Document ID: SEC-2014-1951-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-11-21T05:00Z

[Federal Register Volume 79, Number 225 (Friday, November 21, 2014)]
[Notices]
[Pages 69540-69545]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27570]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73613; File No. SR-NYSEArca-2014-127]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Use of 
Derivative Instruments by the First Trust Preferred Securities and 
Income ETF

November 17, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 5, 2014, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 means of achieving 
the investment objective applicable to the First Trust Preferred 
Securities and Income ETF (the ``Fund'') relating to its use of 
derivative instruments. The Fund is currently listed and traded on the 
Exchange under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''). 
The text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Commission has approved listing and trading on the Exchange of 
shares (``Shares'') of the Fund under NYSE Arca Equities Rule 8.600, 
which governs the listing and trading of Managed Fund Shares on the 
Exchange.\4\ The Shares are offered by the First Trust Exchange-Traded 
Fund III (the ``Trust''), which was organized as a Massachusetts 
business trust and is registered with the Commission as an open-end 
management investment company.\5\
---------------------------------------------------------------------------

    \4\ The Commission originally approved the listing and trading 
of the Shares on the Exchange on February 8, 2013. See Securities 
Exchange Act Release No. 68870 (February 8, 2013), 78 FR 11245 
(February 15, 2013) (SR-NYSEArca-2012-139) (``Prior Order''). See 
also Securities Exchange Act Release No. 68458 (December 18, 2012), 
77 FR 76148 (December 26, 2012) (SR-NYSEArca-2012-139) (``Prior 
Notice,'' and together with the Prior Order, the ``Prior Release'').
    \5\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On February 28, 2014, the Trust filed with the 
Commission an amendment to its registration statement on Form N-1A 
(File Nos. 333-176976 and 811-22245) under the Securities Act of 
1933 (``Securities Act'') and under the 1940 Act relating to the 
Fund (``Registration Statement''). The descriptions of the Shares 
and the Fund contained herein are based, in part, on information in 
the Registration Statement. In addition, the Commission has issued 
an order granting certain exemptive relief to the Trust under the 
1940 Act. See Investment Company Act Release No. 30029 (April 10, 
2012) (File No. 812-13795) (the ``Exemptive Order'').
---------------------------------------------------------------------------

    First Trust Advisors L.P. (``First Trust Advisors'') is the 
investment adviser

[[Page 69541]]

(``Adviser'') to the Fund. Stonebridge Advisors LLC serves as sub-
adviser (``Sub-Adviser'') to the Fund.
    In this proposed rule change, the Exchange proposes to change the 
description of the Fund's use of derivative instruments, as described 
below.\6\
---------------------------------------------------------------------------

    \6\ The Adviser represents that the Adviser and the Sub-Adviser 
have managed and will continue to manage the Fund in the manner 
described in the Prior Release and the Rule 144A Representation (as 
defined below), and will not implement the changes described herein 
until the instant proposed rule change is operative.
---------------------------------------------------------------------------

    On December 6, 2012, the staff of the Commission's Division of 
Investment Management (``Division'') issued a no-action letter (``No-
Action Letter'') relating to the use of derivatives by actively-managed 
exchange-traded funds (``ETFs'').\7\ The No-Action Letter noted that, 
in March of 2010, the Commission announced in a press release that the 
staff was conducting a review to evaluate the use of derivatives by 
mutual funds, ETFs, and other investment companies and that, pending 
completion of this review, the staff would defer consideration of 
exemptive requests under the 1940 Act relating to, among others, 
actively-managed ETFs that would make significant investments in 
derivatives.
---------------------------------------------------------------------------

    \7\ See No-Action Letter dated December 6, 2012 from Elizabeth 
G. Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management.
---------------------------------------------------------------------------

    The No-Action Letter stated that the Division staff will no longer 
defer consideration of exemptive requests under the 1940 Act relating 
to actively-managed ETFs that make use of derivatives provided that 
they include representations to address some of the concerns expressed 
in the Commission's March 2010 press release. These representations 
are: (i) That the ETF's board periodically will review and approve the 
ETF's use of derivatives and how the ETF's investment adviser assesses 
and manages risk with respect to the ETF's use of derivatives; and (ii) 
that the ETF's disclosure of its use of derivatives in its offering 
documents and periodic reports is consistent with relevant Commission 
and staff guidance (together, the ``No-Action Letter 
Representations''). The No-Action Letter stated that the Division would 
not recommend enforcement action to the Commission under sections 
2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the 1940 Act, or rule 
22c-1 under the 1940 Act if actively-managed ETFs operating in reliance 
on specified orders (which include the Trust's Exemptive Order \8\) 
invest in options contracts, futures contracts or swap agreements 
provided that they comply with the No-Action Letter Representations.\9\
---------------------------------------------------------------------------

    \8\ See note 5, supra.
    \9\ The Adviser acknowledges that, for the Fund to rely on the 
No-Action Letter, the Fund must comply with the No-Action Letter 
Representations, which include the following: (i) The Board of 
Trustees of the Trust (the ``Trust Board'') will periodically review 
and approve the Fund's use of derivatives and how the Adviser 
assesses and manages risk with respect to the Fund's use of 
derivatives and (ii) the Fund's disclosure of its use of derivatives 
in its offering documents and periodic reports will be consistent 
with relevant Commission and staff guidance.
---------------------------------------------------------------------------

    The Prior Release included the following representation: 
``Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements'' (the 
``Derivatives Representation''). In view of the No-Action Letter, the 
Exchange is proposing to delete the Derivatives Representation.
    The Exchange now proposes that, to pursue its investment objective, 
the Fund be permitted to invest in exchange-traded and over-the-counter 
(``OTC'') interest rate swaps, exchange-listed options on U.S. Treasury 
futures contracts, exchange-listed U.S. Treasury futures contracts, 
exchange-listed options on Eurodollar futures contracts, exchange-
listed Eurodollar futures contracts, exchange-traded and OTC non-U.S. 
currency swaps, exchange-listed currency options, forward currency 
contracts and non-deliverable forward currency contracts (collectively, 
``Derivative Instruments'').\10\ The use of Derivative Instruments may 
allow the Fund to seek to enhance return, to hedge some of the risks of 
its investments in securities, to substitute a position in an 
underlying asset, to reduce transaction costs, to maintain full market 
exposure (which means to adjust the characteristics of its investments 
to more closely approximate those of the markets in which it invests), 
to manage cash flows, to preserve capital or to manage its foreign 
currency exposures.\11\
---------------------------------------------------------------------------

    \10\ Non-deliverable forward currency contracts do not involve 
physical exchange of the two currencies of the subject contract, but 
instead a net cash settlement of the two currencies is made by one 
party to the other and is based upon the movement of the two 
currencies relative to each other. The net cash settlement occurs in 
a predetermined convertible currency. Non-deliverable forward 
currency contracts differ from conventional forward currency 
contracts in that there is not a physical exchange of the subject 
currencies at settlement, and non-deliverable forward currency 
contracts can be used on currencies that may be less liquid and/or 
have a smaller market of trade.
    \11\ In particular, the Sub-Adviser contemplates that the Fund 
will utilize Derivative Instruments for hedging purposes. For 
example, the Sub-Adviser may seek to use futures contracts or swap 
agreements to hedge the Fund's assets against higher rates by 
reducing its [sic] overall duration.
---------------------------------------------------------------------------

    Under normal market conditions, no more than 20% of the value of 
the Fund's net assets will be invested in Derivative Instruments.\12\ 
In addition, at least 90% of the Fund's net assets that are invested in 
exchange-listed options on U.S. Treasury futures contracts, exchange-
listed U.S. Treasury futures contracts, exchange-listed options on 
Eurodollar futures contracts, exchange-listed Eurodollar futures 
contracts, and exchange-listed currency options will be invested in 
such instruments whose principal market is a member of the Intermarket 
Surveillance Group (``ISG''), which includes all U.S. national 
securities exchanges, certain U.S. futures exchanges and certain 
foreign exchanges, or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.\13\
---------------------------------------------------------------------------

    \12\ The Fund will limit its direct investments in futures, 
options on futures and swaps to the extent necessary for the Adviser 
to claim the exclusion from regulation as a ``commodity pool 
operator'' with respect to the Fund under Rule 4.5 promulgated by 
the Commodity Futures Trading Commission (``CFTC''), as such rule 
may be amended from time to time. Under Rule 4.5 as currently in 
effect, the Fund will limit its trading activity in futures, options 
on futures and swaps (excluding activity for ``bona fide hedging 
purposes,'' as defined by the CFTC) such that it will meet one of 
the following tests: (i) Aggregate initial margin and premiums 
required to establish its futures, options on futures and swap 
positions will not exceed 5% of the liquidation value of the Fund's 
portfolio, after taking into account unrealized profits and losses 
on such positions; or (ii) aggregate net notional value of its 
futures, options on futures and swap positions will not exceed 100% 
of the liquidation value of the Fund's portfolio, after taking into 
account unrealized profits and losses on such positions.
    \13\ For a list of the current members of ISG, see 
www.isgportal.org. As stated in the Prior Release, the Exchange 
notes that not all components of the Disclosed Portfolio for the 
Fund may trade on markets that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    The Prior Release stated that the Fund's investments would be 
consistent with the Fund's investment objective and would not be used 
to enhance leverage. In view of the Exchange's proposal to permit the 
Fund to use Derivative Instruments, the Fund's investments in 
Derivative Instruments could potentially be used to enhance leverage. 
However, the Fund's investments in Derivative Instruments will be 
consistent with the Fund's investment objective and will not be used to 
seek to achieve a multiple or inverse multiple of an index.
    Investments in Derivative Instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. The Fund will comply with the regulatory requirements of 
the Commission to maintain assets as ``cover,'' maintain segregated 
accounts, and/or make margin payments when it takes

[[Page 69542]]

positions in Derivative Instruments involving obligations to third 
parties (i.e., instruments other than purchase options). If the 
applicable guidelines prescribed under the 1940 Act so require, the 
Fund will earmark or set aside cash, U.S. government securities, high 
grade liquid debt securities and/or other liquid assets permitted by 
the Commission in a segregated custodial account in the amount 
prescribed.\14\
---------------------------------------------------------------------------

    \14\ With respect to guidance under the 1940 Act, see 15 U.S.C. 
80a-18; Investment Company Act Release No. 10666 (April 18, 1979), 
44 FR 25128 (April 27, 1979); Dreyfus Strategic Investing, 
Commission No-Action Letter (June 22, 1987); Merrill Lynch Asset 
Management, L.P., Commission No-Action Letter (July 2, 1996).
---------------------------------------------------------------------------

    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 
Derivative Instruments, may give rise to leverage, causing the Fund to 
be more volatile than if it had not been leveraged.\15\
---------------------------------------------------------------------------

    \15\ To mitigate leveraging risk, the Fund will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
---------------------------------------------------------------------------

    Based on the above, the Exchange seeks this modification regarding 
the Fund's use of Derivative Instruments. The Adviser represents that 
there is no change to the Fund's investment objective. The Adviser and 
the Sub-Adviser believe that the ability to invest in Derivative 
Instruments will provide the Sub-Adviser with additional flexibility to 
meet the Fund's investment objective.
    The Exchange further notes that the Prior Release stated that the 
Fund may hold up to an aggregate amount of 15% of its net assets in 
illiquid securities (calculated at the time of investment), including, 
among other enumerated assets, Rule 144A securities. To clarify this 
statement given that Rule 144A securities are not necessarily 
``illiquid,'' the Adviser now represents that the Fund's limitation on 
holding up to an aggregate amount of 15% of its net assets in illiquid 
assets (calculated at the time of investment) would include Rule 144A 
securities deemed illiquid by the Adviser or Sub-Adviser, in accordance 
with Commission guidance (the ``Rule 144A Representation'').\16\
---------------------------------------------------------------------------

    \16\ A change regarding the restriction on the Fund's 
investments in Rule 144A securities was reflected in a supplement to 
the Registration Statement, dated March 31, 2014. The Commission has 
stated that long-standing Commission guidelines have required open-
end funds to hold no more than 15% of their net assets in illiquid 
securities and other illiquid assets. See Investment Company Act 
Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), 
footnote 34. See also, Investment Company Act Release No. 5847 
(October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement 
Regarding ``Restricted Securities''); Investment Company Act Release 
No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions 
of Guidelines to Form N-1A). A fund's portfolio security is illiquid 
if it cannot be disposed of in the ordinary course of business 
within seven days at approximately the value ascribed to it by the 
fund. See Investment Company Act Release No. 14983 (March 12, 1986), 
51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 under 
the 1940 Act); Investment Company Act Release No. 17452 (April 23, 
1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the 
Securities Act).
    The Commission previously has approved listing and trading on 
the Exchange of issues of Managed Fund Shares that may invest up to 
an aggregate amount of 15% of a fund's net assets in Rule 144A 
securities deemed illiquid by a fund's adviser, in accordance with 
Commission guidance. See, e.g., Securities Exchange Act Release No. 
71067 (December 12, 2013), 78 FR 76669 (December 18, 2013) (order 
approving listing and trading of shares of the SPDR MFS Systematic 
Core Equity ETF, SPDR MFS Systematic Growth Equity ETF, and SPDR MFS 
Systematic Value Equity ETF under NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------

    The Fund will continue to comply with all initial and continued 
listing requirements under NYSE Arca Equities Rule 8.600.
    Except for the changes noted herein, all other facts presented and 
representations made in the Rule 19b-4 filing underlying the Prior 
Release remain unchanged.
    The changes described herein will be effective upon (i) the 
effectiveness of an amendment to the Trust's Registration Statement 
disclosing the Fund's intended use of Derivative Instruments and (ii) 
when this proposed rule change has become operative. The Adviser 
represents that the Adviser, has managed and will continue to manage 
the Fund in the manner described in the Prior Release and the Rule 144A 
Representation, and will not implement the changes described herein 
until this proposed rule change is operative.
Impact on Arbitrage Mechanism
    The Adviser believes there will be minimal, if any, impact to the 
arbitrage mechanism as a result of the use of derivatives. Market 
makers and participants should be able to value derivatives as long as 
the positions are disclosed with relevant information. The Adviser 
believes that the price at which Shares trade will continue to be 
disciplined by arbitrage opportunities created by the ability to 
purchase or redeem Creation Units (as defined below) at their net asset 
value (``NAV''), which should ensure that Shares will not trade at a 
material discount or premium in relation to their NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of the Fund's arbitrage 
mechanism due to the use of derivatives. Certain derivatives may not be 
eligible for in-kind transfer, and such derivatives will be substituted 
with a ``cash in lieu'' amount (as described below) when the Fund 
processes purchases or redemptions of Creation Units (as defined below) 
in-kind.
Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis, at 
NAV, only in large specified blocks each consisting of 50,000 Shares 
(each such block of Shares, a ``Creation Unit''). The Fund will issue 
and redeem Creation Units in exchange for an in-kind portfolio of 
instruments and/or cash in lieu of such instruments (the ``Creation 
Basket''). In addition, if there is a difference between the NAV 
attributable to a Creation Unit and the market value of the Creation 
Basket exchanged for the Creation Unit, the party conveying instruments 
with the lower value will pay to the other an amount in cash equal to 
the difference (referred to as the ``Cash Component''). Cash will be 
conveyed in lieu of any Derivative Instruments that cannot be 
transferred in-kind.
    The Fund's custodian, through the National Securities Clearing 
Corporation, will make available on each business day, prior to the 
opening of business of the New York Stock Exchange, the list of the 
names and quantities of the instruments comprising the Creation Basket, 
as well as the estimated Cash Component (if any), for that day. The 
published Creation Basket will apply until a new Creation Basket is 
announced on the following business day.
Valuation for Purposes of Calculating Net Asset Value
    As indicated in the Prior Release, the Fund's NAV is determined as 
of the close of trading (normally 4:00 p.m., Eastern Time) on each day 
the New York Stock Exchange is open for business and is calculated by 
taking the market value of the Fund's total assets, including interest 
or dividends accrued but not yet collected, less all liabilities, and 
dividing such amount by the total amount of Shares outstanding.
    For purposes of calculating NAV, the Fund's investments are valued 
daily at market value or, in the absence of market value with respect 
to any such investment, at fair value, in each case in accordance with 
valuation procedures (which may be revised from time to time) adopted 
by the Trust Board (the ``Valuation Procedures'') and in accordance 
with the 1940 Act. All valuations are subject to review by the Trust 
Board or its delegate. A market

[[Page 69543]]

valuation generally means a valuation (i) obtained from an exchange, an 
independent pricing service (``Pricing Service''), or a major market 
maker (or dealer) or (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). The information 
summarized below is based on the Valuation Procedures as currently in 
effect; however, as noted above, the Valuation Procedures are amended 
from time to time and, therefore, such information is subject to 
change.
    Exchange-listed options on U.S. Treasury futures contracts, 
exchange-listed U.S. Treasury futures contracts, exchange-listed 
options on Eurodollar futures contracts, exchange-listed Eurodollar 
futures contracts, and exchange-listed currency options will typically 
be valued at the closing price in the market where such instruments are 
principally traded. OTC and exchange-traded swaps will typically be 
valued using a Pricing Service. Forward currency contracts and non-
deliverable forward currency contracts will typically be valued at the 
current day's interpolated foreign exchange rate, as calculated using 
the current day's spot rate, and the thirty, sixty, ninety, and one-
hundred-eighty day forward rates provided by a Pricing Service or by 
certain independent dealers in such contracts.
    Certain Derivative Instruments may not be able to be priced by pre-
established pricing methods. Such Derivative Instruments may be valued 
by the Trust Board or its delegate at fair value. The use of fair value 
pricing by the Fund is governed by the Valuation Procedures and 
conducted in accordance with the provisions of the 1940 Act. As a 
general principle, the current ``fair value'' of an asset would appear 
to be the amount which the owner might reasonably expect to receive for 
the asset upon its current sale. The use of fair value prices by the 
Fund generally results in prices used by the Fund that may differ from 
current market valuations or official closing prices on the applicable 
exchange. A variety of factors may be considered in determining the 
fair value of Derivative Instruments.
    Because foreign exchanges may be open on different days than the 
days during which an investor may purchase or sell Shares, the value of 
the Fund's Derivative Instruments that are traded on foreign exchanges 
may change on days when investors are not able to purchase or sell 
Shares. Derivative Instruments that are denominated in foreign 
currencies will be translated into U.S. dollars at the exchange rate of 
such currencies against the U.S. dollar as provided by a Pricing 
Service. All Derivative Instruments that are denominated in foreign 
currencies will be converted into U.S. dollars at the exchange rates in 
effect at the time of valuation.
Availability of Information
    As described 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 as 
defined in NYSE Arca Equities Rule 8.600(c)(2) that will form the basis 
for the Fund's calculation of NAV at the end of the business day. See 
``Disclosed Portfolio'' below.
    Pricing information for Derivative Instruments will be available 
from major broker-dealer firms, subscription services, and/or Pricing 
Services and, in addition, for exchange-traded Derivative Instruments, 
from the exchanges on which they are traded.
Disclosed Portfolio
    The Fund's disclosure of derivative positions in the Disclosed 
Portfolio will include information that market participants can use to 
value these positions intraday. On a daily basis, 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 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.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\17\ 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.
---------------------------------------------------------------------------

    \17\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-listed options on U.S. 
Treasury futures contracts, exchange-listed U.S. Treasury futures 
contracts, exchange-listed options on Eurodollar futures contracts, 
exchange-listed Eurodollar futures contracts, and exchange-listed 
currency options with other markets and other entities that are members 
of the ISG, and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, exchange-listed options on 
U.S. Treasury futures contracts, exchange-listed U.S. Treasury futures 
contracts, exchange-listed options on Eurodollar futures contracts, 
exchange-listed Eurodollar futures contracts, and exchange-listed 
currency options from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares, 
exchange-listed options on U.S. Treasury futures contracts, exchange-
listed U.S. Treasury futures contracts, exchange-listed options on 
Eurodollar futures contracts, exchange-listed Eurodollar futures 
contracts, and exchange-listed currency options from markets and other 
entities that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.\18\
---------------------------------------------------------------------------

    \18\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    At least 90% of the Fund's net assets that are invested in 
exchange-listed options on U.S. Treasury futures contracts, exchange-
listed U.S. Treasury futures contracts, exchange-listed options on 
Eurodollar futures contracts, exchange-listed Eurodollar futures 
contracts, and exchange-listed currency options will be invested in 
such instruments whose principal market is a member of the ISG.

[[Page 69544]]

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \19\ 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.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will continue to be listed and traded on the Exchange pursuant 
to the initial and continued listing criteria in NYSE Arca Equities 
Rule 8.600. The Fund will continue to comply with all initial and 
continued listing requirements under NYSE Arca Equities Rule 8.600.
    Under the proposed rule change, the Fund seeks to invest in 
Derivative Instruments, consistent with the No-Action Letter. Under 
normal market conditions, no more than 20% of the value of the Fund's 
net assets will be invested in Derivative Instruments. The Fund's 
investments in Derivative Instruments will be consistent with the 
Fund's investment objective and will not be used to seek to achieve a 
multiple or inverse multiple of an index. Investments in Derivative 
Instruments will be made in accordance with the 1940 Act and consistent 
with the Fund's investment objective and policies. The Fund will comply 
with the regulatory requirements of the Commission to maintain assets 
as ``cover,'' maintain segregated accounts, and/or make margin payments 
when it takes positions in Derivative Instruments involving obligations 
to third parties (i.e., instruments other than purchase options). If 
the applicable guidelines prescribed under the 1940 Act so require, the 
Fund will earmark or set aside cash, U.S. government securities, high 
grade liquid debt securities and/or other liquid assets permitted by 
the Commission in a segregated custodial account in the amount 
prescribed. Moreover, the Fund will include appropriate risk disclosure 
in its offering documents, including leveraging risk.
    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 Adviser represents that there is no change to the Fund's 
investment objective. With respect to the proposal to permit the Fund 
to invest in Derivative Instruments, the Adviser represents that use of 
Derivative Instruments may allow the Fund to seek to enhance return, to 
hedge some of the risks of its investments in securities, to substitute 
a position in an underlying asset, to reduce transaction costs, to 
maintain full market exposure, to manage cash flows, to preserve 
capital or to manage its foreign currency exposures. In addition, such 
proposed change will provide the Sub-Adviser with additional 
flexibility in meeting the Fund's investment objective. The Adviser has 
represented that it believes there will be minimal, if any, impact to 
the arbitrage mechanism as a result of the use of derivatives. In 
addition, the Commission has previously approved the use of derivatives 
similar to those proposed herein by issues of Managed Fund Shares 
traded on the Exchange.\20\ Consistent with the Prior Release, NAV will 
continue to be calculated daily and the NAV and Disclosed Portfolio (as 
defined in NYSE Arca Equities Rule 8.600(c)(2)) will be made available 
to all market participants at the same time.
---------------------------------------------------------------------------

    \20\ See, e.g., Securities Exchange Act Release Nos. 73081 
(September 11, 2014), 79 FR 55859 (September 17, 2014) (SR-NYSEArca-
2014-20) (order approving listing and trading on the Exchange of 
shares of the Reality Shares DIVS ETF under NYSE Arca Equities Rule 
8.600); 72882 (August 20, 2014), 79 FR 50964 (August 26, 2014) (SR-
NYSEArca-2014-58) (order approving listing and trading on the 
Exchange of shares of the PIMCO Short-Term Exchange-Traded Fund and 
the PIMCO Municipal Bond Exchange-Traded Fund under NYSE Arca 
Equities Rule 8.600).
---------------------------------------------------------------------------

    With respect to the proposal that at least 90% of the Fund's net 
assets that are invested in exchange-listed options on U.S. Treasury 
futures contracts, exchange-listed U.S. Treasury futures contracts, 
exchange-listed options on Eurodollar futures contracts, exchange-
listed Eurodollar futures contracts, and exchange-listed currency 
options will be invested in such instruments whose principal market is 
a member of the ISG, the Exchange notes that the Commission has 
previously approved such limitations for other funds listed on the 
Exchange under NYSE Arca Equities Rule 8.600.\21\ In addition, such a 
representation assures that most applicable exchange-traded assets of 
the Fund will be assets whose principal market is an ISG member or a 
market with which the Exchange has a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    \21\ See, e.g., Securities Exchange Act Release Nos. 7882 
(August 20, 2014) (SR-NYSEArca-2014-58) (order approving listing and 
trading on the Exchange of shares of the PIMCO Short-Term Exchange-
Traded Fund and the PIMCO Municipal Bond Exchange-Traded Fund under 
NYSE Arca Equities Rule 8.600); 72641 (July 18, 2014), 79 FR 43108 
(July 24, 2014) (SR-NYSEArca-2014-64) (order approving listing and 
trading on the Exchange of the ARK Innovation ETF, ARK Genomic 
Revolution ETF, ARK Industrial Innovation ETF, and ARK Web x.0 ETF 
under NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------

    With respect to the Adviser now representing that the Fund's 
limitation on holding up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) would 
include Rule 144A securities deemed illiquid by the Adviser or Sub-
Adviser, in accordance with Commission guidance, the Exchange notes 
that the Commission previously has approved listing and trading on the 
Exchange of issues of Managed Fund Shares that may invest up to an 
aggregate amount of 15% of a fund's net assets in Rule 144A securities 
deemed illiquid by the Adviser or Sub-Adviser, in accordance with 
Commission guidance.\22\
---------------------------------------------------------------------------

    \22\ See note 16, supra.
---------------------------------------------------------------------------

    In accordance with the Prior Release, 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.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an actively-managed exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace. As noted, the additional flexibility to be afforded to 
the Sub-Adviser by permitting the Fund to invest in Derivative 
Instruments under the proposed rule change is intended to enhance the 
Sub-Adviser's ability to meet the Fund's investment objective. FINRA, 
on behalf of the Exchange, will communicate as needed regarding trading 
in the Shares, exchange-listed options on U.S. Treasury futures 
contracts, exchange-listed U.S. Treasury futures contracts, exchange-
listed options on Eurodollar futures contracts, exchange-listed 
Eurodollar futures contracts, and exchange-listed currency options with 
other markets and other entities that are members of the ISG, and 
FINRA, on behalf of the Exchange, may

[[Page 69545]]

obtain trading information regarding trading in the Shares, exchange-
listed options on U.S. Treasury futures contracts, exchange-listed U.S. 
Treasury futures contracts, exchange-listed options on Eurodollar 
futures contracts, exchange-listed Eurodollar futures contracts, and 
exchange-listed currency options from such markets and other entities. 
In addition, the Exchange may obtain information regarding trading in 
the Shares, exchange-listed options on U.S. Treasury futures contracts, 
exchange-listed U.S. Treasury futures contracts, exchange-listed 
options on Eurodollar futures contracts, exchange-listed Eurodollar 
futures contracts, and exchange-listed currency options from markets 
and other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement. At least 
90% of the Fund's net assets that are invested in exchange-listed 
options on U.S. Treasury futures contracts, exchange-listed U.S. 
Treasury futures contracts, exchange-listed options on Eurodollar 
futures contracts, exchange-listed Eurodollar futures contracts, and 
exchange-listed currency options will be invested in such instruments 
whose principal market is a member of the ISG. In addition, as 
indicated in the Prior Release, investors will have ready access to 
information regarding the Fund's holdings, the PIV (as defined in the 
Prior Release), the Disclosed Portfolio (as defined in the Prior 
Release and as further described herein), and quotation and last sale 
information for the Shares.

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 purposes of the Act. The Exchange believes the 
proposed rule change will permit the Sub-Adviser additional flexibility 
in achieving the Fund's investment objective, thereby offering 
investors additional investment options.

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 foregoing 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 for 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 
\23\ and Rule 19b-4(f)(6)(iii) thereunder.\24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the 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.

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-2014-127 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-NYSEArca-2014-127. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2014-127 and should 
be submitted on or before December 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27570 Filed 11-20-14; 8:45 am]
BILLING CODE 8011-01-P