[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Notices]
[Pages 68330-68341]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26944]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73556; File No. SR-NYSEArca-2014-85]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of Shares
of the PIMCO Low Duration Investment Grade Corporate Bond Active
Exchange-Traded Fund Under NYSE Arca Equities Rule 8.600
November 7, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 23, 2014, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): PIMCO
Low Duration Investment Grade Corporate Bond Active Exchange-Traded
Fund.
[[Page 68331]]
The text of the proposed rule change is available on the Exchange's Web
site at www.nyse.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600,\4\ which governs the
listing and trading of Managed Fund Shares: \5\ PIMCO Low Duration
Investment Grade Corporate Bond Active Exchange-Traded Fund (``Fund'').
The Shares will be offered by PIMCO ETF Trust (the ``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.\6\
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\4\ The Commission has previously approved the listing and
trading on the Exchange of other actively managed funds under Rule
8.600. See, e.g., Securities Exchange Act Release Nos. 60981
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving Exchange listing and trading of five fixed
income funds of the PIMCO ETF Trust); 72666 (July 24, 2014), 79 FR
44224 (July 30, 2014) (SR-NYSEArca-2013-122) (order approving
proposed rule change relating to use of derivative instruments by
the PIMCO Total Return Exchange Traded Fund).
\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\6\ The Trust is registered under the 1940 Act. On June 17,
2014, the Trust filed an amendment to its registration statement on
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) (``1933
Act'') and the 1940 Act relating to the Fund (File Nos. 333-155395
and 811-22250) (the ``Registration Statement''). The description of
the operation of the Trust and the Fund herein is based, in part, on
the Registration Statement. In addition, the Commission has issued
an order granting certain exemptive relief to the Trust under the
1940 Act. See Investment Company Act Release No. 28993 (November 10,
2009) (File No. 812-13571) (``Exemptive Order'').
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The investment manager to the Fund will be Pacific Investment
Management Company LLC (``PIMCO'' or the ``Adviser''). PIMCO
Investments LLC will serve as the distributor for the Fund
(``Distributor''). State Street Bank & Trust Co. will serve as the
custodian and transfer agent for the Fund (``Custodian'' or ``Transfer
Agent'').
Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\7\ In addition,
Commentary .06 further requires that personnel who make decisions on
the open-end fund's portfolio composition must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the open-end fund's portfolio. The Adviser is not
registered as a broker-dealer, but is affiliated with a broker-dealer,
and will implement a ``fire wall'' with respect to such broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the Fund's portfolio. If PIMCO elects to hire a sub-
adviser for the Fund that is registered as a broker-dealer or is
affiliated with a broker-dealer, such 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
and/or changes to the portfolio and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio.
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\7\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violations, 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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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, it will implement a fire wall with respect to its
relevant personnel or its broker-dealer affiliate regarding access to
information concerning the composition and/or changes to a portfolio,
and will be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding such
portfolio.
Characteristics of the Fund \8\
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\8\ Many of the investment strategies of the Fund are
discretionary, which means that PIMCO can decide from time to time
whether to use them or not.
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According to the Registration Statement, in selecting investments
for the 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 the
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 the 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
[[Page 68332]]
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, the Fund
may invest in Fixed Income Instruments, which include any one or more
of the following:
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; \9\
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\9\ With respect to the Fund, 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 Fund, at least 80% of issues of such securities
held by the Fund must have $100 million or more par amount
outstanding at the time of investment. See also note 33, infra,
regarding emerging market corporate debt securities.
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Mortgage-backed and other asset-backed securities; \10\
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\10\ 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; \11\
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\11\ 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; \12\
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\12\ The Fund 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, 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, the
Fund may lose a portion or its entire principal invested in the bond
or notional amount on a swap.
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Bank capital and trust preferred securities; \13\
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\13\ There are two common types of bank capital: Tier I and Tier
II. Bank capital is generally, but not always, of investment grade
quality. Tier I securities are typically exchange-traded and often
take the form of trust preferred securities. Tier II securities are
commonly thought of as hybrids of debt and preferred stock. Tier II
securities are typically traded over-the-counter, 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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Loans, including loan participations and assignments; \14\
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\14\ The Fund 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 Fund
The Fund's investments in derivative instruments will be made in
accordance with the 1940 Act and consistent with the Fund's investment
objective and policies. With respect to the Fund, derivative
instruments will include forwards; \15\ 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.\16\ Generally,
derivatives are financial contracts 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. The Fund
may, but is not required to, use derivative instruments for risk
management purposes or as part of its investment strategies.\17\
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\15\ Forwards are contracts to purchase or sell securities for a
fixed price at a future date beyond normal settlement time (forward
commitments).
\16\ In the future, in the event that there are exchange-traded
options on swaps, the Fund may invest in these instruments.
\17\ The 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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As described further below, the 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. The Fund may also use
derivative instruments to enhance returns. To limit the potential risk
associated with such transactions, the Fund will segregate or
``earmark'' assets determined to be liquid by PIMCO in accordance with
procedures established by the Trust's Board of Trustees and in
accordance with the 1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its
obligations under derivative instruments. These procedures have been
adopted consistent with Section 18 of the 1940 Act and related
Commission guidance. In addition, the Fund will include appropriate
risk disclosure in its offering documents, including leveraging risk.
Leveraging risk is the risk that certain transactions of the Fund,
including the Fund's use of derivatives, may give rise to leverage,
causing the Fund to be more volatile than if it had not been
leveraged.\18\ Because the markets for certain securities, or the
securities themselves, may be unavailable or cost prohibitive as
compared to derivative instruments, suitable derivative transactions
may be an efficient alternative for the Fund to obtain the desired
asset exposure.
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\18\ 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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The Adviser believes that derivatives can be an economically
attractive substitute for an underlying physical security that the Fund
would otherwise purchase. For example, the Fund could purchase Treasury
futures contracts instead of physical Treasuries or could sell credit
default protection on a corporate bond instead of buying a physical
bond. Economic benefits include potentially lower transaction
[[Page 68333]]
costs or attractive relative valuation of a derivative versus a
physical bond (e.g., differences in yields).
The Adviser further believes that derivatives can be used as a more
liquid means of adjusting portfolio duration as well as targeting
specific areas of yield curve exposure, with potentially lower
transaction costs than the underlying securities (e.g., interest rate
swaps may have lower transaction costs than physical bonds). Similarly,
money market futures can be used to gain exposure to short-term
interest rates in order to express views on anticipated changes in
central bank policy rates. In addition, derivatives can be used to
protect client assets through selectively hedging downside (or ``tail
risks'') in the Fund.
The Fund also can use derivatives to increase or decrease credit
exposure. Index credit default swaps (CDX) can be used to gain exposure
to a basket of credit risk by ``selling protection'' against default or
other credit events, or to hedge broad market credit risk by ``buying
protection.'' Single name credit default swaps (CDS) can be used to
allow the Fund to increase or decrease exposure to specific issuers,
saving investor capital through lower trading costs. The Fund can use
total return swap contracts to obtain the total return of a reference
asset or index in exchange for paying a financing cost. A total return
swap may be much more efficient than buying underlying securities of an
index, potentially lowering transaction costs.
The Adviser believes that the use of derivatives will allow the
Fund to selectively add diversifying sources of return from selling
options. Option purchases and sales can also be used to hedge specific
exposures in the portfolio, and can provide access to return streams
available to long-term investors such as the persistent difference
between implied and realized volatility. Option strategies can generate
income or improve execution prices (i.e., covered calls).
Principal Investments
According to the Registration Statement, the Fund will seek to
maximize total return, consistent with prudent investment management.
The Fund will seek to achieve its investment objective by investing
under normal circumstances \19\ at least 80% of its assets in a
diversified portfolio of investment grade corporate Fixed Income
Instruments \20\ of varying maturities, which may be represented by
forwards or derivatives such as options, futures contracts or swap
agreements (the ``80% Policy''). The average portfolio duration of the
Fund normally will vary from zero to 4 years based on PIMCO's forecast
for interest rates.\21\
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\19\ With respect to the 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.
\20\ Corporate Fixed Income Instruments will be: corporate debt
securities of U.S. and non-U.S. issuers, including convertible
securities and corporate commercial paper, inflation-indexed bonds,
bank capital securities, trust preferred securities, and loan
participations and assignments.
\21\ Duration is a measure used to determine the sensitivity of
a security's price to changes in interest rates. The longer a
security's duration, the more sensitive it will be to changes in
interest rates.
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In furtherance of the Fund's 80% 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 purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis and may engage in short sales.\22\
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).\23\
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\22\ The Fund may make short sales of securities to: (i) Offset
potential declines in long positions in similar securities, (ii) to
[sic] increase the flexibility of the Fund; (iii) for [sic]
investment return; and (iv) as [sic] part of a risk arbitrage
strategy.
\23\ 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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Other (Non-Principal) Investments
The non-principal investments listed below would consist of
investments that are not included in the Fund's 80% Policy, as
described above. Assets not invested in investment grade corporate
Fixed Income Instruments may be invested in other types of Fixed Income
Instruments and other instruments, as described below.
The Fund may gain exposure to the real estate sector by investing
in OTC real estate-linked derivatives \24\, exchange-traded and OTC
real estate investment trusts (``REITs''), and exchange traded common,
exchange-traded and OTC preferred and exchange-traded and OTC
convertible securities of issuers in real estate-related
industries.\25\
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\24\ Real estate-linked derivatives are derivative instruments
that are tied to real estate, such as derivatives (e.g., swaps or
options) on real-estate related indices or specific real-estate
related companies. The value and risks associated with real estate-
linked derivative instruments are generally similar to those
associated with direct ownership of real estate.
\25\ See infra, note 30 and accompanying text.
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The Fund may invest in variable and floating rate securities that
are not corporate Fixed Income Instruments. The Fund may invest in
floaters and inverse floaters that are not corporate Fixed Income
Instruments.
As disclosed in the Registration Statement, the Fund may invest in
trade claims,\26\ privately placed and unregistered securities, and
exchange-traded and OTC-traded structured products,\27\ including
credit-linked securities,\28\ and commodity-linked notes. The Fund may
invest in Brady Bonds.
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\26\ 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.
\27\ The Funds [sic] may invest in structured products,
including instruments such as credit-linked securities. For example,
a structured product may combine a traditional stock, bond, or
commodity with an option or forward contract. Generally, the
principal amount, amount payable upon maturity or redemption, or
interest rate of a structured product is tied (positively or
negatively) to the price of some commodity, currency or securities
index or another interest rate or some other economic factor. The
interest rate or (unlike most fixed income securities) the principal
amount payable at maturity of a structured product may be increased
or decreased, depending on changes in the value of the benchmark. An
example of exchange-traded structured products would be an [sic]
exchange-traded notes or ETNs, such as those listed and traded under
NYSE Arca Equities Rule 5.2(j)(6).
\28\ Credit-linked securities are generally a basket of
derivative instruments, such as credit default swaps or interest
rate swaps. Like an investment in a bond, investments in credit-
linked securities represent the right to receive periodic income
payments (in the form of distributions) and payment of principal at
the end of the term of the security. However, these payments are
conditioned on the trust's receipt of payments from, and the trust's
potential obligations to, the counterparties to the derivative
instruments and other securities in which the trust invests.
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The Fund may enter into repurchase agreements on instruments other
than corporate Fixed Income Instruments, in addition to repurchase
agreements on corporate 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
[[Page 68334]]
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 corporate Fixed Income
Instruments, in addition to reverse repurchase agreements on corporate
Fixed Income Instruments mentioned above, subject to the Fund's
limitations on borrowings.\29\ 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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\29\ With respect to the 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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The Fund may invest only up to 10% of its total assets in preferred
stocks, convertible securities, common stocks and other equity-related
securities; such limit will not include real-estate related
investments, such as REITs or investments in common, preferred or
convertible securities of issuers in real estate-related
industries.\30\
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\30\ 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 the 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 the Fund in the aggregate invested in equity securities
(other than non-exchange-traded investment company 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 the 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 up to 20% of its total assets in structured
notes, including hybrid or ``indexed'' securities and event-linked
bonds.
The Fund may invest up to 15% of its total assets in high yield
securities (``junk bonds'') rated below BBB- (with a minimum level of
B- at purchase) by Standard & Poor's Ratings Services (``S&P''), or
equivalently rated by Moody's Investors Service, Inc. (``Moody's'') or
Fitch, Inc. (``Fitch''), or, if unrated, determined by PIMCO to be of
comparable quality (except that within such limitation, the Fund may
invest in mortgage-related securities rated below B-).\31\
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\31\ With respect to the 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 comparable rated
securities and involve the risk that the Fund's portfolio manager
may not accurately evaluate the security's comparative credit
rating. To the extent that the Fund invests in unrated securities,
the Fund's success in achieving its investment objective may depend
more heavily on the portfolio manager's creditworthiness analysis
than if the 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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Investment Restrictions
If PIMCO believes that economic or market conditions are
unfavorable to investors or that market conditions are not normal,
PIMCO may temporarily invest up to 100% of the Fund's assets in certain
defensive strategies, including holding a substantial portion of the
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. As noted above, the Fund
may invest without limit, for temporary or defensive purposes, in such
instruments, if PIMCO deems it appropriate to do so.
The Fund 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 the Fund's
investment in units or shares of investment companies and other open-
end collective investment vehicles will not exceed 10% of the Fund's
total assets. The Fund may invest its 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.
The Fund may invest up to 20% of its total 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. The Fund may invest
up to 20% 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. The Fund will normally limit its foreign
currency exposure (from non-U.S. dollar-denominated securities or
currencies) to 10% of its total assets.\32\ The Fund may engage in
foreign currency transactions either on a spot (cash) basis at the rate
prevailing in the currency exchange market at the time or through
forward currency contracts (``forwards'').
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\32\ 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.
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The Fund may invest up to 20% of its total assets in securities and
instruments of issuers economically tied to emerging market
countries.\33\
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\33\ 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 which country the security is economically tied to, 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 the Fund, at least 80% of issues of
such securities held by the Fund must have $200 million or more par
amount outstanding at the time of investment.
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The 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 the Fund may hold up to an aggregate amount of 15%
of its net assets in illiquid assets (calculated at the time of
investment), including Rule 144A securities deemed illiquid by the
Adviser, consistent with Commission guidance.\34\ The Fund will monitor
its
[[Page 68335]]
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 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.\35\
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\34\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers willing 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 trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer).
\35\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act).
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The Fund will be diversified within the meaning of the 1940
Act.\36\
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\36\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act (15 U.S.C. 80e).
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The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue
Code.\37\ The Fund will not 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.\38\
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\37\ 26 U.S.C. 851.
\38\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and the Fund's use of derivatives
may be used to enhance leverage. However, the Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities
market index (as defined in Form N-1A).\39\
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\39\ The Fund's broad-based securities market index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
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Net Asset Value and Derivatives Valuation Methodology for Purposes of
Determining Net Asset Value
The net asset value (``NAV'') of the Fund's Shares will be
determined by dividing the total value of the Fund's portfolio
investments and other assets, less any liabilities, by the total number
of Shares outstanding.
The Fund's Shares will be valued as of the close of regular trading
(normally 4:00 p.m. Eastern time (``E.T.'') (the ``NYSE Close'')) on
each day NYSE Arca is open (``Business Day''). Information that becomes
known to the Fund or its agents after the NAV has been calculated on a
particular day will not generally be used to retroactively adjust the
price of a portfolio asset or the NAV determined earlier that day.
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. Domestic and 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. Prices
obtained from independent pricing services use information provided by
market makers or estimates of market values obtained from yield data
relating to investments or securities with similar characteristics.
Short-term debt instruments having a remaining maturity of 60 days or
less will generally be valued at amortized cost.
As discussed in more detail below, 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.
With respect to specific derivatives:
Currency spot and forward rates from major market data
vendors \40\ will generally be determined as of the NYSE Close.
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\40\ Major market data vendors may include, but are not limited
to: Thomson Reuters, JPMorgan Chase PricingDirect Inc., Markit Group
Limited, Bloomberg, Interactive Data Corporation or other major data
vendors.
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Exchange-traded futures will generally be valued at the
settlement price of the relevant exchange.
A total return swap on an index will be valued at the
publicly available index price. The index price, in turn, is determined
by the applicable index calculation agent, which generally values the
securities underlying the index at the last reported sale price.
Equity total return swaps will generally be valued using
the actual underlying equity at local market closing, while bank loan
total return swaps will generally be valued using the evaluated
underlying bank loan price minus the strike price of the loan.
Exchange-traded non-equity options, (for example, options
on bonds, Eurodollar options and U.S. Treasury options), index options,
and options on futures will generally be valued at the official
settlement price determined by the relevant exchange, if available.
OTC and exchange-traded equity options will generally be
valued on a basis of quotes obtained from a quotation reporting system,
established market makers, or pricing services or at the settlement
price of the applicable exchange.
OTC FX options will generally be valued by pricing
vendors.
All other swaps such as interest rate swaps, inflation
swaps, swaptions, credit default swaps, and CDX/CDS will generally be
valued by pricing services.
Exchange-traded equity securities (including common stocks,
exchange-traded investment companies, exchange-traded convertible
securities, REITs and preferred securities, and exchange-traded
structured products) 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.
[[Page 68336]]
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. Money market instruments, trade claims,
OTC REITs, privately placed and unregistered securities, OTC structured
products, OTC real-estate linked derivatives, credit-linked securities,
commodity-linked notes, Brady Bonds, variable and floating rate
securities that are not corporate Fixed Income Instruments; floaters
and inverse floaters that are not corporate Fixed Income Instruments
and other types of debt securities will generally be valued on the
basis of independent pricing services or quotes obtained from brokers
and dealers.
If a foreign security's value has materially changed after the
close of the security's primary exchange or principal market but before
the NYSE Close, the security will be valued at fair value based on
procedures established and approved by the Board. Foreign securities
that do not trade when the NYSE is open will also be valued at fair
value.
Securities and other assets for which market quotes are not readily
available will be valued at fair value as determined in good faith by
the Board or persons acting at their direction. The Board has adopted
methods for valuing securities and other assets in circumstances where
market quotes are not readily available, and has delegated to PIMCO the
responsibility for applying the valuation methods. In the event that
market quotes are not readily available, and the security or asset
cannot be valued pursuant to one of the valuation methods, the value of
the security or asset will be determined in good faith by the Valuation
Committee of the Board of Trustees, generally based upon
recommendations provided by PIMCO.
Market quotes are considered not readily available in circumstances
where there is an absence of current or reliable market-based data
(e.g., trade information, bid/ask information, broker quotes),
including where events occur after the close of the relevant market,
but prior to the NYSE Close, that materially affect the values of the
Fund's securities or assets. In addition, market quotes are considered
not readily available when, due to extraordinary circumstances, the
exchanges or markets on which the securities trade do not open for
trading for the entire day and no other market prices are available.
The Board has delegated to PIMCO the responsibility for monitoring
significant events that may materially affect the values of the Fund's
securities or assets and for determining whether the value of the
applicable securities or assets should be re-evaluated in light of such
significant events.
When the Fund uses fair value pricing to determine its NAV,
securities will not be priced on the basis of quotes from the primary
market in which they are traded, but rather may be priced by another
method that the Board of Trustees or persons acting at their direction
believe reflects fair value. Fair value pricing may require subjective
determinations about the value of a security. While the Trust's policy
is intended to result in a calculation of the Fund's NAV that fairly
reflects security values as of the time of pricing, the Trust cannot
ensure that fair values determined by the Board or persons acting at
its direction would accurately reflect the price that the Fund could
obtain for a security if it were to dispose of that security as of the
time of pricing (for instance, in a forced or distressed sale). The
prices used by the Fund may differ from the value that would be
realized if the securities were sold.
For the Fund's 4:00 p.m. E.T. futures holdings, estimated prices
from Reuters will be used if any cumulative futures margin impact is
greater than $0.005 to the NAV due to futures movement after the fixed
income futures market closes (3:00 p.m. E.T.) and up to the NYSE Close
(generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the
Chicago Mercantile Exchange (``CME'') or the Intercontinental Exchange
(``ICE-US'') will be priced using the applicable exchange closing price
where available.
Investments initially valued in currencies other than the U.S.
dollar will be converted to the U.S. dollar using exchange rates
obtained from pricing services. As a result, the NAV of the Fund's
Shares may be affected by changes in the value of currencies in
relation to the U.S. dollar. The value of securities traded in markets
outside the United States or denominated in currencies other than the
U.S. dollar may be affected significantly on a day that the NYSE is
closed. As a result, to the extent that the Fund holds foreign (non-
U.S.) securities, the NAV of the Fund's Shares may change when an
investor cannot purchase, redeem or exchange shares.
Derivatives Valuation Methodology for purposes of Determining Portfolio
Indicative Value
On each Business Day, before commencement of trading in Fund Shares
on NYSE Arca, the Fund will disclose on its Web site the identities and
quantities of the portfolio instruments and other assets held by the
Fund that will form the basis for the Fund's calculation of NAV at the
end of the Business Day.
In order to provide additional information regarding the intra-day
value of Shares of the Fund, one or more major market data vendors will
disseminate every 15 seconds through the facilities of the Consolidated
Tape Association (``CTA'') or other widely disseminated means an
updated Portfolio Indicative Value (``PIV'') for the Fund as calculated
by an information provider or market data vendor.
A third party market data provider will calculate the PIV for the
Fund. For the purposes of determining the PIV, the third party market
data provider's valuation of derivatives and other assets are expected
to be similar to its valuation of all securities. The third party
market data provider may use market quotes if available or may fair
value securities against proxies (such as swap or yield curves).
With respect to specific derivatives:
Foreign currency derivatives may be valued intraday using
market quotes, or another proxy as determined to be appropriate by the
third party market data provider.
Futures may be valued intraday using the relevant futures
exchange data, or another proxy as determined to be appropriate by the
third party market data provider.
Interest rate swaps may be mapped to a swap curve and
valued intraday based on the swap curve, or another proxy as determined
to be appropriate by the third party market data provider.
CDX/CDS may be valued using intraday data from market
vendors, or based on underlying asset price, or another proxy as
determined to be appropriate by the third party market data provider.
Total return swaps may be valued intraday using the
underlying asset price, or another proxy as determined to be
appropriate by the third party market data provider.
Exchange listed options may be valued intraday using the
relevant exchange data, or another proxy as determined to be
appropriate by the third party market data provider.
OTC options may be valued intraday through option
valuation
[[Page 68337]]
models (e.g., Black-Scholes) or using exchange-traded options as a
proxy, or another proxy as determined to be appropriate by the third
party market data provider.
A third party market data provider's valuation of forwards
will be similar to their valuation of the underlying securities, or
another proxy as determined to be appropriate by the third party market
data provider. The third party market data provider will generally use
market quotes if available. Where market quotes are not available, they
may fair value securities against proxies (such as swap or yield
curves). The Fund's disclosure of forward positions will include
information that market participants can use to value these positions
intraday.
Disclosed Portfolio
The Fund's disclosure of derivative positions in the applicable
Disclosed Portfolio will include information that market participants
can use to value these positions intraday. On a daily basis, the Fund
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 the Fund's portfolio.
Impact on Arbitrage Mechanism
For the Fund, the Adviser believes there will be minimal, if any,
impact to the arbitrage mechanism as a result of the use of
derivatives. Market makers and participants should be able to value
derivatives as long as the positions are disclosed with relevant
information. The Adviser believes that the price at which Shares of the
Fund trade will continue to be disciplined by arbitrage opportunities
created by the ability to purchase or redeem creation Shares of the
Fund at their NAV, which should ensure that Shares of the Fund will not
trade at a material discount or premium in relation to its NAV.
The Adviser does not believe there will be any significant impacts
to the settlement or operational aspects of the Fund's arbitrage
mechanism due to the use of derivatives. Because derivatives generally
are not eligible for in-kind transfer, they will be substituted with a
``cash in lieu'' amount (as described below) when the Fund processes
purchases or redemptions of block-size ``Creation Units'' (as described
below) in-kind.
Creations and Redemptions of Shares
According to the Registration Statement, Shares of the Fund that
trade in the secondary market will be ``created'' at NAV by Authorized
Participants only in block-size Creation Units of 50,000 Shares or
multiples thereof.\41\ The size of a Creation Unit is subject to
change. The Fund will offer and issue Shares at their NAV per Share
generally in exchange for a basket of debt securities held by that Fund
(the ``Deposit Securities'') together with a deposit of a specified
cash payment (the ``Cash Component''), or in lieu of Deposit
Securities, the Fund may permit a ``cash-in-lieu'' amount for any
reason at the Fund's sole discretion. Alternatively, the Fund may issue
Creation Units in exchange for a specified all-cash payment (``Cash
Deposit'') (together with Deposit Securities and Cash Component, the
``Fund Deposit''). Similarly, Shares can be redeemed only in Creation
Units, generally in-kind for a portfolio of debt securities held by the
Fund and/or for a specified amount of cash (collectively, ``Redemption
Instruments'').
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\41\ The NAV of the Fund's Shares generally will be calculated
once daily Monday through Friday as of the close of trading on the
New York Stock Exchange (``NYSE''), generally 4:00 p.m. E.T. (the
``NAV Calculation Time'') on any Business Day. NAV per Share will be
calculated by dividing the Fund's net assets by the number of the
Fund's Shares outstanding. For more information regarding the
valuation of Fund investments in calculating the Fund's NAV, see the
Registration Statement.
The term ``Authorized Participant'' refers to a ``Participating
Party'' (a broker-dealer or other participant in the clearing
process through the Continuous Net Settlement System of the NSCC; or
a Depository Trust Company (``DTC'') Participant who has executed a
Participant Agreement (an agreement with the Distributor and
Transfer Agent with respect to creations and redemptions of Creation
Units) [sic].
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On any given Business Day, purchases and redemptions of Creation
Units will be made in whole or in part on a cash basis if an Authorized
Participant deposits or receives (as applicable) cash in lieu of some
or all of the Fund Deposit or Redemption Instruments, respectively,
solely because such instruments are, in the case of the Fund Deposit,
not available in sufficient quantity.\42\ In determining whether the
Fund will be selling or redeeming Creation Units on a cash or in-kind
basis, the key consideration will be the benefit which would accrue to
Fund investors. In many cases, investors may benefit by the use of all
cash purchase orders because the Adviser would execute trades rather
than market makers, and the Adviser may be able to obtain better
execution in bond transactions due to its size, experience and
potentially stronger relationships in the fixed income markets.
---------------------------------------------------------------------------
\42\ Such purchase or redemption transactions are ``custom
orders.'' On any given Business Day, if the Fund accepts a custom
order, the Adviser represents that the Fund will accept custom
orders from all other Authorized Participants on the same basis.
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Except when aggregated in Creation Units, Shares will not be
redeemable by the Fund. The prices at which creations and redemptions
occur will be based on the next calculation of NAV after an order is
received. Requirements as to the timing and form of orders will be
described in the Authorized Participant agreement. PIMCO will make
available on each Business Day via the National Securities Clearing
Corporation (``NSCC''), prior to the opening of business (subject to
amendments) on the Exchange (currently 9:30 a.m., E.T.), the identity
and the required amount of each Deposit Security and the amount of the
Cash Component (or Cash Deposit) to be included in the current ``Fund
Deposit'' \43\ (based on information at the end of the previous
Business Day). Creations and redemptions must be made by an Authorized
Participant.
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\43\ The Deposit Securities and Cash Component or,
alternatively, the Cash Deposit, will constitute the Fund Deposit,
which will represent the investment amount for a Creation Unit of
the Fund.
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Additional information regarding the Trust, the Fund and the
Shares, including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings, disclosure policies,
distributions and taxes is included in the Registration Statement. All
terms relating to the Fund that are referred to but not defined in this
proposed rule change are defined in the Registration Statement.
Availability of Information
The Trust's Web site (www.pimcoetfs.com), which will be publicly
available prior to the public offering of Shares of the Fund, will
include a form of the prospectus for the Fund that may be downloaded.
The Trust's Web site will include additional quantitative information
updated on a daily basis, including, for the Fund, (1) daily trading
volume, the prior Business Day's reported closing price, NAV and mid-
point of the bid/ask spread at the time of calculation of such NAV (the
``Bid/Ask Price''),\44\ and a calculation of
[[Page 68338]]
the premium and discount of the Bid/Ask Price against the NAV, and (2)
data in chart format displaying the frequency distribution of discounts
and premiums of the daily Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters. On
each Business Day, before commencement of trading in Shares in the Core
Trading Session (9:30 a.m. E.T. to 4:00 p.m. E.T.) on the Exchange, the
Fund 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 the Fund's calculation of NAV at the end of the Business Day.\45\
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\44\ The Bid/Ask Price of Shares of the Fund will be determined
using the mid-point of the highest bid and the lowest offer on the
Exchange as of the time of calculation of the Fund's NAV. The
records relating to Bid/Ask Prices will be retained by the Fund and
its service providers.
\45\ Under accounting procedures followed by the Fund, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (``T+1''). Accordingly, the Fund
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
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The Fund's disclosure of derivative positions in the applicable
Disclosed Portfolio will include information that market participants
can use to value these positions intraday. On a daily basis, the Fund
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 the Fund's portfolio. The
Web site information will be publicly available at no charge.
In addition, a basket composition file, which includes the security
names and share quantities, if 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 Exchange via the NSCC. The basket represents one Creation Unit of
the Fund. The NAV of Shares of the Fund will normally be determined as
of the close of the regular trading session on the Exchange (ordinarily
4:00 p.m. E.T.) on each Business Day. Authorized Participants may refer
to the basket composition file for information regarding Fixed Income
Instruments, and any other instrument that may comprise the Fund's
basket on a given day.
Investors can also obtain the Trust's SAI, the Fund's Shareholder
Reports, and the Fund's Forms N-CSR and Forms N-SAR, filed twice a
year. The Fund's SAI and Shareholder Reports will be available free
upon request from the Trust, and those documents and the Form N-CSR,
Form N-PX and Form N-SAR may be viewed on-screen or downloaded from the
Commission's Web site at www.sec.gov. 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 (including ETNs), exchange-traded REITs, 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) and
futures will be available from the exchange on which such instruments
are traded. Intra-day and closing price information regarding Fixed
Income Instruments and other forms of debt securities also will be
available from major market data vendors. Price information relating to
forwards, spot currency, OTC options and swaps will be available from
major market data vendors. Price information regarding, money market
instruments, OTC REITs, private activity bonds, trade claims, privately
placed and unregistered securities, OTC real estate-linked derivatives,
OTC structured products, credit-linked securities, commodity-linked
notes, Brady Bonds, variable and floating rate securities that are not
corporate Fixed Income Instruments and floaters and inverse floaters
that are not corporate Fixed Income Instruments 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.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the CTA high-speed line. Exchange-traded
options quotation and last sale information for options cleared via the
Options Clearing Corporation (``OCC'') is available via the Options
Price Reporting Authority (``OPRA''). Price information relating to
equity securities traded OTC will be available from major market data
vendors. In addition, the 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.\46\ The dissemination of the PIV, together with the Disclosed
Portfolio, may allow investors to determine an approximate value of the
underlying portfolio of the Fund on a daily basis and to provide an
estimate of that value throughout the trading day.
---------------------------------------------------------------------------
\46\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available PIVs
taken from CTA or other data feeds.
---------------------------------------------------------------------------
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\47\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Equities
Rule 7.12 have been reached. Trading also may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of the Fund;
or (2) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present. Trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which Shares of the Fund may be
halted.
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\47\ See NYSE Arca Equities Rule 7.12.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with
NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on
[[Page 68339]]
the NYSE Arca Marketplace is $0.01, with the exception of securities
that are priced less than $1.00 for which the MPV for order entry is
$0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca
Equities Rule 8.600(d)(2)(B)(ii), the 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 Fund will be
in compliance with Rule 10A-3 \48\ under the Act, as provided by NYSE
Arca Equities Rule 5.3. A minimum of 100,000 Shares for the Fund will
be outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares of
the 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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\48\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\49\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
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\49\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange-traded options, exchange-
traded equities (including common stocks, exchange-traded investment
companies, exchange- traded convertibles and preferred securities,
exchange-traded REITs, and exchange-traded structured products,
including ETNs), futures and options on futures with other markets or
other entities that are members of the ISG, and FINRA may obtain
trading information regarding trading in the Shares, exchange-traded
options, exchange-traded equities, futures and options on futures from
such markets or entities. In addition, the Exchange may obtain
information regarding trading in the Shares, exchange-traded options,
exchange-traded equities, futures and options on futures from markets
or other entities that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement.\50\ FINRA,
on behalf of the Exchange, is able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE'').
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.
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\50\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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Not more than 10% of the net assets of the Fund in the aggregate
invested in equity securities (other than non-exchange-traded
investment company securities) shall consist of equity securities,
including stocks into which a convertible security is converted, 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. Furthermore, not more than 10% of the net assets of the 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.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin will discuss the
following: (1) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (4) how information regarding the PIV and the Disclosed
Portfolio is disseminated; (5) the requirement that ETP Holders deliver
a prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (6) trading
information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \51\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\51\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in 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. FINRA,
on behalf of the Exchange, will communicate as needed regarding trading
in the Shares, exchange-traded options, exchange-traded equities
(including common stocks, exchange-
[[Page 68340]]
traded investment companies, exchange-traded convertibles and preferred
securities, exchange-traded REITs, and exchange-traded structured
products, including ETNs), futures and options on futures with other
markets or other entities that are members of the ISG, and FINRA may
obtain trading information regarding trading in the Shares, exchange-
traded options, exchange-traded equities, futures and options on
futures from such markets or entities. In addition, the Exchange may
obtain information regarding trading in the Shares, exchange-traded
options, exchange-traded equities, futures and options on futures from
markets or other entities that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
FINRA, on behalf of the Exchange, is able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's TRACE. 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. 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 Fund, at least 80% of
issues of such securities held by the Fund must have $200 million or
more par amount outstanding at the time of investment. Furthermore, not
more than 10% of the net assets of the Fund in the aggregate invested
in equity securities (other than non-exchange-traded investment company
securities) shall consist of equity securities, including stocks into
which a convertible security is converted, 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. Furthermore, not
more than 10% of the net assets of the 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.
The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and the Fund's use of derivatives
may be used to enhance leverage. However, the Fund's investments will
not be used to seek performance that is the multiple or inverse
multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities
market index (as defined in Form N-1A). The Fund's investments 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. PIMCO's Counterparty Risk Committee will evaluate the
creditworthiness of swaps counterparties on an ongoing basis.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the PIV will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Exchange's Core Trading Session. On each Business
Day, before commencement of trading in Shares in the Core Trading
Session on the Exchange, the Fund will disclose on the Trust's Web site
the Disclosed Portfolio that will form the basis for the Fund's
calculation of NAV at the end of the Business Day. Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services, and quotation
and last sale information will be available via the CTA high-speed
line. Exchange-traded options quotation and last sale information for
options cleared via the OCC is available OPRA. Price information for
the debt securities and other financial instruments held by the Fund,
including the intra-day closing settlement price for the Fixed Income
Instruments, including Municipal Bonds, and derivatives thereon, and
other financial instruments held by the Fund, will be available through
major market data vendors. The Fund's investments, including
derivatives, will be consistent with the Fund's investment objective.
The Trust's Web site will include a form of the prospectus for the Fund
and additional data relating to NAV and other applicable quantitative
information. Moreover, prior to the commencement of trading, the
Exchange will inform its ETP Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Trading in Shares of the Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule 7.12 have been reached or because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable, and trading in the Shares will
be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of the Fund may be halted. In
addition, as noted above, investors will have ready access to
information regarding the Fund's holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. The Adviser is not a broker-dealer but
is affiliated with a broker-dealer and has implemented a ``fire wall''
with respect to such broker-dealer regarding access to information
concerning the composition and/or changes to the Fund's portfolio. In
addition, the 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded product that, under
normal circumstances, will invest principally in fixed income
securities and that will enhance competition with respect to such
products among market
[[Page 68341]]
participants, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2014-85 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-85. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2014-85 and should
be submitted on or before December 5, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26944 Filed 11-13-14; 8:45 am]
BILLING CODE 8011-01-P