[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:
    <bullet> Securities issued or guaranteed by the U.S. Government, 
its agencies or government-sponsored enterprises (``U.S. Government 
Securities'');
    <bullet> 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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    <bullet> 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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    <bullet> 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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    <bullet> 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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    <bullet> 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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    <bullet> 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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    <bullet> Delayed funding loans and revolving credit facilities;
    <bullet> Bank certificates of deposit, fixed time deposits and 
bankers' acceptances;
    <bullet> Repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments;
    <bullet> Debt securities issued by states or local governments and 
their agencies, authorities and other government-sponsored enterprises 
(``Municipal Bonds'');
    <bullet> Obligations of non-U.S. governments or their subdivisions, 
agencies and government-sponsored enterprises; and
    <bullet> 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.
---------------------------------------------------------------------------

    The Fund may invest up to 20% of its total assets in securities and 
instruments of issuers economically tied to emerging market 
countries.\33\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The Fund will be diversified within the meaning of the 1940 
Act.\36\
---------------------------------------------------------------------------

    \36\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80e).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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:
    <bullet> Currency spot and forward rates from major market data 
vendors \40\ will generally be determined as of the NYSE Close.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    <bullet> Exchange-traded futures will generally be valued at the 
settlement price of the relevant exchange.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> OTC FX options will generally be valued by pricing 
vendors.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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'').
---------------------------------------------------------------------------

    \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].
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
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    \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.
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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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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
    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#0674736a632b65696b6b636872754675636528616970"><span class="__cf_email__" data-cfemail="92e0e7fef7bff1fdfffff7fce6e1d2e1f7f1bcf5fde4">[email protected]</span></a>. Please include 
File Number SR-NYSEArca-2014-85 on the subject line.
Paper Comments
    <bullet> 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\
---------------------------------------------------------------------------

    \52\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26944 Filed 11-13-14; 8:45 am]
BILLING CODE 8011-01-P


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