Document ID: SEC-2011-0163-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-02-04T05:00Z

[Federal Register Volume 76, Number 24 (Friday, February 4, 2011)]
[Notices]
[Pages 6503-6506]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2457]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63802; File No. SR-NYSEArca-2010-118]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
the SiM Dynamic Allocation Diversified Income ETF and SiM Dynamic 
Allocation Growth Income ETF

January 31, 2011.

I. Introduction

    On December 15, 2010, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade the following Managed Fund 
Shares under NYSE Arca Equities Rule 8.600: SiM Dynamic Allocation 
Diversified Income ETF and SiM Dynamic Allocation Growth Income ETF. 
The proposed rule change was published for comment in the Federal 
Register on December 28, 2010.\3\ The Commission received no comments 
on the proposal. This order grants approval of 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. 63587 (December 21, 
2010), 75 FR 81697 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the shares (``Shares'') of 
the SiM Dynamic Allocation Diversified Income ETF and SiM Dynamic 
Allocation Growth Income ETF (each a ``Fund'' and, collectively, 
``Funds'') under NYSE Arca Equities Rule 8.600. The Shares will be 
offered by AdvisorShares Trust (``Trust''), a statutory trust organized 
under the laws of the State of Delaware and registered with the 
Commission as an open-end management investment company.\4\ The 
investment advisor to the Funds is AdvisorShares Investments, LLC 
(``Advisor''), and Strategic Income Management, LLC (``Sub-Advisor'' or 
``SiM'') serves as investment sub-advisor to the Funds. Foreside Fund 
Services, LLC is the principal underwriter and distributor of the 
Funds' Shares. The Bank of New York Mellon Corporation 
(``Administrator'') serves as the administrator, custodian, transfer 
agent, and fund accounting agent for the Funds. Each Fund is an 
actively managed exchange-traded fund (``ETF'') and thus does not seek 
to replicate the performance of a specified index, but uses an active 
investment strategy to meet its investment objective. Accordingly, the 
Sub-Advisor manages each Fund's portfolio in accordance with each 
Fund's investment objective.
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On October 14, 2010, the Trust filed with the 
Commission Post-Effective Amendment No. 13 to Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a) and under the 1940 Act 
relating to the Funds (File Nos. 333-157876 and 811-22110) 
(``Registration Statement'').
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SiM Dynamic Allocation Diversified Income ETF

    This Fund's objective is to provide total return, consisting 
primarily of reinvestment and growth of income with some long-term 
capital appreciation. The Fund is considered a ``fund-of-funds'' that 
will seek to achieve its investment objective by primarily investing in 
other ETFs that offer diversified exposure to various investment types 
(equities, bonds, etc.), global regions, countries, styles (market 
capitalization, value, growth, etc.) or sectors, and exchange-traded 
products (``ETPs,'' and, together with ETFs, ``Underlying ETPs'') 
including, but not limited to, exchange-traded notes (``ETNs''), 
exchange-traded currency trusts, and closed-end funds.\5\
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    \5\ Underlying ETPs, which will be listed on a national 
securities exchange, include: Investment Company Units (as described 
in NYSE Arca Equities Rule 5.2(j)(3)); Index-Linked Securities (as 
described in NYSE Arca Equities Rule 5.2(j)(6)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
Trust Issued Receipts (as described in NYSE Arca Equities Rule 
8.200); Commodity-Based Trust Shares (as described in NYSE Arca 
Equities Rule 8.201); Currency Trust Shares (as described in NYSE 
Arca Equities Rule 8.202); Commodity Index Trust Shares (as 
described in NYSE Arca Equities Rule 8.203); Trust Units (as 
described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as 
described in NYSE Arca Equities Rule 8.600); and closed-end funds.

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[[Page 6504]]

    The Fund will seek to offer the potential for total return from a 
high level of income and a low level of capital growth, with exposure 
to a low level of principal risk. The Fund, through its investments in 
the Underlying ETPs, generally will invest at least 60% of its net 
assets in domestic and international fixed-income funds. The Fund will 
allocate its assets among Underlying ETPs in accordance with the Sub-
Advisor's outlook for the economy, the financial markets, and the 
relative market valuations of the Underlying ETPs. The Fund will sell 
interests or reduce investment exposure among market segments or 
Underlying ETPs, if appropriate, when the Sub-Advisor's fundamental and 
quantitative factors indicate a low relative strength of such market 
segments and that such market segments are likely to underperform the 
market as a whole.
    Under normal market conditions, the Fund's portfolio will 
generally:
     Invest up to 85% of its assets in Underlying ETPs that 
hold fixed-income securities as well as cash equivalents;
     Not invest more than 40% of its net assets in Underlying 
ETPs that primarily hold equity securities; and
     Invest up to 20% of its assets in any single Underlying 
ETP.
    The Fund's portfolio may temporarily exceed these percentage ranges 
for short periods without notice, and the Sub-Advisor, due to certain 
market conditions, may alter the percentage ranges when it deems 
appropriate.

SiM Dynamic Allocation Growth Income ETF

    This Fund's objective is to provide total return, consisting 
primarily of long-term capital appreciation with some reinvestment and 
growth of income. The Fund is considered a ``fund-of-funds'' that will 
seek to achieve its investment objective by primarily investing in 
Underlying ETPs that offer diversified exposure to various investment 
types (equities, bonds, etc.), global regions, countries, styles 
(market capitalization, value, growth, etc.) or sectors, and ETPs 
including, but not limited to, ETNs, exchange-traded currency trusts, 
and closed-end funds.
    In general, the Fund will seek to offer investors the potential for 
total return from a low to medium level of income and a medium to high 
level of capital growth, while exposing them to a medium to high level 
of principal risk. The Fund, through its investments in the Underlying 
ETPs, generally will invest at least 60% of its net assets in domestic 
and international equity funds. The Fund will allocate its assets among 
Underlying ETPs in accordance with the Sub-Advisor's outlook for the 
economy, the financial markets, and the relative market valuations of 
the Underlying ETPs. The Fund will sell interests or reduce investment 
exposure among market segments or Underlying ETPs when the Sub-
Advisor's fundamental and quantitative factors indicate a low relative 
strength of such market segments and that such market segments are 
likely to underperform the market as a whole.
    The Fund's portfolio will generally:
     Invest up to 85% of its assets in Underlying ETPs that 
hold equity securities as well as cash equivalents;
     Not invest more than 40% of its net assets in Underlying 
ETPs that primarily hold fixed-income securities; and
     Invest up to 20% of its assets in any single Underlying 
ETP.
    The Fund's portfolio may temporarily exceed these percentage ranges 
for short periods without notice, and the Sub-Advisor, due to certain 
market conditions, may alter the percentage ranges when it deems 
appropriate.

Other Investments

    The Funds and the Underlying ETPs may invest in equity securities 
representing ownership interests in a company or partnership and that 
consist of common stocks, preferred stocks, warrants to acquire common 
stock, securities convertible into common stock, and investments in 
master limited partnerships.\6\ The Funds may enter into repurchase 
agreements, which may be deemed to be loans, with financial 
institutions, and reverse repurchase agreements as part of the Funds' 
investment strategy. The Funds may also invest in U.S. government 
securities, U.S. Treasury zero-coupon bonds, and shares of real estate 
investment trusts, which are pooled investment vehicles that primarily 
invest in real estate or real estate-related loans. To respond to 
adverse market, economic, political, or other conditions, the Funds may 
invest 100% of their total assets, without limitation, in high-quality 
short-term debt securities and money market instruments.
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    \6\ The Funds will hold only equity securities traded in the 
United States on registered exchanges.
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    Additional details regarding the Trust, Shares, and the Funds, 
including, among other things, investment strategies, risks, creations 
and redemptions of Shares, fees, portfolio holdings disclosure 
policies, distributions, taxes, the calculation of the net asset value 
(``NAV''), dissemination and availability of key information about the 
Funds, trading halts, trading rules, surveillance, and the Information 
Bulletin can be found in the Notice and the Registration Statement, as 
applicable.\7\
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    \7\ See supra notes 3 and 4.
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\8\ In particular, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act,\9\ which requires, among other things, that the Exchange's rules 
be designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
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. 
The Commission notes that it has approved the listing and trading of 
other similar Managed Fund Shares.\10\
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See, e.g., Securities Exchange Act Release No. 63076 
(October 12, 2010), 75 FR 63874 (October 18, 2010) (SR-NYSEArca-
2010-79) (approving the listing and trading of the Cambria Global 
Tactical ETF, which is a ``fund-of-funds'' that seeks to invest 
primarily in other exchange-traded funds listed and traded in the 
United States and certain other exchange-traded products including, 
but not limited to, exchange-traded notes, exchange-traded currency 
trusts, and closed-end funds).
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    The Commission 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,\11\ 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

[[Page 6505]]

last-sale information for the Shares will be available via the 
Consolidated Tape Association high-speed line. In addition, the 
Portfolio Indicative Value will be disseminated at least every 15 
seconds during the Core Trading Session by one or more major market 
data vendors. On each business day before commencement of trading in 
Shares in the Core Trading Session on the Exchange, the Funds will 
disclose on their website the Disclosed Portfolio, as defined in NYSE 
Arca Equities Rule 8.600(c)(2), that will form the basis for the Funds' 
calculation of NAV at the end of the business day.\12\ The NAV per 
Share for the Funds will be calculated by the Administrator and 
determined as of the close of the regular trading session on NYSE Arca 
(ordinarily 4:00 p.m., Eastern Time) on each day that the Exchange is 
open. Information regarding market price and trading volume of the 
Underlying ETPs will be continually available on a real-time basis 
throughout the day from major market data vendors, and last-sale and 
closing price information for Underlying ETPs will be available on the 
website of the national securities exchange on which such securities 
are listed or through major market data vendors. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real time basis through the day on brokers' computer 
screens and other electronic services, and the previous day's closing 
price and trading volume information will be published daily in the 
financial section of newspapers. The Funds' Web site will also include 
a form of the Prospectus for the Funds, information relating to NAV, 
and other quantitative and trading information. Further, a basket 
composition file, which includes the security names and share 
quantities required to be delivered in exchange for Fund Shares, 
together with estimates and actual cash components, will be publicly 
disseminated daily prior to the opening of the New York Stock Exchange 
via the National Securities Clearing Corporation.
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    \11\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \12\ On a daily basis, the Advisor will disclose for each 
portfolio security or other financial instrument of the Funds the 
following information: Ticker symbol (if applicable), name of 
security or financial instrument, number of shares or dollar value 
of financial instruments held in the portfolio, and percentage 
weighting of the security or financial instrument in the portfolio.
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    The Commission further 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 Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV and the 
Disclosed Portfolio will be made available to all market participants 
at the same time.\13\ In addition, the Exchange will halt trading in 
the Shares under the specific circumstances set forth in NYSE Arca 
Equities Rule 8.600(d)(2)(D), and may halt trading in the Shares to the 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Funds, 
or whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\14\ In addition, 
NYSE Arca Equities Rule 8.600(d)(2)(B)(ii) requires that the Reporting 
Authority that provides the Disclosed Portfolio implement and maintain, 
or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the actual 
components of the portfolio. Further, the Commission notes that neither 
the Advisor nor the Sub-Advisor is affiliated with a broker-dealer.\15\ 
In the event (a) the Advisor or the Sub-Advisor becomes newly 
affiliated with a broker-dealer, or (b) any new advisor or sub-advisor 
becomes affiliated with a broker-dealer, they will be required to 
implement a fire wall with respect to such broker-dealer regarding 
access to information concerning the composition and/or changes to a 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding such 
portfolio.
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    \13\ See NYSE Arca Equities Rule 8.600(d)(1)(B) (also requiring 
that the Exchange obtain a representation from the issuer that NAV 
per Share for each Fund will be calculated daily).
    \14\ See NYSE Arca Equities Rule 8.600(d)(2)(C)(ii). With 
respect to trading halts, the Exchange may consider other relevant 
factors in exercising its discretion to halt or suspend trading in 
the Shares of the Funds. Trading in Shares of the Funds will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
    \15\ See Commentary .06 to NYSE Arca Equities Rule 8.600. With 
respect to the Funds, the Exchange represents that the Advisor and 
Sub-Advisor, and their related personnel, are subject to Investment 
Advisers Act Rule 204A-1. This Rule specifically requires the 
adoption of a code of ethics by an investment advisor to include, at 
a minimum: (i) Standards of business conduct that reflect the 
firm's/personnel fiduciary obligations; (ii) provisions requiring 
supervised persons to comply with applicable federal securities 
laws; (iii) provisions that require all access persons to report, 
and the firm to review, their personal securities transactions and 
holdings periodically as specifically set forth in Rule 204A-1; (iv) 
provisions requiring supervised persons to report any violations of 
the code of ethics promptly to the chief compliance officer 
(``CCO'') or, provided the CCO also receives reports of all 
violations, to other persons designated in the code of ethics; and 
(v) provisions requiring the investment advisor to provide each of 
the supervised persons with a copy of the code of ethics with an 
acknowledgement by said supervised persons. In addition, Rule 
206(4)-7 under the Advisers Act makes it unlawful for an investment 
advisor to provide investment advice to clients unless such 
investment advisor has (i) adopted and implemented written policies 
and procedures reasonably designed to prevent violation, by the 
investment advisor and its supervised persons, of the Advisers Act 
and the Commission rules adopted thereunder; (ii) implemented, at a 
minimum, an annual review regarding the adequacy of the policies and 
procedures established pursuant to subparagraph (i) above and the 
effectiveness of their implementation; and (iii) designated an 
individual (who is a supervised person) responsible for 
administering the policies and procedures adopted under subparagraph 
(i) above.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance 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 applicable federal 
securities laws.
    (4) 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. 
Specifically, the Information Bulletin will discuss the following: (a) 
The procedures for purchases and redemptions of Shares in Creation Unit 
aggregations (and that Shares are not individual 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 
Portfolio Indicative Value will not be calculated or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value is 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.
    (5) A minimum of 100,000 Shares for each Fund will be outstanding 
at the

[[Page 6506]]

commencement of trading on the Exchange.
    (6) For initial and/or continued listing, the Funds will be in 
compliance with Rule 10A-3 under the Act.\16\
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    \16\ 17 CFR 240.10A-3.
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    This approval order is based on the Exchange's representations.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \17\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \17\ 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,\18\ that the proposed rule change (SR-NYSEArca-2010-118), be, and 
it hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2457 Filed 2-3-11; 8:45 am]
BILLING CODE 8011-01-P