[Federal Register Volume 79, Number 237 (Wednesday, December 10, 2014)]
[Notices]
[Pages 73377-73382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28879]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73741; File No. SR-NYSEArca-2014-30]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Shares of Hull Tactical US ETF Under NYSE Arca Equities
Rule 8.600
December 4, 2014.
I. Introduction
On March 24, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of Hull Tactical US ETF (``Fund'')
under NYSE Arca Equities Rule 8.600. The proposed rule change was
published for comment in the Federal Register on April 11, 2014.\3\ On
May 21, 2014, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to either approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to disapprove the proposed
rule change.\5\ On July 9, 2014, the Commission instituted proceedings
to determine whether to approve or disapprove the proposed rule
change.\6\ The Commission received one comment letter.\7\ On October 8,
2014, the Commission designated a longer period of time for Commission
action on the proposed rule change.\8\ On October 23, 2014, the
Exchange filed Amendment No. 1 to the proposal.\9\ This order grants
approval of the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71894 (Apr. 7,
2014), 79 FR 20273 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 72214 (May 21, 2014), 79
FR 30672 (May 28, 2014). The Commission determined that it was
appropriate to designate a longer period within which to take action
on the proposed rule change so that it would have sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated July 10, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\6\ Securities Exchange Act Release No. 72571 (July 9, 2014), 79
FR 41330 (July 15, 2014).
\7\ See Letter from Christopher S. Jones, Associate Professor,
University of Southern California to Elizabeth M. Murphy, Secretary,
Commission (Sept. 16, 2014) (``Jones Letter'').
\8\ See Securities Exchange Act Release No. 73320, 79 FR 61911
(Oct. 15, 2014) (designating December 5, 2014 as the date by which
the Commission must either approve or disapprove the proposed rule
change).
\9\ In Amendment No. 1, the Exchange clarified that the Sub-
Adviser will utilize more than one proprietary, analytical
investment model to make investment decisions for the Fund, that the
Sub-Adviser's determination whether to take certain long or short
positions in S&P 500-related ETFs and S&P 500-related futures will
depend on the investment signals delivered by the models and on the
judgment of the Sub-Advisor, and that the Sub-Adviser may adjust the
Fund's long and short positions when necessary to take into account
new market conditions as well as data from the models. Because
Amendment No. 1 provides clarification to the proposed rule change
and does not materially affect the substance of the proposed rule
change or raise any unique or novel regulatory issues, Amendment No.
1 does not require notice and comment.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to 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
the Exchange Traded Concepts Trust (``Trust''), a Delaware statutory
trust. The Trust is registered with the Commission as an investment
company.\10\ Exchange Traded Concepts, LLC will be the investment
adviser (``Adviser'') to the Fund. HTAA, LLC will be the sub-adviser to
the Fund (``Sub-Adviser'').\11\ SEI Investments Co. will serve as the
administrator of the Fund (``Administrator''). JP Morgan Chase Bank
N.A. will serve as the custodian, transfer agent and dividend
disbursing agent of the Fund. SEI Investments Distribution Co. will
serve as the distributor for the Trust.
---------------------------------------------------------------------------
\10\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). The Exchange states that on July 26, 2013, the
Trust filed with the Commission a post-effective amendment to its
registration statement on Form N-1A relating to the Fund (File Nos.
333-156529 and 811-22263) (``Registration Statement''). In addition,
the Exchange states that the Commission has issued an order granting
certain exemptive relief to the Trust under the 1940 Act. See
Investment Company Act Release No.30445 (Apr. 2, 2013) (File No.
812-13969) (``Exemptive Order'').
\11\ The Exchange states that neither the Adviser nor the Sub-
Adviser is, or is affiliated with, a broker-dealer. The Exchange
states that, in the event (a) the Adviser or Sub-Adviser becomes, or
becomes newly affiliated with, a broker-dealer, or (b) any new
manager, adviser or sub-adviser is, or becomes affiliated with, a
broker-dealer, the adviser or sub-adviser will implement a fire wall
with respect to its relevant personnel or broker-dealer affiliate,
as applicable, regarding access to information concerning the
composition of or changes to the portfolio, and that adviser or sub-
adviser will be subject to procedures designed to prevent the use
and dissemination of material non-public information regarding such
portfolio.
---------------------------------------------------------------------------
The Exchange has made the following representations and statements
in describing the Fund and its investment
[[Page 73378]]
strategies, including portfolio holdings and investment
restrictions.\12\
---------------------------------------------------------------------------
\12\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, Fund 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 10, respectively.
---------------------------------------------------------------------------
General
The investment objective of the Fund will be to seek long-term
capital appreciation. The Fund will be actively managed.
Under normal market conditions,\13\ the Fund will seek to achieve
its investment objective by taking long and short positions \14\ in one
or more exchange traded funds (``ETFs'') \15\ that seek to track the
performance of the S&P 500 Index (each, an ``S&P 500-related ETF'').
The ETFs the Fund invests in all will be listed and traded in the U.S.
on registered exchanges. Under normal market conditions, substantially
all of the Fund's assets will be invested in one or more S&P 500-
related ETFs; ETFs that provide leveraged or inverse exposure to the
S&P 500 Index; and, to seek the desired exposure to the S&P 500 Index,
futures contracts. The Fund may also, as described below, invest in
cash instruments.
---------------------------------------------------------------------------
\13\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of adverse market, economic,
political or other conditions, including extreme volatility or
trading halts in the equity markets or the financial markets
generally; operational issues causing dissemination of inaccurate
market information; and 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.
\14\ Short sales are transactions in which the Fund sells a
security it does not own. To complete the transaction, the Fund must
borrow or otherwise obtain the security to make delivery to the
buyer. The Fund is then obligated to replace the security borrowed
by purchasing the security at the market price at the time of
replacement. The Fund may use repurchase agreements to satisfy
delivery obligations in short sales transactions. The Fund may use
up to 100% of its net assets to engage in short sales transactions
and collateralize its open short positions.
\15\ ETFs are securities registered under the 1940 Act such as
those listed and traded on the Exchange under NYSE Arca Equities
Rules 5.2(j)(3) (Investment Company Units), 8.100 (Portfolio
Depositary Receipts) and 8.600 (Managed Fund Shares).
---------------------------------------------------------------------------
The Sub-Adviser will utilize a proprietary, analytical investment
model that examines current and historical market data to attempt to
predict the performance of the S&P 500 Index. The model will deliver
investment signals that the Sub-Adviser will use to make investment
decisions for the Fund. Depending on the investment signal delivered by
the model, the Sub-Adviser will take certain long or short positions in
one or more S&P 500-related ETFs: (1) If the model indicates bull-
market conditions, the Sub-Adviser will take long positions; or (2) if
the model indicates bear-market conditions, the Sub-Adviser will take
short positions. When the Fund takes long positions, it may maintain
long exposure of up to 200% of net assets; exposure to short positions
will be limited to no more than 100% of net assets. The Sub-Adviser
will adjust the Fund's long and short positions when necessary to take
into account new data from the model that reflects changing market
conditions. Positions may be adjusted as the model predictions
fluctuate.
The Fund will enter into futures contracts to seek the desired
exposure to the S&P 500 Index.\16\ The Fund will limit its investment
in futures contracts such that either (1) the aggregate net notional
value of its futures investments will not exceed the value of the
Fund's net assets, after taking into account unrealized profits and
unrealized losses on the futures positions it has entered into; or (2)
the aggregate initial margin and premiums required to establish
positions in its futures investments will not exceed 5% of the Fund's
net assets, after taking into account unrealized profits and unrealized
losses on any such positions. The Fund will only enter into futures
contracts traded on a national futures exchange regulated by the CFTC.
The Fund will trade futures when the Sub-Adviser determines that doing
so may provide an efficient means of seeking exposure to the S&P 500
Index that is complimentary to its investment in shares of one or more
S&P 500-related ETFs.
---------------------------------------------------------------------------
\16\ To the extent the Fund enters into futures contracts or
invests in underlying ETFs that invest in futures, options on
futures or other instruments subject to regulation by the U.S.
Commodity Futures Trading Commission (``CFTC''), it will do so in
reliance upon and in accordance with CFTC Rule 4.5. The Exchange
states that the Trust has filed a notice of eligibility for
exclusion from the definition of the term ``commodity pool
operator'' in accordance with CFTC Rule 4.5. Therefore, neither the
Trust nor any of its series is deemed to be a ``commodity pool'' or
``commodity pool operator'' under the Commodity Exchange Act
(``CEA''), and they are not subject to registration or regulation as
such under the CEA. In addition, neither the Adviser nor the Sub-
Adviser is deemed to be a ``commodity pool operator'' or ``commodity
trading adviser'' with respect to the advisory services it provides
to the Fund.
---------------------------------------------------------------------------
In addition to investments in the S&P 500-related ETFs and futures
contracts, the Fund may invest up to 10% of its total assets in
leveraged ETFs or inverse ETFs that seek to deliver multiples, or the
inverse, of the performance of the S&P 500 Index, respectively
(collectively with S&P 500-related ETFs, ``Underlying ETFs''). Such
investments will be made in accordance with the 1940 Act and consistent
with the Fund's investment objective and policies, and they will not be
used to seek performance that is the multiple or inverse multiple
(e.g., 2X or 3X) of any securities market index. The inverse and
leveraged ETFs held by the Fund may utilize leverage (i.e., borrowing)
to acquire their underlying portfolio investments.\17\
---------------------------------------------------------------------------
\17\ The use of leverage may exaggerate changes in an ETF's
share price and the return on its investments. Inverse and leveraged
ETFs are designed to achieve their objectives for a single day only.
---------------------------------------------------------------------------
The Fund may invest in Underlying ETFs that are primarily index-
based ETFs that hold substantially all of their assets in securities
representing a specific index. The Fund also may invest in Underlying
ETFs that are actively managed. The Underlying ETFs in which the Fund
may invest may invest in equity securities. Equity securities consist
of common stocks, preferred stocks, warrants to acquire common stock,
securities convertible into common stock,\18\ investments in master
limited partnerships (``MLPs'') \19\ and rights.\20\
---------------------------------------------------------------------------
\18\ Convertible securities are bonds, debentures, notes,
preferred stocks, or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the
underlying common stock (or cash or securities of equivalent value)
at a stated exchange ratio.
\19\ MLPs are limited partnerships in which the ownership units
are publicly traded. MLP units are registered with the Commission
and are freely traded on a securities exchange or in the over-the-
counter market.
\20\ A right is a privilege granted to existing shareholders of
a corporation to subscribe to shares of a new issue of common stock
before it is issued. Rights normally have a short life of usually
two to four weeks.
---------------------------------------------------------------------------
The Underlying ETFs in which the Fund may invest may engage in
futures and options transactions. The Fund will only invest in
Underlying ETFs that engage in futures contracts if such futures
contracts are traded on a national futures exchange regulated by the
CFTC. Underlying ETFs in which the Fund may invest may use futures
contracts and related options for bona fide hedging; attempting to
offset changes in the value of securities held or expected to be
acquired or be disposed of; attempting to gain exposure to a particular
market, index, or instrument; or other risk management purposes. When
an Underlying ETF purchases or sells a futures contract, or sells an
option thereon, it is required to cover its position in order to limit
leveraging and related risks.
[[Page 73379]]
The Underlying ETFs in which the Fund may invest may buy and sell
index futures contracts with respect to any index that is traded on a
recognized exchange or board of trade.
The Underlying ETFs in which the Fund may invest may purchase and
write (sell) put and call options on indices and enter into related
closing transactions.\21\ All such options written on indices or
securities must be covered by the Underlying ETF.
---------------------------------------------------------------------------
\21\ A put option on a security gives the purchaser of the
option the right to sell, and the writer of the option the
obligation to buy, the underlying security. A call option on a
security gives the purchaser of the option the right to buy, and the
writer of the option the obligation to sell, the underlying
security. Put and call options on indices are similar to options on
securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying index is greater than (or less than,
in the case of puts) the exercise price of the option.
---------------------------------------------------------------------------
An Underlying ETF in which the Fund may invest may trade put and
call options on securities, securities indices, and currencies, as the
Underlying ETF's investment adviser determines is appropriate in
seeking the ETF's investment objective, and except as restricted by the
Underlying ETF's investment limitations. An Underlying ETF may purchase
put and call options on securities to protect against a decline in the
market value of the securities in its portfolio or to anticipate an
increase in the market value of securities that the Fund may seek to
purchase in the future. An Underlying ETF may write covered call
options on securities as a means of increasing the yield on its assets
and as a means of providing limited protection against decreases in its
market value. An Underlying ETF may purchase and write options on an
exchange or over-the-counter.
The Underlying ETFs in which the Fund may invest may enter into
swaps, including, but not limited to, total return swaps, index swaps,
and interest rate swaps. An Underlying ETF may utilize swaps in an
attempt to gain exposure to the securities in a market without actually
purchasing those securities, or to hedge a position.\22\ The Underlying
ETFs in which the Fund may invest may enter into swaps to invest in a
market without owning or taking physical custody of the underlying
securities in circumstances in which direct investment is restricted
for legal reasons or is otherwise impracticable.
---------------------------------------------------------------------------
\22\ Forms of swaps include interest rate caps, under which, in
return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or
``cap''; interest rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or ``floor''; and
interest rate collars, under which a party sells a cap and purchases
a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
---------------------------------------------------------------------------
During periods when the Fund's assets (or portion thereof) are not
fully invested in one or more S&P 500-related ETFs or otherwise exposed
to the S&P 500 Index, all or a portion of the Fund may be invested in
cash instruments (``Cash Instruments''), which include U.S. Treasury
obligations; cash and cash equivalents including commercial paper,
certificates of deposit and bankers' acceptances; repurchase
agreements; \23\ shares of money market mutual funds; and high-quality,
short-term debt instruments including, in addition to U.S. Treasury
obligations, other U.S. government securities.\24\
---------------------------------------------------------------------------
\23\ The Fund may enter into repurchase agreements with
financial institutions, which may be deemed to be loans. The Fund
will effect repurchase transactions only with large, well-
capitalized, and well-established financial institutions whose
condition will be continually monitored by the Sub-Advisor. In
addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement.
\24\ Securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities include U.S. Treasury securities,
which are backed by the full faith and credit of the U.S. Treasury
and which differ only in their interest rates, maturities, and times
of issuance. Certain U.S. government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. government,
including, but not limited to, obligations of U.S. government
agencies or instrumentalities such as the Federal National Mortgage
Association (``Fannie Mae''), the Federal Home Loan Mortgage
Corporation (``Freddie Mac''), the Government National Mortgage
Association (``Ginnie Mae''), the Federal Home Loan Banks, and other
agencies or instrumentalities. Some obligations issued or guaranteed
by U.S. government agencies and instrumentalities, including, for
example, Ginnie Mae pass-through certificates, are supported by the
full faith and credit of the U.S. Treasury. Other obligations issued
by or guaranteed by federal agencies or instrumentalities, such as
those securities issued by Fannie Mae, are supported by the
discretionary authority of the U.S. government to purchase certain
obligations of the federal agency or instrumentality, while other
obligations issued by or guaranteed by federal agencies or
instrumentalities, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the U.S.
Treasury. The Fund may invest in U.S. Treasury zero-coupon bonds.
---------------------------------------------------------------------------
Other Investments
In addition to the investments described above, the Fund may invest
in other investments, as described below.
In the absence of normal market conditions,\25\ the Fund may invest
100% of its assets, without limitation, in Cash Instruments. The Fund
may be invested in this manner for extended periods, depending on the
Sub-Adviser's assessment of market conditions.
---------------------------------------------------------------------------
\25\ See note 13, supra.
---------------------------------------------------------------------------
In addition to the Underlying ETFs discussed above, which are
primary investments of the Fund, the Fund will invest in money market
mutual funds, to the extent that such an investment would be consistent
with the requirements of Section 12(d)(1) of the 1940 Act, or any rule,
regulation, or order of the Commission or interpretation thereof.
Restrictions on Investment
The Fund may not purchase or sell commodities or commodity
contracts unless acquired as a result of ownership of securities or
other instruments issued by persons that purchase or sell commodities
or commodities contracts, but this shall not prevent the Fund from
entering into futures contracts.
The Fund will not directly enter into swaps or engage in options
transactions.
The Fund may not, with respect to 75% of its total assets, purchase
securities of any issuer (except securities issued or guaranteed by the
U.S. government, its agencies, or its instrumentalities or shares of
investment companies) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer.
The Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer.
The Fund may not invest 25% or more of its total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This limitation
does not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or shares of
investment companies.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including securities deemed illiquid by the Adviser or Sub-Adviser
consistent with Commission guidance \26\ and repurchase agreements that
do not mature within seven days. The Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of
[[Page 73380]]
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 securities. Illiquid securities 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.
---------------------------------------------------------------------------
\26\ In reaching liquidity decisions, the Adviser and Sub-
Adviser may consider the following factors: The frequency of trades
and quotes for the security; the number of dealers wishing to
purchase or sell the security and the number of other potential
purchasers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace in
which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
---------------------------------------------------------------------------
The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
III. Summary of Comment Letter Received
The Commission received one comment letter supporting the
Exchange's proposal.\27\ The commenter states that tactical asset
allocation strategies are beneficial to investors, may have positive
effects on market stability, and should be encouraged both by
investment advisors and regulators.\28\ The commenter states his belief
that there is nothing inherently risky about tactical asset allocation,
especially for strategies limited to holding cash and a market
index.\29\ Furthermore, the commenter states that the managers of the
Fund have allowed him to see the equity exposures that have arisen from
their model since 2001, and based on this the commenter believes the
Fund should be ``noticeably less risky than a standard equity index
fund.'' \30\
---------------------------------------------------------------------------
\27\ See Jones Letter, supra note 7.
\28\ Id. at 2. The commenter states that maintaining constant
exposures to different asset classes is suboptimal, that investors
can reap greater long-term rewards without increasing risk by
increasing exposure to an asset class when its future returns are
predicted to be above average and by trimming or shorting an asset
class when its future returns are predicted to be poor, and that
there is strong evidence from the finance literature that these
tactical asset allocation strategies have significant value to
investors who use them. Id. at 1.
\29\ Id. at 2.
\30\ Id.
---------------------------------------------------------------------------
IV. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \31\
and the rules and regulations thereunder applicable to a national
securities exchange.\32\ In particular, the Commission finds that the
proposal, as modified by Amendment No. 1., is consistent with Section
6(b)(5) of the Act,\33\ which requires, among other things, that the
Exchange's rules be designed to promote just and equitable principles
of trade, to remove impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission also 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 the finding of Congress 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.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f.
\32\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\33\ 15 U.S.C. 78f(b)(5).
\34\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
The Commission notes that the Exchange has represented that the
Shares are deemed to be equity securities, thus rendering trading in
the Shares subject to the Exchange's existing rules governing the
trading of equity securities. The Commission also notes that, in
support of this proposal, the Exchange has made the following
representations:
(1) The Shares will be subject to Rule 8.600, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and underlying equity securities
(including, without limitation, ETFs) and futures contracts with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG'') and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares and
underlying equity securities (including, without limitation, ETFs) and
futures contracts from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares and
underlying equity securities (including, without limitation, ETFs) and
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. In addition, 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'').
(4) The ETFs the Fund invests in all will be listed and traded in
the U.S. on registered exchanges. The Fund will only enter into futures
contracts traded on a national futures exchange regulated by the CFTC.
(5) Prior to the commencement of trading, the Exchange will inform
its Equity Trading Permit Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The procedures for purchases and redemptions of Shares in creation unit
aggregations (and that Shares are not individually redeemable); (b)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (d) how information regarding the
Portfolio Indicative Value is disseminated; (e) the requirement that
Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(6) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act,\35\ as provided by NYSE Arca
Equities Rule 5.3.
---------------------------------------------------------------------------
\35\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(7) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including securities deemed illiquid by the Adviser or Sub-Adviser,
consistent with Commission guidance.
(8) Under normal market conditions, substantially all of the Fund's
assets will be invested in one or more S&P 500-related ETFs; ETFs that
provide leveraged or inverse exposure to the S&P 500 Index; and, to
seek the desired exposure to the S&P 500 Index, futures contracts. The
Fund may also invest in Cash Instruments.
(9) The Fund will limit its investment in futures contracts such
that either (1) the aggregate net notional value of its futures
investments will not exceed the value of the Fund's net assets, after
taking into account unrealized profits and unrealized losses on the
futures positions it has entered into; or (2) the aggregate initial
margin and premiums
[[Page 73381]]
required to establish positions in its futures investments will not
exceed 5% of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such positions.
(10) The Fund may invest up to 10% of its total assets in leveraged
ETFs or inverse ETFs that seek to deliver multiples, or the inverse, of
the performance of the S&P 500 Index, respectively. Such investments
will be made in accordance with the 1940 Act and consistent with the
Fund's investment objective and policies, and they will not be used to
seek performance that is the multiple or inverse multiple (e.g., 2X or
3X) of any securities market index.
(11) The Fund will not directly enter into swaps or engage in
options transactions.
(12) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association (``CTA'') high-speed
line. In addition, the Portfolio Indicative Value \36\ as defined in
NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated at
least every 15 seconds during the Core Trading Session by one or more
major market data vendors.\37\ On each business day, before
commencement of trading in Shares in the Core Trading Session on the
Exchange, the Fund will disclose on its Web site the identities and
quantities of the portfolio of securities and other assets (``Disclosed
Portfolio'') held by the Fund that will form the basis for the Fund's
calculation of NAV at the end of the business day.\38\ The
Administrator, through the National Securities Clearing Corporation
(``NSCC''), will make available on each business day, immediately prior
to the opening of business on the Exchange (currently 9:30 a.m., E.T.),
the list of the names and the required number of shares of each
security, and amount of cash, to be delivered in exchange for a
creation unit of the Fund. The NAV of the Fund will be calculated once
each business day as of the regularly scheduled close of normal trading
on the Exchange (normally, 4:00 p.m., Eastern Time).\39\ 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. The intra-day, closing, and settlement prices of
the Fund investments will be readily available from the exchanges
trading such securities, automated quotation systems, published or
other public sources, or on-line information services such as Bloomberg
or Reuters. Quotation and last sale information for underlying U.S.
exchange-traded equities, including the Underlying ETFs, will be
available via the CTA high-speed line and from the national securities
exchange on which they are listed. Quotations and last sale information
for the Fund's futures investments will be available from the futures
exchange on which the futures are listed. Quotation information from
brokers and dealers or pricing services will be available for Cash
Instruments and non-exchange traded securities of money market mutual
funds held by the Fund. Pricing information regarding each asset class
in which the Fund will invest is generally available through nationally
recognized data service providers through subscription arrangements.
The Fund's Web site will include a form of the prospectus for the Fund
and additional data relating to NAV and other applicable quantitative
information.
---------------------------------------------------------------------------
\36\ According to the Exchange, the Portfolio Indicative Value
will be calculated using the estimates of the value of the Fund's
NAV per Share using market data converted into U.S. dollars at the
current currency rates. The Portfolio Indicative Value will be based
upon the current value for the components of the Disclosed
Portfolio. The Portfolio Indicative Value will be based on quotes
and closing prices from the securities' local market and may not
reflect events that occur subsequent to the local market's close.
Premiums and discounts between the Portfolio Indicative Value and
the market price may occur. The Portfolio Indicative Value should
not be viewed as a ``real-time'' update of the NAV per Share of the
Fund, which is calculated once per day. All asset classes in which
the Fund will invest will be included in the calculation of the
Portfolio Indicative Value.
\37\ According to the Exchange, several major market data
vendors display or make widely available Portfolio Indicative Values
published on CTA or other data feeds.
\38\ The Disclosed Portfolio will include each portfolio
security and other financial instruments of the Fund with the
following information on the Fund's Web site: Ticker symbol (if
applicable), name of security and financial instrument, number of
shares (if applicable) and dollar value of securities and financial
instruments held in the Fund, and percentage weighting of the
security and financial instrument in the Fund. The Web site
information will be publicly available at no charge.
\39\ The Fund will calculate NAV by: (i) Taking the current
market value of its total assets; (ii) subtracting any liabilities;
and (iii) dividing that amount by the total number of Shares owned
by shareholders.
---------------------------------------------------------------------------
The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange will obtain a representation from the issuer of
the Shares that the NAV 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. Trading in Shares of a 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,\40\ and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances
under which trading in the Shares of a Fund may be halted. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. Consistent with NYSE
Arca Equities Rule 8.600(d)(2)(B)(ii), the Reporting Authority must
implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the Fund's portfolio. In addition,
the Exchange states that neither the Adviser nor the Sub-Adviser is or
is affiliated with a broker-dealer.\41\
[[Page 73382]]
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.\42\ The Exchange further represents
that these procedures are adequate to properly monitor Exchange-trading
of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
Moreover, prior to the commencement of trading, the Exchange states
that it will inform its Equity Trading Permit Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares.
---------------------------------------------------------------------------
\40\ These reasons may include: (1) The extent to which trading
is not occurring in the securities or financial instruments
composing the Disclosed Portfolio of the Fund; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance
of a fair and orderly market are present. With respect to trading
halts, the Exchange may consider all relevant factors in exercising
its discretion to halt or suspend trading in the Shares of the Fund.
\41\ See supra note 11. The Exchange states that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and the Sub-Adviser and their related personnel are subject
to the provisions of Rule 204A-1 under the Advisers Act relating to
codes of ethics. This Rule requires investment advisers to adopt a
code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
\42\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act,\43\ Section 11A(a)(1)(C)(iii) of the Act,\44\ and
the rules and regulations thereunder applicable to a national
securities exchange.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(5).
\44\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\45\ that the proposed rule change (SR-NYSEArca-2014-30), as
modified by Amendment No. 1, be, and it hereby is, approved.\46\
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78s(b)(2).
\46\ This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice,
and the Exchange's description of the Fund.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------
\47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28879 Filed 12-9-14; 8:45 am]
BILLING CODE 8011-01-P