Document ID: SEC-2016-2105-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-12-01T05:00Z

[Federal Register Volume 81, Number 231 (Thursday, December 1, 2016)]
[Notices]
[Pages 86760-86762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28830]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79402; File No. SR-NYSEArca-2016-131]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change Relating To Listing and Trading of Shares of the 
Virtus Enhanced U.S. Equity ETF Under Commentary .01 to NYSE Arca 
Equities Rule 5.2(j)(3)

November 25, 2016.

I. Introduction

    On October 3, 2016, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the Virtus Enhanced U.S. Equity ETF (``Fund''), 
a series of Virtus ETF Trust II (``Trust''), under Commentary .01 to 
NYSE Arca Equities Rule 5.2(j)(3) (``Investment Company Units''). The 
proposed rule change was published for comment in the Federal Register 
on October 20, 2016.\3\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79101 (October 14, 
2016), 81 FR 72630 (``Notice'').
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II. Exchange's Description of the Proposal \4\
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    \4\ The Commission notes that additional information regarding 
the Fund, the Trust, and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, calculation of net asset 
value (``NAV''), distributions, and taxes, among other things, can 
be found in the Notice, and the Registration Statement, as 
applicable. See Notice, supra note 3, and Registration Statement, 
infra note 6.
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    The Exchange proposes to list and trade Shares of the Fund under 
Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3), which governs the 
listing and trading of Investment Company Units on the Exchange. The 
Exchange represents that it has submitted the proposed rule change 
because the underlying index of 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.'' 
Specifically, as discussed in the Notice,\5\ options on the S&P 500 
index may be Index components. Consequently, the Index is not composed 
entirely of US Component Stocks, and therefore the Shares do not 
satisfy the requirements for generic listing under Commentary .01(a)(A) 
to NYSE Arca Equities Rule 5.2(j)(3).
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    \5\ See Notice, supra note 3, 81 FR at 72631.
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    The Fund will be an index-based exchange traded fund (``ETF''). The 
Shares will be offered by the Trust, which is registered with the 
Commission as an investment company and has filed a registration 
statement on Form N-1A (the ``Registration Statement'') with the 
Commission on behalf of the Fund.\6\
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    \6\ The Exchange represents that, on September 1, 2016, the 
Trust filed a Registration Statement on Form N-1A under the 
Securities and Exchange Act of 1933 and the Investment Company Act 
of 1940 (``1940 Act'') (File Nos. 333-206600 and 811-23078). 
According to the Exchange, the Trust has obtained certain exemptive 
relief from the Commission under the 1940 Act. See Investment 
Company Act Release No. 30825 (December 11, 2013) (File No. 812-
14212).
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    The investment adviser to the Fund will be Virtus ETF Advisers LLC 
(``Adviser''). ETF Distributors LLC will serve as the distributor 
(``Distributor'') of Fund shares on an agency basis. The Bank of New 
York Mellon (``Administrator'') will be the administrator, custodian 
and transfer agent for the Fund.

A. The Fund's Principal Investments

    According to the Exchange, the Fund's investment objective is to 
seek investment results that, before fees and expenses, closely 
correspond to the price and yield performance of the Rampart Enhanced 
U.S. Equity Index (``Index'').\7\ Under normal market conditions,\8\ 
the Fund will invest not less than 80% of its total assets in component 
securities of the Index. Additionally, under normal market conditions, 
the Fund will invest not less than 80% of its total assets in U.S. 
exchange-traded common stocks. The Fund will also seek to generate 
additional income by writing SPX call options and will seek additional 
capital appreciation by purchasing SPX call options.
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    \7\ According to the Exchange, the Index was developed by 
Rampart Investment Management Company, LLC (``Index Provider''), and 
is calculated and maintained by NYSE Global Index Group (``Index 
Calculation Agent''). The Index Provider is affiliated with the 
Adviser and the Distributor. The Index Calculation Agent is not 
affiliated with the Adviser, Distributor, Administrator, or the 
Trust.
    \8\ The term ``normal market conditions'' is defined in NYSE 
Arca Equities Rule 8.600(c)(5). On a temporary basis, including for 
defensive purposes, during the initial invest-up period and during 
periods of high cash inflows or outflows, the Fund may depart from 
its principal investment strategies; for example, it may hold a 
higher than normal proportion of its assets in cash. During such 
periods, the Fund may not be able to achieve its investment 
objectives. The Fund may adopt a defensive strategy when the Adviser 
believes securities in which the Fund normally invests have elevated 
risks due to political or economic factors and in other 
extraordinary circumstances.
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B. The Fund's Non-Principal Investments

    While the Fund, under normal market conditions will invest at least 
80% of its net assets in the securities and financial instruments 
described above, the Fund may invest its remaining assets in the 
securities and financial instruments described below.
    The Fund may invest in short-term, high quality securities issued 
or guaranteed by the U.S. government (in addition to U.S. Treasury 
securities) and non-U.S. governments, and each of their agencies and 
instrumentalities; debt securities issued by U.S. government sponsored 
enterprises; repurchase

[[Page 86761]]

agreements backed by U.S. government and non-U.S. government 
securities; money market mutual funds; and deposit and other 
obligations of U.S. and non-U.S. banks and financial institutions 
(``Money Market Instruments'').
    The Fund may invest in ETFs.\9\
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    \9\ The Fund will not invest in leveraged ETFs, (e.g., 2X or 3X) 
or inverse or inverse leveraged ETFs (e.g., -1X or -2X).
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    The Fund may invest in U.S. exchange-traded equity index futures 
contracts.
    The Fund may invest in U.S. exchange-traded index options (other 
than SPX) and U.S. exchange-traded options on ETFs.
    The Fund may invest in U.S. exchange-traded options on futures 
contacts and U.S. exchange-traded options on stocks.

C. Investment Restrictions

    The Exchange represents that the Fund will not invest in any non-
U.S. equity securities. The Fund's investments will be consistent with 
the Fund's investment objective and will not be used to enhance 
leverage.
    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.\10\
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    \10\ 26 U.S.C. 851.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \11\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\12\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\13\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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.
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    \11\ 15 U.S.C. 78f.
    \12\ 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).
    \13\ 17 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Act,\14\ 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''). The current value of the Index will be 
widely disseminated by one or more major market data vendors as 
required by NYSE Arca Equities Rule 5.2(j)(3), Commentary .02(b)(iii). 
In addition, during the Core Trading Session (9:30 a.m. to 4:00 p.m. 
Eastern Time), an IIV for the Shares will be disseminated by one or 
more major market data vendors and updated at least every 15 
seconds.\15\ 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 
devices. The Web site for the Fund will include the prospectus for the 
Fund and additional data relating to the net asset value (``NAV'') and 
other applicable quantitative information. Information regarding each 
portfolio holding will be disclosed by the Trust on each business day 
before commencement of trading in Shares in the Core Trading Session on 
the Exchange.
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    \14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \15\ The Exchange states that it understands that several major 
market data vendors display and/or make widely available IIV's taken 
from the CTA or other data feeds. See Notice, supra note 3, 81 FR at 
72634, n.20.
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    The Commission believes that the proposal to list and trade the 
Shares is reasonably designed to promote fair disclosure of information 
that may be necessary to price the Shares appropriately and to prevent 
trading when a reasonable degree of transparency cannot be assured. The 
Exchange may consider all relevant factors in exercising its discretion 
to halt or suspend trading in the Shares of a Fund. Shares of the Fund 
will be halted if the ``circuit breaker'' parameters in NYSE Arca 
Equities Rule 7.12 are reached. Trading may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent to 
which trading is not occurring in the securities and/or the financial 
instruments of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
    If the IIV, 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.\16\ 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.\17\ 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.
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    \16\ See id. at 72634.
    \17\ See id.
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    In support of this proposal, the Exchange has made the following 
representations:
    (1) 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 
include options.
    (2) The Exchange represents that trading in the Shares will be 
subject to the existing Exchange trading surveillances procedures, as 
well as cross-market surveillances administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the 
Exchange.\18\ The Exchange represents that these procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and federal securities laws applicable to trading on the Exchange.\19\
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    \18\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
    \19\ See id.
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    (3) The Exchange or FINRA, on behalf of the Exchange will 
communicate as needed regarding trading in the Shares, ETFs, options, 
and futures with markets and other entities that are members of the 
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on 
behalf of the Exchange may obtain trading information regarding trading 
in the Shares, ETFs, options, and futures from those markets and other 
entities that are members of ISG or with which

[[Page 86762]]

the Exchange has in place a comprehensive surveillance sharing 
agreement.\20\ The Exchange is able to access from FINRA, as needed, 
trade information for certain fixed income securities held by the Fund 
reported to FINRA's Trade Reporting and Compliance Engine.\21\
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    \20\ For a list of the current members of ISG, see 
www.isgportal.org.
    \21\ See id.
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    (4) For initial and continued listing of the Shares, the Trust is 
required to comply with Rule 10A-3 under the Act.\22\
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    \22\ See 17 CFR 240.10A-3.
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    (5) Prior to the commencement of trading of Shares in the Fund, the 
Exchange will inform its ETP Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (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 ETP 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 ETP Holders 
deliver a prospectus to investors purchasing newly issued Shares prior 
to or concurrently with the confirmation of a transaction; and (f) 
trading information.
    (6) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.\23\
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    \23\ See Notice, supra note 3, 81 FR at 76234.
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    (7) The Exchange represents that all statements and representations 
made in this filing regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange.\24\
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    \24\ See id. at 72635.
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    (8) The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Fund to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Fund is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Equities Rule 5.5(m).\25\
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    \25\ See id.
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    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, is consistent with Section 6(b)(5) of the Act \26\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \26\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-NYSEArca-2016-131), be, and 
it hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).
    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Brent J. Fields,
Secretary.
[FR Doc. 2016-28830 Filed 11-30-16; 8:45 am]
 BILLING CODE 8011-01-P