44\ See supra note 6. An investment adviser to an open-end fund
is required to be registered under the Investment Advisers Act of
1940 (``Advisers Act''). As a result, the Adviser and its related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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The Exchange 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. In support of this
proposal, the Exchange has made representations, including:
(1) The Shares will conform to the initial and continuing 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. 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.
(4) 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: (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 ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (d) how information regarding the PIV and the Disclosed
Portfolio is disseminated; (e) the requirement that ETP Holders deliver
a prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and continued listing, each Fund must be in
compliance with Rule 10A-3 under the Exchange Act.\45\
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\45\ 17 CFR 240.10A-3.
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(6) While non-emerging markets corporate debt securities (excluding
commercial paper) generally must have $100 million or more par amount
outstanding and significant par value traded to be considered as an
eligible investment for the Funds, at least 80% of issues of such
securities held by the Funds must have $100 million or more par amount
outstanding at the time of investment. While emerging markets corporate
debt securities (excluding commercial paper) generally must have $200
million or more par amount outstanding and significant par value traded
to be considered as an eligible investment for the Funds, at least 80%
of issues of such securities held by the Funds must have $200 million
or more par amount outstanding at the time of investment.
(7) Not more than 10% of the net assets of a Fund in the aggregate
invested in exchange-traded equity securities shall consist of equity
securities, including stocks into which a convertible security is
converted, 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
a Fund in the aggregate invested in futures contracts or exchange-
traded options contracts shall consist of futures contracts or
exchange-traded options contracts 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.
(8) The PIMCO Short-Term Exchange-Traded Fund may invest up to 20%
of its assets in mortgage-related and other asset-backed securities,
although this 20% limitation does not apply to securities issued or
guaranteed by Federal agencies and/or U.S. government sponsored
instrumentalities.
(9) Each Fund's investments, including investments in derivative
instruments, will be subject to all of the restrictions under the 1940
Act, including restrictions with respect to investments in illiquid
assets, that is, the limitation that a 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, in accordance with Commission guidance.
(10) To limit the potential risk associated with such transactions,
a Fund will segregate or ``earmark'' assets determined to be liquid by
PIMCO in accordance with procedures established by the Trust's Board
and in accordance with the 1940 Act (or, as permitted by applicable
regulation, enter into certain
[[Page 50971]]
offsetting positions) to cover its obligations under derivative
instruments. These procedures have been adopted consistent with Section
18 of the 1940 Act and related Commission guidance. In addition, each
Fund will include appropriate risk disclosure in its offering
documents, including leveraging risk. Leveraging risk is the risk that
certain transactions of a Fund, including a Fund's use of derivatives,
may give rise to leverage, causing a 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.
(11) The Funds will seek, where possible, to use counterparties
whose financial status is such that the risk of default is reduced.
(12) A minimum of 100,000 Shares for each Fund will be outstanding
at the commencement of trading on the Exchange.
(13) Each Fund's investments, including derivatives, will be
consistent with each Fund's respective investment objective, and each
Fund's use of derivatives may be used to enhance leverage. However,
each Fund's investments will not be used to seek performance that is
the multiple or inverse multiple (i.e., 2Xs and 3Xs) of such Fund's
broad-based securities market index (as defined in Form N-1A).
This approval order is based on all of the Exchange's representations
and description of the Funds, including those set forth above and in
the Notice.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1 thereto, is consistent with
Section 6(b)(5) of the Act \46\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\46\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rule change (SR-NYSEArca-2014-58), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20208 Filed 8-25-14; 8:45 am]
BILLING CODE 8011-01-P