Document ID: SEC-2016-1463-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-08-18T04:00Z

[Federal Register Volume 81, Number 160 (Thursday, August 18, 2016)]
[Notices]
[Pages 55247-55250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19686]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78564; File No. SR-NYSEArca-2016-62]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to a Change to the Underlying Index for the 
PowerShares Build America Bond Portfolio

August 12, 2016.

I. Introduction

    On May 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: (1) Permit the 
continued listing and trading of shares (``Shares'') of the PowerShares 
Build America Bond Portfolio (``Fund'') following a change to the index 
underlying the Fund, and (2) propose changes to the index underlying 
the Fund and the name of the Fund. The proposed rule change was 
published for comment in the Federal Register on May 23, 2016.\3\ On 
June 27, 2016, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission received no comments on the proposed rule 
change. This order institutes proceedings under Section 19(b)(2)(B) of 
the Act \6\ to determine whether to approve or disapprove 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. 77849 (May 17, 
2016), 81 FR 32371 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78157, 81 FR 43327 
(July 1, 2016). The Commission designated August 21, 2016 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposal

    The Exchange currently lists and trades Shares of the Fund \7\ 
under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which governs 
the listing and trading of Investment Company Units (``Units'') based 
on fixed income securities indexes.\8\ The Fund is a series of the 
Trust. Invesco PowerShares Capital Management LLC is the investment 
adviser (``Adviser'') for the Fund. Invesco Distributors, Inc. is the 
Fund's distributor. The Bank of New York Mellon is the administrator, 
custodian, and fund accounting and transfer agent for the Fund.
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    \7\ According to the Exchange, on February 26, 2016, PowerShares 
Exchange-Traded Fund Trust II (``Trust'') filed a post-effective 
amendment on Form 485 under the Securities Act of 1933 (``Securities 
Act'') to its registration statement on Form N-1A under the 
Securities Act and the Investment Company Act of 1940 (``1940 Act'') 
(File Nos. 333-138490 and 811-21977) (``Registration Statement''). 
The Exchange states that the Trust has obtained certain exemptive 
relief under the 1940 Act. See Investment Company Act Release No. 
27841 (May 25, 2007) (File No. 812-13335) (``Exemptive Order'').
    \8\ The PowerShares Build America Bond Portfolio was initially 
listed on the Exchange on November 17, 2009 pursuant to the generic 
listing criteria of Commentary .02 to NYSE Arca Equities Rule 
5.2(j)(3).
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    The Exchange submitted its proposed rule change to: (1) Permit the 
continued listing and trading of Shares of the Fund following a change 
to the index underlying the Fund; and (2) propose changes to the index 
underlying the Fund and the name of the Fund.
    The Fund seeks investment results that generally correspond to the 
price and yield (before fees and expenses) of The Bank of America 
(``BofA'') Merrill Lynch Build America Bond Index (``Build America Bond 
Index''). The Fund generally invests at least 80% of its total assets 
in taxable municipal

[[Page 55248]]

securities eligible to participate in the Build America Bond program 
created under the American Recovery and Reinvestment Act of 2009 or 
other legislation providing for the issuance of taxable municipal 
securities on which the issuer receives federal support of the interest 
paid (``Build America Bonds'') and that comprise the Build America Bond 
Index. The Build America Bond Index is designed to track the 
performance of U.S. dollar-denominated investment grade taxable 
municipal debt publicly issued under the Build America Bond program by 
U.S. states and territories, and their political subdivisions, in the 
U.S. market. Qualifying securities must have a minimum amount 
outstanding of $1 million, at least 18 months remaining term to final 
maturity at the time of issuance, at least one year remaining term to 
final maturity, a fixed coupon schedule, and an investment grade rating 
(based on an average of Moody's Investors Services, Inc. (``Moody's''), 
Standard & Poor's, a division of The McGraw-Hill Company, Inc. 
(``S&P'') and Fitch Ratings, Inc. (``Fitch'')).
    The Trust has proposed to change the index underlying the Fund to 
the BofA Merrill Lynch U.S. Taxable Municipal Securities Plus Index 
(``New Index'') and to change the name of the Fund to PowerShares 
Taxable Municipal Bond Portfolio. The Exchange represents that the New 
Index does not meet the generic listing criteria of NYSE Arca Equities 
Rule 5.2(j)(3). The Exchange submitted this proposed rule change to 
permit the continued listing of the Fund. The New Index meets all of 
the requirements of the generic listing criteria of NYSE Arca Equities 
Rule 5.2(j)(3), except for that set forth in Commentary .02(a)(2).\9\ 
Specifically, as of February 4, 2016, approximately 60.51% of the New 
Index weight was composed of individual maturities of $100 million or 
more (determined at the time of issuance).
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    \9\ Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that components that in the aggregate account for at least 
75% of the weight of the index or portfolio each shall have a 
minimum original principal amount outstanding of $100 million or 
more.
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A. Changes to the Index Underlying the Fund

    According to the Exchange, the Fund currently has a non-fundamental 
policy to invest at least 80% of its net assets (plus the amount of any 
borrowings for investment purposes) in Build America Bonds. Moreover, 
as stated in the Registration Statement, the Fund complies with that 
non-fundamental policy because it also is required generally to invest 
at least 80% of the value of its total assets in the Build America 
Bonds that comprise the Build America Bond Index, in accordance with 
the terms of the relief set forth in the Trust's Exemptive Order.
    However, in response to a changing market environment that includes 
a reduction in the number of Build America Bonds, the Adviser has 
proposed that the Fund's underlying index be changed from one that is 
focused on Build America Bonds to one that is more broadly focused on 
taxable municipal debt in general, and which may include Build America 
Bonds. Changing the Fund's underlying index would require changing the 
non-fundamental policy set forth above; accordingly, before the Fund 
can change its underlying index, the Registration Statement states that 
the Fund's board of trustees (``Board'') must approve the underlying 
index change, and the Fund must provide shareholders with sixty days 
written notice of the change.
    Thus, after this proposed rule change is approved, the Trust 
represents that it intends to seek to obtain Board approval and provide 
the requisite shareholder notice. Subject to that Board approval and 
shareholder notice, the Fund intends to change its underlying index to 
one that is composed of taxable municipal securities, including both 
Build America Bonds and non-Build America Bonds. Following such change, 
the proposed underlying index for the Fund will be the New Index.
    According to the Exchange, the change in Fund's underlying index is 
designed to enable the Fund to expand its range of investments in light 
of a diminishing supply of Build America Bonds; otherwise, there is no 
other change to the Fund's investment strategies or objective. After 
such change, the Fund's investment objective will be to seek investment 
results that generally correspond (before fees and expenses) to the 
price and yield of the New Index.
    In addition, the Fund will adopt a new non-fundamental investment 
policy to invest at least 80% of its net assets (plus borrowings for 
investment purposes) in taxable municipal securities. In addition, the 
Fund generally will invest at least 80% of its total assets in the 
securities that will compose the New Index, in accordance with the 
terms of the Trust's Exemptive Order. However, the Fund may invest up 
to 20% of its total assets in securities not included in the New Index, 
in money market instruments, including repurchase agreements or other 
funds that invest exclusively in money market instruments (subject to 
applicable limitations under the 1940 Act or exemptions therefrom), 
convertible securities and structured notes (notes on which the amount 
of principal repayment and interest payments is based on the movement 
of one or more specified factors, such as the movement of a particular 
security or securities index), all to the extent that the Adviser 
believes investment in such instruments will facilitate the Fund's 
ability to achieve its new investment objective. In addition, the Fund 
intends to change its name to PowerShares Taxable Municipal Bond 
Portfolio.\10\
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    \10\ The changes described herein with respect to use of the New 
Index will be effective upon: (1) Approval by the Trust's Board; (2) 
shareholders' receipt of sixty days written notice of the proposed 
change; and (3) completing a filing with the Commission of another 
amendment to the Trust's Registration Statement, or a prospectus 
supplement reflecting these changes. The Adviser represents that the 
Adviser has managed and will continue to manage the Fund in the 
manner described in the Registration Statement and will not 
implement the changes described herein until this proposed rule 
change is operative.
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B. Description of the New Index 11
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    \11\ The description of the New Index is based on information 
provided by BofA Merrill Lynch. BofA Merrill Lynch is the ``Index 
Provider'' with respect to the Underlying Index and the New Index. 
The Index Provider is a broker-dealer and has implemented a firewall 
with respect to and will maintain procedures designed to prevent the 
use and dissemination of material non-public information regarding 
the New Index.
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    The New Index tracks the performance of U.S. dollar denominated 
taxable municipal debt publicly issued by U.S. states and territories, 
and their political subdivisions, in the U.S. domestic market. 
Qualifying securities must be subject to U.S. federal taxes and must 
have at least 18 months to maturity at point of issuance, at least one 
year remaining term to final maturity, a fixed coupon schedule 
(including zero coupon bonds), and an investment grade rating (based on 
an average of Moody's, S&P and Fitch). The call date on which a pre-
refunded bond will be redeemed is used for purposes of determining 
qualification with respect to final maturity requirements. For Build 
America Bonds, the minimum amount outstanding is $1 million, and only 
``direct pay'' (i.e., a direct federal subsidy is paid to the issuer) 
securities qualify for inclusion. ``Tax-Credit'' (i.e., where the 
investor receives a tax credit on the interest payments) Build America 
Bonds are excluded. For all other securities, minimum size requirements 
vary based on the initial term to final maturity at time of issuance. 
Securities with an initial term to final maturity greater than or equal 
to one year and less than five years must have a current amount 
outstanding of at least $10

[[Page 55249]]

million. Securities with an initial term to final maturity greater than 
or equal to five years and less than ten years must have a current 
amount outstanding of at least $15 million. Securities with an initial 
term to final maturity of ten years or more must have a current amount 
outstanding of at least $25 million. Local bonds issued by U.S. 
territories within their jurisdictions that are tax exempt within the 
U.S. territory but not elsewhere are excluded from the New Index. All 
Rule 144A securities, both with and without registration rights, and 
securities in legal default are excluded from the New Index. New Index 
constituents are capitalization-weighted based on their current amount 
outstanding times the market price plus accrued interest. Accrued 
interest is calculated assuming next-day settlement. Cash flows from 
bond payments that are received during the month are retained in the 
index until the end of the month and then are removed as part of the 
rebalancing. Cash does not earn any reinvestment income while it is 
held in the New Index.\12\ The index is rebalanced on the last calendar 
day of the month, based on information available up to and including 
the third business day before the last business day of the month. No 
changes are made to constituent holdings other than on month end 
rebalancing dates.
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    \12\ Information concerning constituent bond prices, timing, and 
conventions is provided in the BofA Merrill Lynch Bond Index Guide, 
which can be accessed on Bloomberg.
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    As of February 4, 2016, approximately 84.39% of the weight of the 
New Index components was composed of individual maturities that were 
part of an entire municipal bond offering with a minimum original 
principal amount outstanding of $100 million or more for all maturities 
of the offering. In addition, as of February 4, 2016, the total dollar 
amount outstanding of issues in the New Index was approximately 
$281,589,346,769, and the average dollar amount outstanding of issues 
in the New Index was approximately $27,808,547. Further, the most 
heavily weighted component represents 2.27% of the weight of the Index 
and the five most heavily weighted components represent 6.33% of the 
weight of the New Index.\13\ Therefore, the Exchange believes that, 
notwithstanding that the New Index does not satisfy the criterion in 
NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 (a)(2), the New Index 
is sufficiently broad-based to deter potential manipulation, given that 
it is composed of approximately 10,126 issues and 1,811 unique issuers. 
In addition, the Exchange believes that the New Index securities are 
sufficiently liquid to deter manipulation in that a substantial portion 
(84.39%) of the New Index weight is composed of maturities that are 
part of a minimum original principal amount outstanding of $100 million 
or more for all the maturities of the offering, and in view of the 
substantial total dollar amount outstanding and the average dollar 
amount outstanding of New Index issues, as referenced above.
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    \13\ Commentary .02(a)(4) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that no component fixed-income security (excluding Treasury 
Securities and GSE Securities, as defined therein) shall represent 
more than 30% of the weight of the index or portfolio, and the five 
most heavily weighted component fixed-income securities in the index 
or portfolio shall not in the aggregate account for more than 65% of 
the weight of the index or portfolio.
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    All components of the New Index have at least an investment grade 
composite rating of BBB3 or higher (based on an average of S&P, Moody's 
and Fitch).
    The Exchange represents that: (1) With respect to the New Index, 
except for Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3), 
the Shares of the New Index currently satisfy all of the generic 
listing standards under NYSE Arca Equities Rule 5.2(j)(3); (2) the 
continued listing standards under NYSE Arca Equities Rules 5.2(j)(3) 
and 5.5(g)(2) applicable to Units shall apply to the Shares of the 
Fund; and (3) the Trust is required to comply with Rule 10A-3 under the 
Act \14\ for the initial and continued listing of the Shares of the 
Fund. In addition, the Exchange represents that the Shares of the Fund 
will comply with all other requirements applicable to Units including, 
but not limited to, requirements relating to the dissemination of key 
information such as the value of the New Index and the applicable 
Intraday Indicative Value (``IIV''),\15\ rules governing the trading of 
equity securities, trading hours, trading halts, surveillance, 
information barriers and the Information Bulletin to Equity Trading 
Permit Holders, as set forth in Exchange rules applicable to Units and 
prior Commission orders approving the generic listing rules applicable 
to the listing and trading of Units.\16\
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    \14\ 17 CFR 240.10A-3.
    \15\ The IIV will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Exchange's 
Core Trading Session of 9:30 a.m. to 4:00 p.m., Eastern time. 
Currently, it is the Exchange's understanding that several major 
market data vendors display and/or make widely available IIVs taken 
from the Consolidated Tape Association (``CTA'') or other data 
feeds.
    \16\ See, e.g., Securities Exchange Act Release Nos. 55783 (May 
17, 2007), 72 FR 29194 (May 24, 2007) (SR-NYSEArca-2007-36) (order 
approving NYSE Arca generic listing standards for Units based on a 
fixed income index); 44551 (July 12, 2001), 66 FR 37716 (July 19, 
2001) (SR-PCX-2001-14) (order approving generic listing standards 
for Units and Portfolio Depositary Receipts); 41983 (October 6, 
1999), 64 FR 56008 (October 15, 1999) (SR-PCX-98-29) (order 
approving rules for listing and trading of Units).
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    The current value of the New Index is widely disseminated by one or 
more major market data vendors at least once per day, as required by 
NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 (b)(ii). The IIV for 
Shares of the Fund is disseminated by one or more major market data 
vendors, updated at least every 15 seconds during the Exchange's Core 
Trading Session, as required by NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02 (c). The components and percentage weightings of the New 
Index are also available from major market data vendors. In addition, 
the portfolio of securities held by the Fund is disclosed daily on the 
Fund's Web site at www.invescopowershares.com. The Exchange also 
represents that information regarding market price and trading volume 
of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services, and quotation and last-sale information will be available via 
the CTA high-speed line. The Web site for the Fund will include the 
prospectus for the Fund and additional data relating to net asset value 
(``NAV'') and other applicable quantitative information. In addition, 
prior to the commencement of trading, the Exchange will inform its ETP 
Holders in an Information Bulletin of the special characteristics and 
risks associated with trading the Shares. If the Exchange becomes aware 
that the NAV 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. With respect to 
trading halts, the Exchange may consider all relevant factors in 
exercising its discretion to halt or suspend trading in the Shares of 
the Fund. Trading also may be halted because of market conditions or 
for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. If the IIV and the New Index value are not being 
disseminated as required, the Exchange may halt trading during the day 
in which the interruption to the dissemination of the IIV or New Index 
value occurs. If the interruption to the dissemination of the IIV or 
New Index value persists past the trading day in which it occurred, the 
Exchange will halt trading. Trading in Shares of the Fund will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule

[[Page 55250]]

7.12 have been reached or because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable, and trading in the Shares will be subject to NYSE Arca 
Equities Rule 7.34, which sets forth circumstances under which Shares 
of the Fund may be halted. The Exchange states that trade price and 
other information relating to municipal bonds is available through the 
Municipal Securities Rulemaking Board's Electronic Municipal Market 
Access system.
    According to the Exchange, all statements and representations made 
in this proposal regarding (a) the description of the Fund's 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. The Adviser 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 monitor 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).

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-62 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \19\
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    \18\ Id.
    \19\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\20\
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    \20\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 8, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 22, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\21\ in addition to any other 
comments they may wish to submit about the proposed rule change.
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    \21\ See supra note 3.
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    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-2016-62 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2016-62. 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 these filings 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 Number SR-NYSEArca-2016-62 and should 
be submitted on or before September 8, 2016. Rebuttal comments should 
be submitted by September 22, 2016.
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    \22\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19686 Filed 8-17-16; 8:45 am]
 BILLING CODE 8011-01-P