Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69929 

135 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 72015 

(Apr. 24, 2014), 79 FR 24475 (‘‘Notice’’). 

4 In Amendment No. 1, the Exchange clarified the 

valuation of investments for purposes of calculating 

net asset value, provided additional details 

regarding the dissemination of the Disclosed 

Portfolio, and made other minor technical edits to 

the proposed rule change. Amendment No. 1 

provided clarification to the proposed rule change, 

and because it does not materially affect the 

substance of the proposed rule change or raise 

novel or unique regulatory issues, Amendment No. 

1 is not subject to notice and comment. 

5The Exchange filed Amendment No. 2 on June 

4, 2014 and withdrew it on June 5, 2014, and filed 

Amendment No. 3 on June 5, 2014 and withdrew 

it on June 6, 2014. Amendment No. 4 supersedes 

both Amendments No. 2 and No. 3. In Amendment 

No. 4, the Exchange amended the proposal to reflect 

a change to the name of the Fund and the 

underlying index. Specifically, the Exchange 

replaced each reference in the proposal to the 

‘‘Reality Shares Isolated Dividend Growth Index 

ETF’’ (the original name of the Fund) with a 

reference to the ‘‘Reality Shares DIVS Index ETF.’’ 

Similarly, the Exchange replaced each reference in 

the proposal to the ‘‘Reality Shares Isolated 

Dividend Growth Index’’ with a reference to the 

‘‘Reality Shares DIVS Index.’’ Amendment No. 4 is 

a technical amendment and is not subject to notice 

and comment as it does not materially affect the 

substance of the filing. 

6 15 U.S.C. 78s(b)(2). 

7See Securities Exchange Act Release No. 72385, 

79 FR 35205 (Jun. 19, 2014). The Commission 

designated a longer period within which to take 

action on the proposed rule change and designated 

July 29, 2014, as the date by which it should 

approve, disapprove, or institute proceedings to 

determine whether to disapprove the proposed rule 

change. 

8 15 U.S.C. 78s(b)(2)(B). 

9See Securities Exchange Act Release No. 72714, 

79 FR 45574 (Aug. 5, 2014) (‘‘Order Instituting 

Proceedings’’). Specifically, the Commission 

instituted proceedings to allow for additional 

analysis of the proposed rule change’s consistency 

with Section 6(b)(5) of the Act, which requires, 

among other things, that the rules of a national 

securities exchange be ‘‘designed to prevent 

fraudulent and manipulative acts and practices, to 

promote just and equitable principles of trade,’’ and 

‘‘to protect investors and the public interest.’’ See 

id. 

10See Letter from Eric R. Ervin, President, Reality 

Shares ETF Trust and Reality Shares Advisors, LLC, 

and President and CEO, Reality Shares, Inc., to 

Kevin M. O’Neill, Deputy Secretary, Commission, 

dated August 22, 2014 (‘‘Reality Shares Letter 1’’); 

Letter from Eric R. Ervin, President, Reality Shares 

ETF Trust and Reality Shares Advisors, LLC, and 

President and CEO, Reality Shares, Inc., to Arun 

Manoharan, Financial Economist, Commission, 

dated October 21, 2014 (‘‘Reality Shares Letter 2’’). 

11See Securities Exchange Act Release No. 73417, 

79 FR 64430 (Oct. 29, 2014). 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2014–048 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2014–048. 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 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. 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–FINRA–2014–048 and 

should be submitted on or before 

December 15, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.135

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27701 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73631; File No. SR– 

NYSEArca–2014–41] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Order Granting Approval of 

a Proposed Rule Change, as Modified 

by Amendments No. 1 and No. 4 

Thereto, Relating to Listing and 

Trading of Shares of the Reality Shares 

DIVS Index ETF Under NYSE Arca 

Equities Rule 5.2(j)(3) 

November 18, 2014. 

I. Introduction 

On April 11, 2014, NYSE Arca, Inc. 

(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’ or 

‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

list and trade shares (‘‘Shares’’) of the 

Reality Shares DIVS Index ETF 

(‘‘Fund’’) under NYSE Arca Equities 

Rule 5.2(j)(3). The proposed rule change 

was published for comment in the 

Federal Register on April 30, 2014.3 On 

May 6, 2014, the Exchange filed 

Amendment No. 1 to the proposed rule 

change, which amended and replaced 

the proposed rule change in its 

entirety.4 On June 6, 2014, the Exchange 

filed Amendment No. 4 to the proposed 

rule change.5 On June 13, 2014, 

pursuant to Section 19(b)(2) of the Act,6

the Commission designated a longer 

period within which to approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

disapprove the proposed rule change.7

On July 29, 2014, the Commission 

instituted proceedings under Section 

19(b)(2)(B) of the Act 8 to determine 

whether to approve or disapprove the 

proposed rule change.9 In response to 

the Order Instituting Proceedings, the 

Commission received two comment 

letters on the proposal.10 On October 23, 

2014, the Commission designated a 

longer period for Commission action on 

the Order Instituting Proceedings.11

This order grants approval of the 

proposed rule change, as modified by 

Amendments No. 1 and No. 4 thereto. 

II. Description of the Proposal, as 

Modified by Amendments No. 1 and 

No. 4 Thereto 

A. The Fund, Generally 

The Exchange proposes to list and 

trade Shares of the Fund under NYSE 

Arca Equities Rule 5.2(j)(3), which 


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12NYSE Arca Equities Rule 5.2(j)(3)(A) provides 

that an Investment Company Unit is a security that 

represents an interest in a registered investment 

company that holds securities comprising, or 

otherwise based on or representing an interest in, 

an index or portfolio of securities (or holds 

securities in another registered investment 

company that holds securities comprising, or 

otherwise based on, or representing an interest in, 

an index or portfolio of securities). 

13According to the Exchange, the Trust will be 

registered under the Investment Company Act of 

1940 (‘‘1940 Act’’). On February 6, 2014, the Trust 

filed a registration statement on Form N–1A under 

the Securities Act of 1933 and the 1940 Act relating 

to the Fund, as amended by Pre-Effective 

Amendment Number 1, filed with the Commission 

on February 6, 2014 (File Nos. 333–192288 and 

811–22911) (‘‘Registration Statement’’). In addition, 

the Exchange states that the Trust has obtained 

certain exemptive relief under the 1940 Act. 

Investment Company Act Release No. 30678 (Aug. 

27, 2013) (‘‘Exemptive Order’’). The Exchange 

represents that investments made by the Fund will 

comply with the conditions set forth in the 

Exemptive Order. 

14The Adviser is a wholly-owned subsidiary of 

Reality Shares, Inc. (‘‘Index Provider’’). 

15According to the Exchange, the Adviser and the 

Index Provider have represented that a fire wall 

exists around the respective personnel who have 

access to information concerning changes and 

adjustments to the Index. The Exchange further 

represents that in the event (a) the Adviser, any subadviser, or the Index Provider becomes registered as 

a broker-dealer or newly affiliated with a brokerdealer, or (b) any new adviser, sub-adviser, or Index 

Provider is a registered broker-dealer or becomes 

affiliated with a broker-dealer, it will implement a 

fire wall with respect to the relevant personnel or 

broker-dealer affiliate regarding access to 

information concerning the composition 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. 

16Additional information regarding the Trust, the 

Fund, and the Shares, including investment 

strategy, risks, creation and redemption procedures, 

fees, portfolio holdings disclosure policies, 

distributions, and taxes, among other things, is 

included in the Notice, Registration Statement, and 

Exemptive Order, as applicable. See Notice, supra 

note 3; see also Registration Statement and 

Exemptive Order, supra note 13. 

17The Index will be calculated by International 

Data Corporation (‘‘IDC’’), which is not affiliated 

with the Adviser or Index Provider, and which is 

not a broker-dealer or fund advisor. 

18See supra note 15. 

19NYSE Arca Equities Rule 5.2(j)(3) defines the 

term ‘‘US Component Stock’’ as an equity security 

that is registered under Sections 12(b) or 12(g) of 

the Act or an American Depositary Receipt, the 

underlying equity security of which is registered 

under Sections 12(b) or 12(g) of the Act. 

20For purposes of this proposed rule change, 

ETFs include Investment Company Units (as 

described in NYSE Arca Equities Rule 5.2(j)(3)) and 

Portfolio Depositary Receipts (as described in NYSE 

Arca Equities Rule 8.100). The ETFs all will be 

listed and traded in the U.S. on registered 

exchanges. The Fund may not invest in leveraged 

or inverse leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs 

or options on such ETFs. 

21NYSE Arca Equities Rule 5.2(j)(3), Commentary 

.01(a)(A)(5) provides that all securities in the 

applicable index or portfolio shall be US 

Component Stocks listed on a national securities 

exchange and shall be NMS Stocks as defined in 

Rule 600 under Regulation NMS of the Act. The 

Exchange states that each component stock of the 

S&P 500 Index is a US Component Stock that is 

listed on a national securities exchange and is an 

NMS Stock. Options, however, are excluded from 

the definition of NMS Stock. The Exchange 

represents that the Fund and the Index meet all of 

the requirements of the listing standards for 

Investment Company Units in Rule 5.2(j)(3) and the 

requirements of Commentary .01, except the 

requirements in Commentary .01(a)(A)(1)–(5), 

because the Index includes options on US 

Component Stocks. 

governs the listing and trading of 

Investment Company Units on the 

Exchange.12 The Fund is an exchangetraded fund (‘‘ETF’’) that will seek longterm capital appreciation by tracking the 

performance of the Reality Shares DIVS 

Index (‘‘Index’’). The Shares of the Fund 

will be offered by the Reality Shares 

ETF Trust (‘‘Trust’’). The Exchange 

represents that the Trust will be 

registered with the Commission as an 

open-end management investment 

company.13 Reality Shares Advisors, 

LLC will serve as the investment adviser 

to the Fund (‘‘Adviser’’).14 The 

Exchange states that the Adviser is not 

registered as a broker-dealer and is not 

affiliated with any broker-dealers.15

ALPS Distributors, Inc. will be the 

principal underwriter and distributor of 

the Fund’s Shares. The Bank of New 

York Mellon will serve as administrator, 

custodian, and transfer agent for the 

Fund. 

B. The Exchange’s Description of the 

Fund 

The Exchange has made the following 

representations and statements in 

describing the Fund and its investment 

strategy, including permitted portfolio 

holdings and investment restrictions.16

Reality Shares DIVS Index ETF 

The Index was developed and is 

maintained by Reality Shares, Inc.17 The 

Exchange states that the Index Provider 

is not registered as an investment 

adviser or broker dealer and is not 

affiliated with any broker-dealers.18 The 

Exchange states that the Index for the 

Fund does not meet all of the ‘‘generic’’ 

listing requirements of Commentary 

.01(a)(A) to NYSE Arca Equities Rule 

5.2(j)(3) applicable to the listing of 

Investment Company Units based upon 

an index of ‘‘US Component Stocks.’’ 19

Specifically, Commentary .01(a)(A) to 

NYSE Arca Equities Rule 5.2(j)(3) sets 

forth the requirements to be met by 

components of an index or portfolio of 

US Component Stocks. As discussed in 

more detail herein, the Index is 

calculated using a proprietary, rulesbased methodology designed to track 

market expectations for dividend 

growth conveyed in real-time using bidask prices on exchange-listed S&P 500 

Index options and exchange-listed 

options on exchange traded funds 

(‘‘ETFs’’) designed to track the S&P 500 

Index.20 The Fund may also invest up 

to 20% of its total assets in other 

securities such as over-the-counter 

(‘‘OTC’’) options, futures, and forward 

contracts on the S&P 500 Index, and 

OTC options, futures, and forward 

contracts on ETFs that track the S&P 500 

Index. Because the Index will consist 

primarily of S&P 500 Index options and 

options on ETFs designed to track the 

S&P 500 Index, and not US Component 

Stocks, the Index does not satisfy the 

requirements of Commentary 

.01(a)(A).21

Principal Investments of the Fund 

The Fund will seek long-term capital 

appreciation and will seek investment 

results that, before fees and expenses, 

generally correspond to the performance 

of the Index. At least 80% of the Fund’s 

total assets (exclusive of collateral held 

from securities lending, if any) will be 

invested in the component securities of 

the Index. The Fund will seek a 

correlation of 0.95 or better between its 

performance and the performance of its 

Index (a figure of 1.00 would represent 

perfect correlation). The Fund generally 

will use a representative sampling 

investment strategy. 

The Fund will buy (i.e., hold a ‘‘long’’ 

position in) and sell (i.e., hold a ‘‘short’’ 

position in) put and call options. The 

strategy of taking both a long position in 

a security through its ex-dividend date 

(the last date an investor can own the 

security and receive dividends paid on 

the security) and a corresponding short 

position in the same security 

immediately thereafter is designed to 

allow the Fund to isolate its exposure to 

the growth of the level of dividends 

expected to be paid on such security 

while minimizing its exposure to 

changes in the trading price of such 

security. 

The Fund will buy and sell U.S. 

exchange-listed options on the S&P 500 

Index and U.S. exchange-listed options 

on ETFs designed to track the S&P 500 

Index. A put option gives the purchaser 

of the option the right to sell, and the 

issuer of the option the obligation to 

buy, the underlying security or 

instrument on a specified date or during 

a specified period of time. A call option 

on a security gives the purchaser of the 

option the right to buy, and the writer 

of the option the obligation to sell, the 

underlying security or instrument on a 

specified date or during a specified 

period of time. The Fund will invest in 

a combination of put and call options 

designed to allow the Fund to isolate its 


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22The Exchange notes that there is no guarantee 

that either the level of overall dividends paid by 

such companies will grow over time, or that the 

Index or Fund’s investment strategies will capture 

such growth. The Fund will include appropriate 

risk disclosure in its offering documents disclosing 

these risks, which will be available for free on the 

Commission’s Web site and on the Fund’s Web site, 

www.realityshares.com. 

23The Fund will transact only with swap dealers 

that have in place an ISDA agreement with the 

Fund. 

24Where practicable, the Fund intends to invest 

in swaps cleared through a central clearing house 

(‘‘Cleared Swaps’’). Currently, only certain of the 

interest rate swaps in which the Fund intends to 

invest are Cleared Swaps, while the dividend and 

total return swaps (including equity swaps) in 

which the Fund may invest are currently not 

Cleared Swaps. 

exposure to the growth of the level of 

expected dividends reflected in options 

on the S&P 500 Index and options on 

ETFs tracking the S&P 500 Index, while 

minimizing the Fund’s exposure to 

changes in the trading price of such 

securities. 

Index Methodology 

The Index will be calculated using a 

proprietary, rules-based methodology 

designed to track market expectations 

for dividend growth conveyed in realtime using the mid-point of the bid-ask 

spread on S&P 500 Index options and 

options on ETFs designed to track the 

S&P 500 Index.22 All options included 

in the Index will be listed and traded on 

a U.S. national securities exchange. The 

Index will consist of a minimum of 20 

components. 

The prices of index and ETF options 

reflect the market trading prices of the 

securities included in the applicable 

underlying index or ETF, as well as 

market expectations regarding the level 

of dividends to be paid on such indexes 

or ETFs during the term of the option. 

The Index constituents, and, therefore, 

most of the Fund’s portfolio holdings, 

will consist of multiple corresponding 

near-term and long-term put and call 

option combinations on the same 

reference assets (i.e., options on the S&P 

500 Index or options on S&P 500 ETFs) 

with the same strike price. Because 

option prices reflect both stock price 

and dividend expectations, they can be 

used in combination to isolate either 

price exposure or dividend 

expectations. The use of near-term and 

long-term put and call options 

combinations on the same reference 

asset with the same strike price, but 

with different maturities, is designed to 

gain exposure to the expected dividends 

reflected in options on the S&P 500 

Index and options on ETFs tracking the 

S&P 500 Index while neutralizing the 

impact of stock price. 

Once established, this portfolio 

construction of options combinations 

will accomplish two goals. First, the use 

of corresponding buy or sell positions 

on near and long-term options at the 

same strike price is designed to 

neutralize underlying stock price 

movements. In other words, the 

corresponding ‘‘buy’’ and ‘‘sell’’ 

positions on the same reference asset are 

designed to net against each other and 

eliminate the impact that changes to the 

stock price of the reference asset would 

otherwise have on the value of the Index 

(and Fund Shares). Second, by 

minimizing the impact of price 

fluctuations through the construct of the 

near- and long-term contract 

combinations, the strategy is designed to 

isolate market expectations for 

dividends implied between expiration 

dates of the near-term and long-term 

option contracts. Over time, the Index 

will increase or decrease in value as the 

dividend spread between the near-term 

and long-term options combinations 

increases or decreases as a result of 

changing market expectations for 

dividend growth. 

Other Fund Investments 

While, as described above, at least 

80% of the Fund’s total assets (exclusive 

of collateral held from securities 

lending, if any) will be invested in the 

component securities of the Index, the 

Fund may invest up to 20% of its total 

assets in other securities and financial 

instruments, as described below. 

The Fund may invest in: (a) U.S. 

exchange-listed futures contracts based 

on the S&P 500 Index and ETFs 

designed to track the S&P 500 Index; 

and (b) forward contracts based on the 

S&P 500 Index and ETFs designed to 

track the S&P 500 Index. The Fund’s use 

of exchange-listed futures contracts and 

forward contracts is designed to allow 

the Fund to isolate its exposure to the 

growth of the level of expected 

dividends reflected in options on the 

S&P 500 Index and options on ETFs 

tracking the S&P 500 Index, while 

minimizing the Fund’s exposure to 

changes in the trading price of such 

securities. The Fund may also buy and 

sell OTC options on the S&P 500 Index 

and on ETFs designed to track the S&P 

500 Index. 

The Fund may enter into dividend 

and total return swap transactions 

(including equity swap transactions) 

based on the S&P 500 Index and ETFs 

designed to track the S&P 500 Index.23

In a typical swap transaction, one party 

agrees to make periodic payments to 

another party (‘‘counterparty’’) based on 

the change in market value or level of 

a specified rate, index, or asset. In 

return, the counterparty agrees to make 

periodic payments to the first party 

based on the return of a different 

specified rate, index, or asset. Swap 

transactions are usually done on a net 

basis, whereby the Fund would receive 

or pay only the net amount of the two 

payments. In a typical dividend swap 

transaction, the Fund would pay the 

swap counterparty a premium and 

would be entitled to receive the value of 

the actual dividends paid on the subject 

index during the term of the swap 

contract. In a typical total return swap, 

the Fund might exchange long or short 

exposures to the return of the 

underlying securities or index to isolate 

the value of the dividends paid on the 

underlying securities or index 

constituents. The Fund also may engage 

in interest rate swap transactions. In a 

typical interest rate swap transaction 

one stream of future interest payments 

is exchanged for another. Such 

transactions often take the form of an 

exchange of a fixed payment for a 

variable payment based on a future 

interest rate. The Fund intends to use 

interest rate swap transactions to 

manage or hedge exposure to interest 

rate fluctuations. 

The Fund may invest up to 20% of its 

assets (exclusive of collateral held from 

securities lending, if any) in exchangelisted equity securities and derivative 

instruments (specifically, futures 

contracts, forward contracts, and swap 

transactions, as noted above) 24 relating 

to the Index and its component 

securities that the Adviser believes will 

help the Fund track the Index. For 

example, the Fund may buy and sell 

ETFs and, to a limited extent, individual 

large-capitalization equity securities 

listed and traded on a U.S. national 

securities exchange. 

The Fund may invest in the securities 

of other investment companies 

(including money market funds) to the 

extent permitted under the 1940 Act. 

The Fund’s short positions and its 

investments in swaps, futures contracts, 

forward contracts, and options based on 

the S&P 500 Index and ETFs designed 

to track the S&P 500 Index will be 

backed by investments in cash, highquality short-term debt securities, and 

money-market instruments in an 

amount equal to the Fund’s maximum 

liability under the applicable position or 

contract, or will otherwise be offset in 

accordance with Section 18 of the 1940 

Act. Short-term debt securities and 

money market instruments include 

shares of fixed income or money market 

mutual funds, commercial paper, 

certificates of deposit, bankers’ 


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25The Fund may enter into repurchase 

agreements with banks and broker-dealers. A 

repurchase agreement is an agreement under which 

securities are acquired by a fund from a securities 

dealer or bank subject to resale at an agreed upon 

price on a later date. The acquiring fund bears a risk 

of loss in the event that the other party to a 

repurchase agreement defaults on its obligations 

and the fund is delayed or prevented from 

exercising its rights to dispose of the collateral 

securities. 

26The Fund may invest in shares of money 

market mutual funds to the extent permitted by the 

1940 Act. 

27The Fund will seek, where possible, to use 

counterparties, as applicable, whose financial status 

is such that the risk of default is reduced; however, 

the risk of losses resulting from default is still 

possible. The Adviser will evaluate the 

creditworthiness of counterparties on an ongoing 

basis. In addition to information provided by credit 

agencies, the Adviser will evaluate each approved 

counterparty using various methods of analysis, 

such as, for example, the counterparty’s liquidity in 

the event of default, the counterparty’s reputation, 

the Adviser’s past experience with the 

counterparty, and the counterparty’s share of 

market participation. 

28To limit the potential risk associated with such 

transactions, the Fund will segregate or ‘‘earmark’’ 

assets determined to be liquid by the Adviser 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 arising from such transactions. 

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. To 

mitigate leveraging risk, the Adviser will segregate 

or ‘‘earmark’’ liquid assets or otherwise cover the 

transactions that may give rise to such risk. 

29 In reaching liquidity decisions, the Adviser 

may consider the following factors: The frequency 

of trades and quotes for the security; the number of 

dealers wishing to purchase or sell the security and 

the number of other potential purchasers; dealer 

undertakings to make a market in the security; and 

the nature of the security and the nature of the 

marketplace in which it trades (e.g., the time 

needed to dispose of the security, the method of 

soliciting offers, and the mechanics of transfer). 

30See Reality Shares Letter 1; Reality Shares 

Letter 2, supra note 10. 

31 In the Order Instituting Proceedings, the 

Commission sought comment on the following 

questions: (a) Because the Index is designed to 

reflect changes in market expectations of future 

dividend growth, rather than to track actual 

dividend growth, is the Fund’s investment strategy 

fundamentally based on an assumption that the 

options markets systemically underprice dividend 

growth? What are commenters’ views regarding 

whether investors would be able to understand the 

strategy, risks, potential rewards, assumptions, and 

expected performance of the Fund’s strategy? (b) 

With respect to the trading of the Shares on the 

Exchange, do commenters believe that the 

Exchange’s rules governing sales practices are 

adequately designed to ensure the suitability of 

recommendations regarding the Shares? Why or 

why not? If not, should the Exchange’s rules 

governing sales practices be enhanced? If so, in 

what ways? (c) How closely do commenters think 

the market price of the Shares will track the Fund’s 

intraday indicative value (‘‘IIV’’) or the intraday 

value of the Index? Are certain of these values 

likely to be more volatile than others? If so, how 

would this affect trading in the Shares? Are the 

Shares likely to trade with a significant premium 

or discount to IIV? What are commenters’ views of 

how effectively the IIV of the Fund would represent 

the Fund’s portfolio? What are commenters’ views 

of how the Shares’ market price, the Fund’s IIV, and 

the intraday value of the Index will relate to one 

another during times of market stress? and (d) Does 

the liquidity of the long-dated options in which the 

Fund will invest differ materially from that of the 

short-dated options in which the Fund will invest? 

If so, how would that affect the ability of market 

makers to engage in arbitrage or to hedge their 

positions while making a market in the Shares? 

Would the liquidity characteristics of the Index 

components or of the options in the Fund’s 

portfolio affect the calculation of the Index value, 

the calculation of the Fund’s IIV, the calculation of 

the Fund’s NAV, or the ability of market makers or 

other market participants to value the Shares? If so, 

how? 

acceptances, U.S. government securities 

(including securities issued or 

guaranteed by the U.S. government or 

its authorities, agencies, or 

instrumentalities), repurchase 

agreements,25 and bonds that are rated 

BBB or higher. In addition to the 

investments described above, and in a 

manner consistent with its investment 

objective, the Fund may invest a limited 

portion of its net assets in high-quality, 

short-term debt securities and money 

market instruments for cash 

management purposes.26

The Fund will attempt to limit 

counterparty risk in non-cleared swap, 

forward, and OTC option contracts by 

entering into such contracts only with 

counterparties the Adviser believes are 

creditworthy and by limiting the Fund’s 

exposure to each counterparty. The 

Adviser will monitor the 

creditworthiness of each counterparty 

and the Fund’s exposure to each 

counterparty on an ongoing basis.27

The Fund’s investments in swaps, 

futures contracts, forward contracts, and 

options will be consistent with the 

Fund’s investment objective and with 

the requirements of the 1940 Act.28

Investment Restrictions 

To the extent the Index concentrates 

(i.e., holds 25% or more of its total 

assets) in the securities of a particular 

industry or group of industries, the 

Fund will concentrate its investments to 

approximately the same extent as the 

Index. 

The Fund may hold up to an aggregate 

amount of 15% of its net assets in 

illiquid assets (calculated at the time of 

investment) deemed illiquid by the 

Adviser, consistent with Commission 

guidance.29 The Fund will monitor its 

portfolio liquidity on an ongoing basis 

to determine whether, in light of current 

circumstances, an adequate level of 

liquidity is being maintained, and will 

consider taking appropriate steps in 

order to maintain adequate liquidity if, 

through a change in values, net assets, 

or other circumstances, more than 15% 

of the Fund’s net assets are held in 

illiquid assets. Illiquid assets include 

securities subject to contractual or other 

restrictions on resale and other 

instruments that lack readily available 

markets as determined in accordance 

with Commission staff guidance. 

The Fund may make secured loans of 

its portfolio securities; however, 

securities loans will not be made if, as 

a result, the aggregate amount of all 

outstanding securities loans by the Fund 

exceeds 331⁄3% of its total assets 

(including the market value of collateral 

received). To the extent the Fund 

engages in securities lending, securities 

loans will be made to broker-dealers 

that the Adviser believes to be of 

relatively high credit standing pursuant 

to agreements requiring that the loans 

continuously be collateralized by cash, 

liquid securities, or shares of other 

investment companies with a value at 

least equal to the market value of the 

loaned securities. 

The Fund will be classified as a ‘‘nondiversified’’ investment company under 

the 1940 Act. The Fund intends to 

qualify for and to elect treatment as a 

separate regulated investment company 

(‘‘RIC’’) under Subchapter M of the 

Internal Revenue Code. 

The Fund’s investments will be 

consistent with its investment objective 

and will not be used to provide multiple 

returns of a benchmark or to produce 

leveraged returns. 

III. Summary of Comment Letters 

As noted above, the Commission 

received two comment letters in 

response to the Order Instituting 

Proceedings.30 Both comment letters, 

which were in favor of the proposal, 

sought to address certain questions, as 

outlined in the Order Instituting 

Proceedings,31 and provide additional 

clarification regarding the proposal. 

A. Reality Shares Letter 1 

In Reality Shares Letter 1, the 

commenter offers its responses to the 

Commission’s questions. The 

commenter responds that the Fund’s 

investment strategy is not based on the 

assumption that dividend growth is 

underpriced by the options markets, 

stating that it is instead based on the 

expected dividend value to be paid on 

S&P 500 securities (as implied in the 

price of listed S&P 500 Index options 

over time) and the ‘‘historical high 

correlation between such expected 

dividend values and the value of actual 

dividends paid on S&P 500 


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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69933 

32See Reality Shares Letter 1, supra note 10, at 

2–3. 

33See id., at 3. 

34See id., at 3–4. 

35See id., at 4. 

36See id., at 5. 

37See Reality Shares Letter 1, supra note 10, at 

6. 

38See id. 

39See id. 

40See id., at 7. 

41See id. 

42See Reality Shares Letter 1, supra note 10, at 

9. 

43See id. 

44See id., at 10. 

45See id. 

46See id., at 11. 

47See Reality Shares Letter 1, supra note 10, at 

12. 

48See Reality Shares Letter 2, supra note 10, at 

1. 

49See id. 

50See id. 

51See id. 

52See id. 

53See Reality Shares Letter 2, supra note 10, at 

2. 

54See id. 

55See id. 

56See id. 

57See id. 

securities.’’ 32 The commenter then 

explains that as the value of actual 

dividends paid increases or decreases, 

market expectations for dividends 

typically move up or down in a 

corresponding direction, and that if the 

current expected dividend value of the 

options in the Fund’s portfolio changes, 

the value of an investment in the Fund 

changes correspondingly.33

The commenter asserts that the 

Fund’s Registration Statement will 

sufficiently disclose to investors the key 

features of the Fund, including 

explanations of how the Fund’s strategy 

works and how the Fund is expected to 

perform under various market 

conditions, and disclosures highlighting 

all material risks of investing in the 

Fund.34 The commenter believes that 

these disclosures and the disclosures in 

the Fund’s marketing materials, will 

allow investors to understand the 

Fund’s investment objective, strategy, 

risks, potential rewards, assumptions, 

and performance characteristics.35

Further, the commenter believes that the 

Exchange’s rules governing sales 

practices are sufficient to ensure the 

suitability of recommendations to 

investors regarding the Fund’s Shares.36

With respect to IIV, the commenter 

responds that it believes that the market 

price of the Fund Shares will closely 

approximate the IIV of the Fund’s 

portfolio and the intraday value of the 

Fund’s underlying Index.37 While it 

believes that ‘‘the Fund’s IIV and 

intraday Index values may reflect higher 

volatility than the market trading price 

of Fund Shares,’’ the commenter does 

not expect this will have any material 

impact on secondary market trading of 

Fund Shares or arbitrage in Fund 

Shares.38 The commenter expects that 

Authorized Participants and other 

institutional investors will quote and 

trade the option contracts held by the 

Fund in combination (by holding 

simultaneous long and short positions 

in the same put/call contracts) and that 

this combination tends to trade at 

tighter bid/ask spreads than do the 

individual contracts.39 The commenter 

expects that Authorized Participants 

and other market makers will factor the 

price of the combination trades into 

their assessment of the value of Fund 

Shares, which will be reflected in the 

trading price of Fund Shares.40 The 

commenter explains that the Fund’s IIV 

and the intraday Index values are based 

on the intraday market price of 

individual option contracts and do not 

reflect the trading price of option 

contracts held in combination. So, while 

the commenter expects the price of 

Fund Shares to closely approximate the 

Fund’s IIV and the intraday values of 

the Index, it also expects that the 

trading price of Fund shares will be less 

volatile than the Fund’s IIV and the 

intraday value of the Index.41

In times of market stress, the 

commenter believes that the Fund’s 

Shares will trade within an acceptable 

spread to the Fund’s IIV and the 

intraday value of the Index.42 The 

commenter believes that because the 

Fund’s portfolio is transparent and the 

Index constituents are publicly 

disclosed, market participants will be 

able to assess the value of the Fund and 

the Index and access the securities 

necessary to hedge their position 

exposures, even during times of market 

stress.43 Further, the commenter asserts 

that, ‘‘[b]ecause of the transparency of 

the Fund’s portfolio and the liquidity 

and transparency of the underlying 

listed index options . . . investors will 

continue to have the ability to buy and 

sell Shares in the secondary market at 

fair and representative prices should 

there be any material departure from the 

IIV.’’ 44

The commenter states that the 

liquidity of the longer-dated option 

contracts in the Fund’s portfolio will 

not differ materially from the liquidity 

of the shorter-dated option contracts.45

Further, the commenter explains that 

the liquidity characteristics of the 

option contracts held by the Fund will 

not negatively impact the Fund’s 

operation, the calculation of the Index 

value, the calculation of the Fund’s IIV, 

or the calculation of the Fund’s NAV.46

The commenter believes that the 

options contracts provide ‘‘sufficient 

and ample liquidity . . . for Authorized 

Participants and other investors to 

engage in efficient hedging activity, to 

value Fund Shares and to make markets 

in Fund Shares.’’ 47

B. Reality Shares Letter 2 

In Reality Shares Letter 2, the 

commenter seeks to address whether the 

Fund’s strategy will produce positive 

returns for buy-and-hold investors over 

the longer term in light of the efficient 

nature of markets and the ability of 

astute market participants to predict 

dividend growth.48 The commenter 

claims that the historical returns of the 

Fund’s strategy have been positive over 

long periods of time and that an investor 

can reasonably expect returns in the 

future that are non-zero and positive in 

the long term.49

In support of this claim, the 

commenter argues that all investments, 

even in perfectly efficient markets, are 

expected to have, at minimum, a riskfree rate associated with them.50 For 

example, Treasury Bills (theoretically 

risk-free assets) are discounted by the 

risk-free rate in order to entice investors 

to purchase them.51 Thus, even in a 

perfectly efficient market such as the 

one for Treasury Bills, an investment in 

a riskless asset will produce a long-term 

return greater than zero.52 In addition, 

the commenter adds that, if any 

uncertainty surrounds the future payoff 

of an investment, one would expect a 

risk premium to be attached to the 

investment.53 This would be quantified 

as the amount of money by which the 

expected return on the asset exceeds the 

known return of a risk-free asset.54 This 

risk premium compensates investors for 

the uncertainty in their investment in a 

risky asset.55 If the dividend risk 

premium were low, one would expect 

the strategy to earn less than the actual 

growth of dividends; if dividend risk 

premium were high, one would expect 

the strategy to earn more than actual 

dividend growth.56 The commenter 

notes that, while expected dividend 

returns may not match dividend growth 

exactly, the rate of return would (at a 

minimum) be expected to be equal to 

the risk free rate, plus the risk 

premium.57

The commenter further asserts that, 

beyond the theoretical analogy stated 

above, an investment in the expected 

dividend implied in the options markets 

has historically produced positive 

returns and that the Fund’s strategy can 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
69934 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

58See Reality Shares Letter 2, supra note 10, at 

2. 

59See id., at 3. 

60 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

61 15 U.S.C. 78f(b)(5). 

62 15 U.S.C. 78k–1(a)(1)(C)(iii). 

63According to the Exchange, several major 

market data vendors display and/or make widely 

available IIVs taken from the CTA or other data 

feeds. 

64Under accounting procedures to be 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. On a daily basis, the Adviser, on behalf of the 

Fund, will disclose on the Fund’s Web site 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. 

65The Trust will generally value exchange-listed 

equity securities (which include common stocks 

and ETFs) and exchange-listed options, including 

options on the S&P 500 Index and options on ETFs, 

at market closing prices. Market closing price is 

generally determined on the basis of last reported 

sales prices on the applicable exchange, or if no 

sales are reported, based on the mid-point between 

the last reported bid and ask. The Trust will 

generally value exchange-listed futures at the 

settlement price determined by the applicable 

exchange. Non-exchange-traded derivatives, 

including OTC options, swap transactions, and 

forward transactions, will normally be valued on 

the basis of quotations or equivalent indication of 

value supplied by an independent pricing service 

or major market makers or dealers. Debt securities 

and money market instruments generally will be 

valued based on prices provided by independent 

pricing services, which may use valuation models 

or matrix pricing to determine current value. 

Investment company securities (other than ETFs) 

will be valued at NAV. The Trust generally will use 

amortized cost to value fixed income or money 

market securities that have a remaining maturity of 

60 days or less. 

66 Information relating to U.S. exchange-listed 

options is available via the Options Price Reporting 

Authority. 

be expected to produce future positive 

long-term returns.58 While the 

commenter believes that it is possible 

for implied dividend strategies to 

outperform equity returns, as well as 

actual dividend growth, the commenter 

argues that the foundation of the Fund’s 

investment strategy is predicated on its 

conclusion that implied dividends carry 

risk and that, in an efficient market, this 

risk will be reflected in the form of a 

dividend risk premium.59

IV. Discussion and Commission 

Findings 

The Commission has carefully 

considered the proposal and the 

comments submitted in response to the 

questions raised by the Commission in 

the Order Instituting Proceedings. For 

the reasons discussed below, the 

Commission finds that the Exchange’s 

proposal to list and trade the Shares is 

consistent with the Exchange Act and 

the rules and regulations thereunder 

applicable to a national securities 

exchange.60 In particular, the 

Commission finds that the proposed 

rule change, as modified by 

Amendments No. 1 and No. 4 thereto, 

is consistent with Section 6(b)(5) of the 

Exchange Act,61 which requires, among 

other things, that the Exchange’s rules 

be designed to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

The Commission also finds that the 

proposal to list and trade the Shares on 

the Exchange is consistent with Section 

11A(a)(1)(C)(iii) of the Exchange Act,62

which sets forth Congress’ finding that 

it is in the public interest and 

appropriate for the protection of 

investors and the maintenance of fair 

and orderly markets to assure the 

availability to brokers, dealers, and 

investors of information with respect to 

quotations for and transactions in 

securities. Quotation and last-sale 

information for the Shares will be 

available via the Consolidated Tape 

Association (‘‘CTA’’) high-speed line. 

The value of the Index will be published 

by one or more major market data 

vendors every 15 seconds during the 

NYSE Arca Core Trading Session of 9:30 

a.m. E.T. to 4:00 p.m. E.T. Information 

about the Index constituents, the 

weighting of the constituents, the 

Index’s methodology, and the Index’s 

rules will be available at no charge on 

the Index Provider’s Web site at 

www.realityshares.com. In addition, the 

Intraday Indicative Value (‘‘IIV’’) as 

defined in NYSE Arca Equities Rule 

5.2(j)(3), Commentary 01(c), will be 

widely disseminated at least every 15 

seconds during the Core Trading 

Session by one or more major market 

data vendors.63 On each business day, 

before commencement of trading in 

Shares in the Core Trading Session on 

the Exchange, the Fund will disclose on 

its Web site the ‘‘Disclosed Portfolio’’ 

(as such term is 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.64

In addition, a portfolio composition file, 

which includes the security names and 

quantities, as applicable, required to be 

delivered in exchange for the Fund’s 

Shares, together with estimates and 

actual cash components, will be 

publicly disseminated daily prior to the 

opening of the New York Stock 

Exchange (‘‘NYSE’’) via the National 

Securities Clearing Corporation. The 

portfolio composition file will represent 

one Creation Unit of Shares of the Fund. 

The Fund will calculate its NAV by: (i) 

Taking the current market value of its 

total assets; (ii) subtracting any 

liabilities; and (iii) dividing that amount 

by the total number of Shares 

outstanding. The Fund will calculate 

NAV once each business day as of the 

regularly scheduled close of trading on 

the NYSE (normally, 4:00 p.m., Eastern 

Time).65 The intra-day, closing, and 

settlement prices of the portfolio 

securities and other Fund investments, 

including futures and exchange-traded 

equities, ETFs, and exchange-traded 

options,66 will also be readily available 

from the national securities exchanges 

trading such securities, automated 

quotation systems, published or other 

public sources, and, with respect to 

OTC options, swap transactions, and 

forward transactions, from third party 

pricing sources, or on-line information 

services such as Bloomberg or Reuters. 

The intra-day, closing, and settlement 

prices of debt securities and money 

market instruments will be readily 

available from published and other 

public sources or on-line information 

services. Price information regarding 

investment company securities, 

including ETFs, 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. The Fund’s Web 

site will include a form of the 

prospectus for the Fund that may be 

downloaded and additional data 

relating to NAV and other applicable 

quantitative information. 

The Commission also believes that the 

proposal to list and trade the Shares is 

reasonably designed to promote fair 

disclosure of information that may be 


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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69935 

67These reasons may include: (1) The extent to 

which trading is not occurring in the securities 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. The Exchange represents that it may 

consider all relevant factors in exercising its 

discretion to halt or suspend trading in the Shares 

of the Fund. 

68See supra note 15 and accompanying text. The 

Exchange states that an investment adviser to an 

open-end fund is required to be registered under the 

Investment Advisers Act of 1940 (‘‘Advisers Act’’). 

As a result, the Adviser and its related personnel 

are subject to the provisions of Rule 204A–1 under 

the Advisers Act relating to codes of ethics. This 

Rule requires investment advisers to adopt a code 

of ethics that reflects the fiduciary nature of the 

relationship to clients as well as compliance with 

other applicable securities laws. Accordingly, 

procedures designed to prevent the communication 

and misuse of non-public information by an 

investment adviser must be consistent with Rule 

204A–1 under the Advisers Act. In addition, Rule 

206(4)–7 under the Advisers Act makes it unlawful 

for an investment adviser to provide investment 

advice to clients unless such investment adviser has 

(i) adopted and implemented written policies and 

procedures reasonably designed to prevent 

violation, by the investment adviser and its 

supervised persons, of the Advisers Act and the 

Commission rules adopted thereunder; (ii) 

implemented, at a minimum, an annual review 

regarding the adequacy of the policies and 

procedures established pursuant to subparagraph (i) 

above and the effectiveness of their 

implementation; and (iii) designated an individual 

(who is a supervised person) responsible for 

administering the policies and procedures adopted 

under subparagraph (i) above. 

69The Exchange states that 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. 

70For a list of the current members of ISG, see 

www.isgportal.org. The Exchange notes that not all 

components of the 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. 

necessary to price the Shares 

appropriately and to prevent trading 

when a reasonable degree of 

transparency cannot be assured. The 

Exchange represents that 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.67 In addition, 

if the IIV, the Index Value or the value 

of the Index Components is not being 

disseminated as required, the Exchange 

may halt trading during the day in 

which the disruption occurs; if the 

interruption persists past the day in 

which it occurred, the Exchange will 

halt trading no later than the beginning 

of the trading day following the 

interruption. The Exchange will obtain 

a representation from the Fund that the 

NAV for the Fund will be calculated 

daily and will be made available to all 

market participants at the same time. 

Under NYSE Arca Equities Rule 

7.34(a)(5), if the Exchange becomes 

aware that the NAV for the Fund is not 

being disseminated to all market 

participants at the same time, it will halt 

trading in the Shares until such time as 

the NAV is available to all market 

participants. 

The Exchange states that it has a 

general policy prohibiting the 

distribution of material, non-public 

information by its employees. The 

Commission notes that the Index 

Provider is not registered as an 

investment adviser or broker dealer and 

is not affiliated with any broker-dealers, 

and the Adviser is not registered as a 

broker-dealer and is not affiliated with 

any broker-dealers.68 Prior to the 

commencement of trading, the Exchange 

will inform its Equity Trading Permit 

Holders in an Information Bulletin of 

the special characteristics and risks 

associated with trading the Shares. The 

Financial Industry Regulatory Authority 

(‘‘FINRA’’), on behalf of the Exchange,69

will communicate as needed regarding 

trading in the Shares, exchange-listed 

equity securities, ETFs, futures 

contracts, and exchange-traded options 

contracts with other markets and other 

entities that are members of the 

Intermarket Surveillance Group (‘‘ISG’’), 

and FINRA, on behalf of the Exchange, 

may obtain trading information 

regarding trading in the Shares, 

exchange-listed equity securities, ETFs, 

futures contracts, and exchange-traded 

options contracts from such markets and 

other entities. In addition, the Exchange 

may obtain information regarding 

trading in the Shares, exchange-listed 

equity securities, ETFs, futures 

contracts, and exchange-traded options 

contracts from markets and other 

entities that are members of ISG or with 

which the Exchange has in place a 

comprehensive surveillance sharing 

agreement.70 All exchange-listed equity 

securities, ETFs, futures contracts and 

options held by the Fund will be traded 

on U.S. exchanges, all of which are 

members of ISG or are exchanges with 

which the Exchange has in place a 

comprehensive surveillance sharing 

agreement. In addition, FINRA, on 

behalf of the Exchange, is able to access, 

as needed, trade information for certain 

fixed income securities held by the 

Fund reported to FINRA’s Trade 

Reporting and Compliance Engine. 

The Exchange deems the Shares to be 

equity securities, thus rendering trading 

in the Shares subject to the Exchange’s 

existing rules governing the trading of 

equity securities. In support of this 

proposal, the Exchange has made 

representations, including: 

(1) The Exchange has appropriate 

rules to facilitate transactions in the 

Shares during all trading sessions 

(Opening, Core, and Late Trading 

Sessions). 

(2) The Shares will conform to the 

initial and continued listing criteria 

under NYSE Arca Equities Rules 

5.2(j)(3) and 5.5(g)(2), except that the 

Index will not meet the requirements of 

NYSE Arca Equities Rule 5.2(j)(3), 

Commentary .01(a)(A)(1)–(5) in that the 

Index will consist of options based on 

US Component Stocks (i.e., ETFs based 

on the S&P 500 Index) and options on 

an index of US Component Stocks (i.e., 

S&P 500 Index options), rather than US 

Component Stocks themselves. The 

Index will include a minimum of 20 

components and, therefore, would meet 

the numerical requirement of NYSE 

Arca Equities Rule 5.2(j)(3), 

Commentary .01(a)(A)(4) (a minimum of 

13 index or portfolio components). 

(3) Trading in the Shares will be 

subject to the existing trading 

surveillances, administered by FINRA 

on behalf of the Exchange, which are 

designed to detect violations of 

Exchange rules and applicable federal 

securities laws, and that these 

procedures are adequate to properly 

monitor Exchange trading of the Shares 

in all trading sessions and to detect and 

help deter violations of Exchange rules 

and federal securities laws applicable to 

trading on the Exchange. 

(4) Prior to the commencement of 

trading, the Exchange will inform its 

Equity Trading Permit Holders in an 

Information Bulletin of the special 

characteristics and risks associated with 

trading the Shares. Specifically, the 

Information Bulletin will discuss the 

following: (a) The procedures for 

purchases and redemptions of Shares in 

Creation Unit aggregations (and that 

Shares are not individually redeemable); 

(b) NYSE Arca Equities Rule 9.2(a), 

which imposes a duty of due diligence 

on its Equity Trading Permit Holders to 

learn the essential facts relating to every 

customer prior to trading the Shares; (c) 

the risks involved in trading the Shares 

during the Opening and Late Trading 

Sessions when an updated IIV or Index 

value will not be calculated or publicly 

disseminated; (d) how information 

regarding the IIV and Index value will 

be disseminated; (e) the requirement 

that Equity Trading Permit Holders 

deliver a prospectus to investors 

purchasing newly issued Shares prior to 

or concurrently with the confirmation of 

a transaction; and (f) trading 

information. 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
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71 17 CFR 240.10A–3. 

72 15 U.S.C. 78f(b)(5). 

73 Id. 

74 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 34–72834 

(August 13, 2014), 79 FR 48805 (August 18, 2014) 

(SR–CME–2014–28). 

4Securities Exchange Act Release No. 34–72959 

(September 2, 2014), 79 FR 53234 (September 8, 

2014) (SR–CME–2014–28). On August 18, 2014, 

CME filed Amendment No. 1 to the proposed rule 

change. CME withdrew Amendment No. 1 on 

August 29, 2014. 

5Securities Exchange Act Release No. 34–73283 

(October 1, 2014), 79 FR 60563 (October 7, 2014) 

(SR–CME–2014–28). 

6 17 CFR 200.30–3(a)(12). 

(5) For initial and continued listing, 

the Fund will be in compliance with 

Rule 10A–3 under the Exchange Act,71

as provided by NYSE Arca Equities Rule 

5.3. 

(6) At least 80% of the Fund’s total 

assets (exclusive of collateral held from 

securities lending, if any) will be 

invested in the component securities of 

the Index. The Fund will seek a 

correlation of 0.95 or better between its 

performance and the performance of its 

Index. A figure of 1.00 would represent 

perfect correlation. All options included 

in the Index will be listed and traded on 

a U.S. national securities exchange. 

(7) The Fund’s investments in swaps, 

futures contracts, forward contracts and 

options will be consistent with the 

Fund’s investment objective and with 

the requirements of the 1940 Act. To 

limit the potential risk associated with 

such transactions, the Fund will 

segregate or ‘‘earmark’’ assets 

determined to be liquid by the Adviser 

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 arising 

from such transactions. 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. To 

mitigate leveraging risk, the Adviser 

will segregate or ‘‘earmark’’ liquid assets 

or otherwise cover the transactions that 

may give rise to such risk. The Fund 

may not invest in leveraged or inverse 

leveraged (e.g., 2X, ¥2X, 3X, or ¥3X) 

ETFs or options on such ETFs. The 

Fund’s investments will be consistent 

with its investment objective and will 

not be used to provide multiple returns 

of a benchmark or to produce leveraged 

returns. 

(8) The Fund will transact only with 

swap dealers that have in place an ISDA 

agreement with the Fund. Where 

practicable, the Fund intends to invest 

in Cleared Swaps. The Fund will 

attempt to limit counterparty risk in 

non-cleared swap, forward, and OTC 

option contracts by entering into such 

contracts only with counterparties the 

Adviser believes are creditworthy and 

by limiting the Fund’s exposure to each 

counterparty. The Adviser will monitor 

the creditworthiness of each 

counterparty and the Fund’s exposure to 

each counterparty on an ongoing basis. 

The Fund will seek, where possible, to 

use counterparties, as applicable, whose 

financial status is such that the risk of 

default is reduced. The Adviser will 

evaluate the creditworthiness of 

counterparties on an ongoing basis. In 

addition to information provided by 

credit agencies, the Adviser will 

evaluate each approved counterparty 

using various methods of analysis, such 

as, for example, the counterparty’s 

liquidity in the event of default, the 

counterparty’s reputation, the Adviser’s 

past experience with the counterparty, 

and the counterparty’s share of market 

participation. 

(9) The Fund may hold up to an 

aggregate amount of 15% of its net 

assets in illiquid assets (calculated at 

the time of investment) deemed illiquid 

by the Adviser, consistent with 

Commission guidance. 

(10) A minimum of 100,000 Shares for 

the Fund will be outstanding at the 

commencement of trading on the 

Exchange. 

(11) The Fund will include 

appropriate risk disclosure in its 

offering documents, which will be 

available on the Commission’s Web site 

and on the Fund’s Web site, 

www.realityshares.com. 

This approval order is based on all of 

the Exchange’s representations, 

including those set forth above and in 

the Notice, and the Exchange’s 

description of the Fund. 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change, as modified by 

Amendments No. 1 and No. 4 thereto, 

is consistent with Section 6(b)(5) of the 

Act 72 and the rules and regulations 

thereunder applicable to a national 

securities exchange. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,73 that the 

proposed rule change (SR–NYSEArca– 

2014–41), as modified by Amendments 

No. 1 and No. 4 thereto, be, and it 

hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.74

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27707 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73627; File No. SR–CME– 

2014–28] 

Self-Regulatory Organizations; 

Chicago Mercantile Exchange Inc.; 

Notice of Withdrawal of Proposed Rule 

Change Related to Enhancements to 

Risk Model for Credit Default Swaps 

November 18, 2014. 

On August 8, 2014, Chicago 

Mercantile Exchange Inc. (‘‘CME’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 1 and Rule 19b– 

4 thereunder,2 a proposed rule change 

(SR–CME–2014–28) relating to CME’s 

Risk Model for Credit Default Swaps 

(‘‘CDS’’) as it applied only to broadbased index CDS products cleared by 

CME, and would not be applicable to 

security-based swaps. Notice of the 

proposed rule change was published in 

the Federal Register on August 18, 

2014.3 Notice of Amendment No. 2 to 

the proposed rule change was published 

in the Federal Register on September 8, 

2014.4 The Commission did not receive 

comments on the proposal. 

On October 1, 2014, the Commission 

extended the time period in which to 

either approve the proposed rule 

change, disapprove the proposed rule 

change, or institute proceedings to 

determine whether to disapprove the 

proposed rule change to November 16, 

2014.5 On November 14, 2014, CME 

withdrew the proposed rule change 

(SR–CME–2014–28). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.6

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27705 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 


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