Document ID: SEC-2013-1560-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-09-05T04:00Z

[Federal Register Volume 78, Number 172 (Thursday, September 5, 2013)]
[Notices]
[Pages 54715-54718]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21535]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70284; File No. SR-NYSEArca-2013-83]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to 
Investments in Leveraged Loans by the Peritus High Yield ETF

August 29, 2013.
    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 August 21, 2013, 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 Exchange. 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 reflect a change to the holdings of the 
Peritus High Yield ETF to achieve its investment objective to include 
leveraged loans. Peritus High Yield ETF is currently listed and traded 
on the Exchange under NYSE Arca Equities Rule 8.600. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Commission has approved listing and trading of shares 
(``Shares'') of the Peritus High Yield ETF (``Fund'') on the Exchange 
under NYSE Arca Equities Rule 8.600) \4\ (``Managed Fund Shares'').\5\ 
The Shares are offered by AdvisorShares 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\ Peritus High Yield ETF is currently listed and traded on 
the Exchange under NYSE Arca Equities Rule 8.600.
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    \4\ See Securities Exchange Act Release No. 63329 (November 17, 
2010), 75 FR 71760 (November 24, 2010) (SR-NYSEArca-2010-86) 
(``Prior Order''). The notice of filing of SR-NYSEArca-2010-86 was 
published in Securities Exchange Act Release No. 63041 (October 5, 
2010), 75 FR 62905 (October 13, 2010) (``First Prior Notice''). In 
addition, the exchange filed a proposed rule change to reflect a 
change to the Fund's holdings to achieve its investment objective to 
include equity securities. See Securities Exchange Act Release No. 
66818 (April 17, 2012), 77 FR 24233 (April 23, 2012) (SR-NYSEArca-
2012-33) (notice of filing and immediate effectiveness of proposed 
rule change (``Second Prior Notice'' and, together with the First 
Prior Notice and the Prior Order, the ``Prior Release'')). The Fund 
and the Shares are currently in compliance with the listing 
standards and other rules of the Exchange and the requirements set 
forth in the Prior Release.
    \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 advisor 
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 October 29, 
2012, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act of 1933 
(15 U.S.C. 77a) and the 1940 Act relating to the Fund (File Nos. 
333-157876 and 811-22110) (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 the1940 Act. See Investment Company Act Release No. 
29291 (May 28, 2010) (File No. 812-13677).
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    The investment adviser to the Fund is AdvisorShares Investments, 
LLC (the ``Adviser''). Peritus I Asset Management, LLC is the Fund's 
sub-adviser (``Peritus'' or the ``Sub-Adviser'').
    According to the Registration Statement and as stated in the Prior 
Release, the Fund's investment objective is to achieve high current 
income with a secondary goal of capital appreciation. The Exchange 
proposes to reflect a change to the holdings of the Fund to achieve its 
investment objective to include up to 20% of its net assets in 
``leveraged loans'', in addition to the other permitted investments set 
forth in the Prior Release.\7\ The Adviser represents that the 
investment objective of the Fund will not be changing.
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    \7\ The change to the Fund's holdings to include leveraged loans 
will be effective upon filing with the Commission of an amendment to 
the Trust's Registration Statement and upon the effectiveness and 
operativeness of this proposal.
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    Leveraged loans will include loans referred to as senior loans, 
bank loans and/or floating rate loans. The Fund will invest in such 
leveraged loans that the Adviser or Sub-Adviser deems to be highly 
liquid with readily available prices. The Fund will invest in leveraged 
loans rated C or higher by a credit rating agency registered as a 
nationally recognized statistical rating organization (``NRSRO'') with 
the Commission (for example, Moody's Investors Service, Inc.), or is 
unrated but considered to be of comparable quality by the Adviser or 
Sub-Adviser.\8\ The Fund will not invest in leveraged loans that are in 
default at time of purchase. The Fund will only invest in U.S. dollar-
denominated leveraged loans. In addition, for investment purposes, the 
leveraged loan must have a par amount outstanding of U.S. $150 million 
or greater at the time the loan is originally issued.\9\
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    \8\ In determining whether a security is of ``comparable 
quality,'' the Adviser or Sub-Adviser will consider, for example, 
whether the borrower 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.
    \9\ The Commission previously has approved listing and trading 
on NYSE Arca of an issue of Managed Fund Shares that primarily holds 
senior loans that include leveraged loans. See Securities Exchange 
Act Release No. 69244 (March 27, 2013), 78 FR 19766 (April 2, 2013) 
(SR-NYSEArca-2013-08) (order approving listing and trading of SPDR 
Blackstone/GSO Senior Loan ETF under NYSE Arca Equities Rule 8.600).
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    Leveraged loans are borrowings by non-investment grade companies 
(i.e., loans rated below Ba1 by Moody's

[[Page 54716]]

Investor Service and BBB+ by Standard & Poor's or are non-rated). The 
word ``leveraged'' refers to the credit quality of the borrower--a non-
investment grade company--not to any sort of use of leverage or margin 
within the loan structure. These are debt obligations that are 
structured between the borrower and the lender or lender group. The 
terms of the loan are negotiated up front and defined in the credit 
agreement. Just as high yield bonds have indentures that govern the 
terms of the debt obligation, leveraged loans have credit agreements 
that specify the terms, including maturity, prepayment obligations, 
financial covenants, and security. The terms of the loan can be 
restructured throughout the life of the loan via an amendment process 
that requires a certain percentage of holder approval. Once issued, 
various pieces of the loan often trade in an active secondary market.
    The four basic features of leveraged loans are as follows:
    1. Seniority in the Capital Structure: Leveraged loans are 
generally among the most senior debt obligations in the borrower's 
capital structures and, as such, would generally have first priority in 
payment.
    2. Security Backing: Leveraged loans are generally secured by the 
borrower's assets and operations. This usually includes both the 
physical assets as well as other assets of the company. In the case of 
a default, the loan holder would have a claim to those assets.
    3. Covenant Protection: Pursuant to the credit agreement governing 
the loan, loan holders are usually protected by a variety of covenants. 
These covenants can include a maximum leverage test, minimum interest 
coverage test, a restricted payments basket potentially limiting 
payments for subordinate obligations and dividends, and/or prepayment 
criteria. The covenants governing leveraged loans are generally more 
restrictive than those governing high yield bonds, providing the loan 
holder with added protections.
    4. Floating Rate Interest Payments: These loans generally pay 
interest with 3 month LIBOR as the base rate. The structure is usually 
a specified spread over the floating LIBOR rate. However, in some cases 
a LIBOR floor or ceiling may be specified.
    As stated in the Prior Release, the Fund will not invest in options 
contracts, futures contracts or swap agreements. The Fund's investments 
will be consistent with its investment objective and will not be used 
to enhance leverage.
    As stated in the Prior Release, on each business day, before 
commencement of trading in Shares in the Core Trading Session on the 
Exchange, the Fund discloses on its Web site the Disclosed Portfolio 
that will include, among other portfolio components, leveraged loans, 
and that will form the basis for the Fund's calculation of net asset 
value (``NAV'') at the end of the business day. The intra-day, closing 
and settlement prices of the portfolio securities, including any 
leveraged loans held by the Fund, will also be readily available from 
the national securities exchanges trading such securities, automated 
quotation systems, published or other public sources, or on-line 
information services.
    In calculating the Fund's NAV per Share, the Fund's investments 
will generally be valued using market valuations.\10\ A market 
valuation generally means a valuation (i) obtained from an exchange, a 
pricing service, or a major market maker (or dealer), (ii) based on a 
price quotation or other equivalent indication of value supplied by an 
exchange, a pricing service, or a major market maker (or dealer) or 
(iii) based on amortized cost.\11\ The Adviser may use various pricing 
services, or discontinue the use of any pricing service, as approved by 
the Trust's Board of Trustees from time to time. A price for leveraged 
loans obtained from a pricing service based on such pricing service's 
valuation matrix may be considered a market valuation. Valuations with 
respect to leveraged loans will be based on information supplied by 
pricing services or major market makers or dealers, as indicated in (i) 
and (ii) above. Any assets or liabilities denominated in currencies 
other than the U.S. dollar will be converted into U.S. dollars at the 
current market rates on the date of valuation as quoted by one or more 
sources.
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    \10\ Markit will be the primary price source for leveraged loans 
in calculating the NAV of the Fund's portfolio.
    \11\ For market valuation purposes, amortized cost will only 
apply to securities that have a remaining maturity of 60 days or 
less.
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    In the event that current market valuations are not readily 
available or such valuations do not reflect current market value, the 
Trust's procedures require that a security's fair value be determined 
if a market price is not readily available.\12\ In determining such 
value the Adviser or Sub-Adviser may consider, among other things, (i) 
Price comparisons among multiple sources, (ii) a review of corporate 
actions and news events, and (iii) a review of relevant financial 
indicators (e.g., movement in interest rates, market indices, and 
prices from the Fund's index providers). In these cases, the Fund's NAV 
may reflect certain portfolio securities' fair values rather than their 
market prices. Fair value pricing involves subjective judgments and it 
is possible that the fair value determination for a security is 
materially different than the value that could be realized upon the 
sale of the security.
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    \12\ The Trust's Board of Trustees has established Fair Value 
Procedures responsible for the valuation and revaluation of any 
portfolio investments for which market quotations or prices are not 
readily available. The Fund has implemented procedures designed to 
prevent the use and dissemination of material, non-public 
information regarding valuation and revaluation of any portfolio 
investments.
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    All representations made in the Prior Release regarding the 
availability of information relating to the Shares, trading halts, 
trading rules, the Portfolio Indicative Value, and surveillance, among 
others, will continue to apply to trading in the Shares.
    Except for the changes noted above, all other representations made 
in the Prior Release remain unchanged.\13\ The Fund will continue to 
comply with all initial and continued listing requirements under NYSE 
Arca Equities Rule 8.600.
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    \13\ See note 4, supra.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \14\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Fund may invest up to 20% of its net assets in leveraged 
loans, in addition to the other permitted investments set forth in the 
Prior Release. The Fund will invest in such leveraged loans that the 
Adviser or Sub-Adviser deems to be highly liquid with readily available 
prices. The Fund will invest in leveraged loans rated C or higher by an 
NRSRO or is unrated but considered to be of comparable quality by the 
Adviser or Sub-Adviser. The Fund will not invest in leveraged loans 
that are in default at time of purchase.

[[Page 54717]]

The Fund will only invest in U.S. dollar-denominated leveraged loans. 
In addition, for investment purposes, the leveraged loan must have a 
par amount outstanding of U.S. $150 million or greater at the time the 
loan is originally issued. The Adviser represents that the investment 
objective of the Fund will not be changing.
    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 net asset value (``NAV'') per Share is calculated daily and 
that the NAV and the Disclosed Portfolio is made available to all 
market participants at the same time. The intra-day, closing and 
settlement prices of the portfolio securities, including any leveraged 
loans held by the Fund, will also be readily available from the 
national securities exchanges trading such securities, automated 
quotation systems, published or other public sources, or on-line 
information services. The Portfolio Indicative Value, as defined in 
NYSE Arca Equities Rule 8.600 (c)(3), is 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 discloses on its 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 is and 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 is 
available via the Consolidated Tape Association high-speed line. 
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. Trading in the Shares is 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of the Fund may be halted. The Web 
site for the Fund includes a form of the prospectus for the Fund and 
additional data relating to NAV and other applicable quantitative 
information. In addition, as stated in the Prior Release, investors 
have ready access to information regarding the Fund's holdings, the 
Portfolio Indicative Value, 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. As noted in the Prior Release, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via the Intermarket Surveillance Group (``ISG'') 
from other exchanges that are members of ISG or with which the Exchange 
has entered into a comprehensive surveillance sharing agreement. In 
addition, as stated in the Prior Notice, investors have ready access to 
information regarding the Fund's holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last-sale information 
for the Shares. As noted above, the Fund may invest up to 20% of its 
net assets in only highly liquid leveraged loans with readily available 
prices. The Fund will invest in leveraged loans rated C or higher by an 
NRSRO or is unrated but considered to be of comparable quality by the 
Adviser or Sub-Adviser. The Fund will not invest in leveraged loans 
that are in default at time of purchase. The Fund will only invest in 
U.S. dollar-denominated leveraged loans. In addition, for investment 
purposes, the leveraged loan must have a par amount outstanding of U.S. 
$150 million or greater at the time the loan is originally issued.

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 believes that 
the proposed rule change, in permitting the Fund to utilize leveraged 
loans as part of its portfolio to achieve its investment objective, 
will enhance competition among issues of Managed Fund Shares that 
invest in leveraged loans.

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

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act\15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\18\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission notes that 
waiver of the operative delay would permit the Fund to invest 
immediately in leveraged loans that the Sub-Adviser believes will 
further the Fund's investment objective to achieve high current income 
with a secondary goal of capital appreciation.
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    \17\ Id.
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
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    Under the proposal, the Fund's investments in leveraged loans would 
be limited to 20% of its net assets. The Exchange states that the Fund 
will not invest in leveraged loans that are in default at time of 
purchase and that the Fund will only invest in U.S. dollar-denominated 
leveraged loans. In addition, for investment purposes, each leveraged 
loan must have a par amount outstanding of U.S. $150 million or greater 
at the time the loan is originally issued. The Commission notes that it 
has approved the listing and trading of shares of another exchange-
traded fund that principally invests in similar leveraged loans.\19\ 
The Exchange represents that the Fund's investment objective is not 
changing, all other representations made in the Prior Release remain 
unchanged, and the Fund will continue to comply with all of the listing 
requirements under NYSE Arca Equities Rule 8.600. For the foregoing 
reasons, the Commission believes that the proposed change does not 
raise novel or unique regulatory issues and is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission waives the 30-day operative delay requirement and designates 
the

[[Page 54718]]

proposed rule change as operative upon filing.\20\
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    \19\ See note 9, supra.
    \20\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-NYSEArca-2013-83 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-83. 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 the filing also will 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 No. SR-NYSEArca-2013-83 and should be 
submitted on or before September 26, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
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    \21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-21535 Filed 9-4-13; 8:45 am]
BILLING CODE 8011-01-P