Document ID: SEC-2013-1896-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-11-05T05:00Z

[Federal Register Volume 78, Number 214 (Tuesday, November 5, 2013)]
[Notices]
[Pages 66409-66413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-26409]

[[Page 66409]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70773; File No. SR-NYSEArca-2013-86]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, to List and Trade Shares of the Franklin Short Duration U.S. 
Government ETF Under NYSE Arca Equities Rule 8.600

October 30, 2013.

I. Introduction

    On August 27, 2013, 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'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Franklin Short Duration U.S. Government ETF (``Fund'') under NYSE Arca 
Equities Rule 8.600. The proposed rule change was published for comment 
in the Federal Register on September 16, 2013.\3\ On October 28, 2013, 
the Exchange submitted Amendment No. 1 to the proposed rule change.\4\ 
The Commission received no comments on the proposed rule change. This 
order grants approval of the proposed rule change, as modified by 
Amendment No. 1 thereto.
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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. 70356 (Sept. 10, 
2013), 78 FR 56970 (``Notice'').
    \4\ Amendment No. 1 amended the proposal to provide that the 
Fund will issue and redeem Shares on a continuous basis at net asset 
value in aggregations of 25,000 Shares (``Creation Units''), rather 
than 50,000 Shares. Because Amendment No. 1 does not materially 
affect the substance of the proposed rule change, it does not 
require notice and comment.
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to NYSE Arca Equities Rule 8.600, which governs the listing and trading 
of Managed Fund Shares on the Exchange. The Shares will be offered by 
Franklin ETF Trust (``Trust''). The Trust will be registered with the 
Commission as an open-end management investment company.\5\ Franklin 
Advisers, Inc. will serve as the investment manager to the Fund 
(``Manager''). Franklin Templeton Distributors, Inc. will be the 
principal underwriter and distributor of the Fund's Shares. Franklin 
Templeton Services, LLC will serve as administrator for the Fund and 
The Bank of New York Mellon will serve as sub-administrator for the 
Fund. The Bank of New York Mellon will serve as the custodian and 
transfer agent for the Fund. The Exchange represents that the Manager 
is not a broker-dealer but is affiliated with a broker-dealer and has 
implemented a firewall with respect to its broker-dealer affiliate 
regarding access to information concerning the composition of or 
changes to the Fund's portfolio.\6\ The Exchange represents that the 
Shares will conform to the initial and continued listing criteria under 
NYSE Arca Equities Rule 8.600 and that, for initial and continued 
listing, the Fund will be in compliance with Rule 10A-3 under the 
Exchange Act,\7\ as provided by NYSE Arca Equities Rule 5.3.\8\
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    \5\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On February 7, 2013, the Trust filed a 
registration statement on Form N-1A under the Securities Act of 1933 
(``Securities Act'') and under the 1940 Act relating to the Fund 
(File Nos. 333-186504 and 811-22801) (``Registration Statement''). 
The Trust filed an application on June 8, 2012, and amendments to 
the application on October 26, 2012 and December 18, 2012, 
requesting an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14042) (``Exemptive Application''). The 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. See Investment Company Act Release No. 
30350 (Jan. 15, 2013) (``Exemptive Order''). The Exchange states 
that investments made by the Fund will comply with the conditions 
set forth in the Exemptive Application and the Exemptive Order. See 
Notice, supra note 3, 78 FR at 56971, n. 5.
    \6\ See id. The Exchange states that in the event (a) the 
Manager or any sub-adviser becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, it will 
implement a firewall with respect to its relevant personnel or the 
broker-dealer affiliate regarding access to information concerning 
the composition of or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio. See id.
    \7\ 17 CFR 240.10A-3.
    \8\ See Notice, supra note 3, 78 FR at 56973.
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Principal Investments

    The Fund's investment goal is to provide a high level of current 
income, consistent with prudent investing, while seeking preservation 
of capital. The Fund will seek to achieve its investment goal by 
investing, under normal market conditions,\9\ at least 80% of its net 
assets in securities issued or guaranteed by the U.S. government or its 
agencies or instrumentalities. The Fund currently targets an estimated 
average portfolio duration of three (3) years or less. The Manager 
calculates the duration of the portfolio by modeling the cash flows of 
all the individual holdings, including the impact of prepayment 
variability and coupon adjustments where applicable, to determine the 
duration of each holding and then aggregating based on the size of the 
position. In performing this duration calculation, the Manager utilizes 
third-party models as adjusted based on the Manager's market 
expectations with respect to interest rates, borrower-level factors 
affecting credit availability, and the condition of the housing market, 
as well as broader economic factors, among other things, consistent 
with industry practice.
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    \9\ The term ``under normal market conditions'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
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    The Fund generally will invest a substantial portion of its assets 
in mortgage-backed securities \10\ issued or guaranteed by the U.S. 
government or its agencies or instrumentalities, including adjustable-
rate mortgage securities, but the Fund also will invest in direct 
obligations of the U.S. government (such as Treasury bonds, bills, and 
notes) and in securities issued or guaranteed by the U.S. government or 
its agencies or instrumentalities, including government sponsored 
entities. All of the Fund's principal investments will be debt 
securities, including bonds, notes, and debentures.
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    \10\ Mortgage-backed securities represent an interest in a pool 
of mortgage loans made by banks and other financial institutions to 
finance purchases of homes, commercial buildings, and other real 
estate. The individual mortgage loans are packaged or ``pooled'' 
together for sale to investors. As the underlying mortgage loans are 
paid off, investors receive principal and interest payments. These 
securities may be fixed-rate or adjustable-rate mortgage-backed 
securities (``ARMS''). Further, these securities can also be 
categorized as collateralized mortgage obligations (``CMOs'') or 
real estate mortgage investment conduits (``REMICs'') where they are 
divided into multiple classes with each class being entitled to a 
different share of the principal and interest payments received from 
the pool of underlying assets.
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    The mortgage-backed securities in which the Fund will substantially 
invest are issued or guaranteed by the U.S. government or its agencies 
or instrumentalities, such as Ginnie Mae, or by U.S. government-
sponsored entities, such as Fannie Mae and Freddie Mac. Most mortgage-
backed securities are pass-through securities, which means that they 
provide investors with monthly payments consisting of a pro rata share 
of both regular interest and principal payments and unscheduled 
prepayments on the underlying mortgage loans. Because prepayment rates 
of individual mortgage pools vary widely, the average life of a

[[Page 66410]]

particular pool cannot be predicted accurately. Adjustable-rate 
mortgage-backed securities include ARMS and other mortgage-backed 
securities with interest rates that adjust periodically to reflect 
prevailing market interest rates.
    The Fund may invest in securities with various levels of credit 
support,\11\ including, but not limited to, those issued or guaranteed 
by the Federal Home Loan Banks, Veterans Administration, Federal 
Housing Authority, Export-Import Bank of the United States, Overseas 
Private Investment Corporation, Commodity Credit Corporation, Small 
Business Administration, U.S. Agency for International Development, 
Tennessee Valley Authority, and Farm Credit System.
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    \11\ Government agency or instrumentality securities have 
different levels of credit support. For example, Ginnie Mae 
securities carry a guarantee as to the timely repayment of principal 
and interest that is backed by the full faith and credit of the U.S. 
government. However, the full faith and credit guarantee does not 
apply to the market prices and yields of the Ginnie Mae securities 
or to the net asset value (``NAV''), trading price, or performance 
of the Fund, which will vary with changes in interest rates and 
other market conditions. Fannie Mae and Freddie Mac pass-through 
mortgage certificates are backed by the credit of the respective 
instrumentality and are not guaranteed by the U.S. government. Other 
securities issued by government agencies or instrumentalities, 
including government sponsored entities, may only be backed by the 
credit worthiness of the issuing institution, not the U.S. 
Government, or the issuers may have the right to borrow from the 
U.S. Treasury to meet their obligations.
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    The Fund may invest in callable agency securities, which give the 
issuer (the U.S. government agency) the right to redeem the security 
prior to maturity. The Fund may also invest in U.S. government 
inflation-indexed securities.\12\ Additionally, the Fund may invest in 
certain mortgage dollar rolls.\13\ The Fund will invest only in covered 
mortgage dollar rolls, meaning that the Fund establishes a segregated 
account with liquid securities equal in value to the securities it will 
repurchase. The Fund intends to enter into mortgage dollar rolls only 
with high quality securities dealers and banks as determined by the 
Manager under board approved counterparty review procedures.
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    \12\ Inflation-indexed securities are fixed-income securities 
that are structured to provide protection against inflation. The 
value of the security's principal or the interest income paid on the 
security is adjusted to track changes in an official inflation 
measure. The U.S. Treasury uses the Consumer Price Index for Urban 
Consumers as the inflation measure for the inflation-indexed 
securities it issues.
    \13\ In a mortgage dollar roll, the Fund will sell (or buy) 
mortgage-backed securities for delivery on a specified date and 
simultaneously contract to repurchase (or sell) substantially 
similar (same type, coupon, and maturity) securities on a future 
date. During the period between a sale and repurchase, the Fund will 
forgo principal and interest paid on the mortgage-backed securities. 
The Fund will earn or lose money on a mortgage dollar roll from any 
difference between the sale price and the future purchase price. In 
a sale and repurchase, the Fund also earns money on the interest 
earned on the cash proceeds of the initial sale.
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Other Investments

    When the Manager believes that market or economic conditions are 
unfavorable for investors, the Manager may invest up to 100% of the 
Fund's assets in a temporary defensive manner by holding all or a 
substantial portion of its assets in cash, cash equivalents, or other 
high quality short-term investments. Temporary defensive investments 
generally may include short-term U.S. government securities, high-grade 
commercial paper, bank obligations, repurchase agreements, money market 
fund shares (including shares of an affiliated money market fund), and 
other money market instruments. The Manager also may invest in these 
types of securities or hold cash while looking for suitable investment 
opportunities or to maintain liquidity.\14\
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    \14\ Circumstances under which the Fund may temporarily depart 
from its normal investment process include, but are not limited to, 
extreme volatility or trading halts in the equity markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance.
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    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 Rule 144A securities deemed illiquid by the Manager.\15\ 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 securities. Illiquid securities include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \15\ In reaching liquidity decisions, the Manager may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
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    The Fund may invest in other investment companies to the extent 
permitted by the 1940 Act, Commission rules thereunder, and exemptions 
thereto. Section 12(d)(1)(A) of the 1940 Act requires that, as 
determined immediately after a purchase is made, (i) not more than 5% 
of the value of the Fund's total assets will be invested in the 
securities of any one investment company, (ii) not more than 10% of the 
value of the Fund's total assets will be invested in securities of 
investment companies as a group, and (iii) not more than 3% of the 
outstanding voting stock of any one investment company will be owned by 
the Fund. Certain exceptions to these limitations may apply, and the 
Fund may also rely on any future applicable Commission rules or orders 
that provide exceptions to these limitations.
    The Fund may invest up to 20% of its net assets in securities not 
issued or guaranteed by the U.S. government or its agencies or 
instrumentalities, including mortgage backed securities. These 
investments may include investment-grade debt securities.\16\ The Fund 
will not invest in non-investment-grade debt securities. The Fund may 
also lend a portfolio of securities up to one-third of the value of its 
total assets (measured at the time of the most recent loan). In 
exchange, the Fund will receive cash collateral from a borrower at 
least equal to the value of the security loaned by the Fund. Cash 
collateral typically consists of any combination of cash, securities 
issued by the U.S. government or its agencies or instrumentalities, and 
irrevocable letters of credit. Securities will only be loaned to 
parties that meet creditworthiness standards approved by the Fund's 
board. The Fund may also invest in multi-class pass-through securities; 
when-issued, delayed delivery, and to-be-announced transactions; 
callable securities; Franklin Templeton money market funds; repurchase 
agreements; U.S. Treasury rolls; unrated debt securities deemed by the 
Manager to be of comparable quality to investment-grade debt 
securities; variable rate securities; and zero coupon, deferred 
interest, and pay-in-kind bonds.
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    \16\ Debt securities that are rated Baa or higher by Moody's or 
rated BBB or higher by S&P, or that are unrated securities deemed by 
the Manager to be of comparable quality, are considered to be 
``investment grade.''
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    The Fund will not invest in equity securities other than possible 
investments in shares of other investment companies as noted above.
    The Fund will be classified as a ``diversified'' investment company 
under the 1940 Act.
    The Fund will not invest more than 25% of the Fund's net assets in

[[Page 66411]]

securities of issuers in any one industry (other than securities issued 
or guaranteed by the U.S. government or any of its agencies or 
instrumentalities or securities of other investment companies, whether 
registered or excluded from registration under Section 3(c) of the 1940 
Act).
    Additionally, the Fund will not purchase the securities of any one 
issuer (other than the U.S. government or any of its agencies or 
instrumentalities or securities of other investment companies, whether 
registered or excluded from registration under Section 3(c) of the 1940 
Act) if immediately after such an investment (i) more than 5% of the 
value of the Fund's total assets would be invested in that issuer or 
(ii) more than 10% of the outstanding voting securities of that issuer 
would be owned by the Fund, except that up to 25% of the value of the 
Fund's total assets may be invested without regard to these 5% and 10% 
limitations.
    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code.
    Consistent with the Exemptive Order, to pursue its investment goal, 
the Fund may invest in interest rate, fixed income index, bond, and 
U.S. Treasury futures contracts. The use of these derivative 
transactions may allow the Fund to obtain net long or short exposures 
to selected interest rates or durations. These derivatives may be used 
to hedge risks associated with the Fund's other portfolio investments. 
The Fund expects that no more than 20% of the value of the Fund's net 
assets will be invested in derivative instruments. The Fund will not 
otherwise invest in options, futures contracts, or swap agreements. The 
Fund's investments will be consistent with its investment goal and will 
not be used to enhance leverage.
    Additional information regarding the Trust, Fund, and Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, disclosure policies, 
distributions and taxes, calculation of net asset value per share 
(``NAV''), availability of information, trading rules and halts, and 
surveillance procedures, among other things, can be found in the Notice 
or the Registration Statement, as applicable.\17\
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    \17\ See Notice and Registration Statement, supra notes 3 and 5, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \18\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\19\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\20\ which requires, among other things, that the 
Exchange's rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
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 the Fund and the Shares must comply with the 
requirements of NYSE Arca Equities Rule 8.600 to be listed and traded 
on the Exchange.
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    \18\ 15 U.S.C. 78f.
    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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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,\21\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line.\22\ In addition, the 
Portfolio Indicative Value, as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated by one or more major market 
data vendors at least every 15 seconds during the NYSE Arca Core 
Trading Session (9:30 a.m. Eastern time to 4:00 p.m. Eastern time).\23\ 
On each business day, before commencement of trading in Shares in the 
Core Trading Session on the Exchange, the Fund will disclose 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.\24\ The Fund will calculate the NAV 
each business day normally as of the close of regular trading on the 
New York Stock Exchange (normally, 4:00 p.m. Eastern time).\25\ 
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.\26\ 
Information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers.\27\ The intra-day, closing, and 
settlement prices of the portfolio securities and other Fund 
investments will also be readily available from the national securities 
exchanges trading those securities, automated quotation systems, 
published or other public sources, or on-line information services such 
as Bloomberg or Reuters.\28\ The Fund's Web site will include a form of 
the prospectus for the Fund and additional data relating to NAV and 
other applicable quantitative information.\29\
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    \21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \22\ See Notice, supra note 3, 78 FR at 56975.
    \23\ According to the Exchange, several major market data 
vendors widely disseminate Portfolio Indicative Values taken from 
the CTA or other data feeds. See id.
    \24\ See id. On a daily basis, the Manager will disclose for 
each portfolio security or other financial instrument of the Fund 
the following information on the Fund's Web site: ticker symbol (if 
applicable), name of security or financial instrument, number of 
shares or dollar value of securities and financial instruments held 
in the portfolio, and percentage weighting of the security or 
financial instrument in the portfolio. The Web site information will 
be publicly available at no charge. See id.
    \25\ See id. at 56974.
    \26\ See id. at 56975.
    \27\ See id.
    \28\ See id.
    \29\ See id. at 56974-75.
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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 will be 
calculated daily and that the NAV and the Disclosed Portfolio will be 
made available to all market participants at the same time.\30\ In 
addition, for in-kind creations, the basket composition file will be 
publicly disseminated daily prior to the opening of the Exchange via 
the National Securities Clearing Corporation.\31\ Further, trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which trading in the Shares of the 
Fund may be halted.\32\ The Exchange may halt trading in the Shares if 
trading is not occurring in the securities or the

[[Page 66412]]

financial instruments constituting the Disclosed Portfolio of the Fund 
or if other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\33\ Further, the 
Commission notes that the Reporting Authority that provides the 
Disclosed Portfolio must 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.\34\ The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.\35\ The Exchange also states that the Manager is affiliated 
with a broker-dealer and has implemented a firewall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolio.\36\ The Exchange states 
that, on its behalf, the Financial Industry Regulatory Authority 
(``FINRA'') will communicate as needed regarding trading in the Shares 
with other markets that are members of the Intermarket Surveillance 
Group (``ISG'') and that FINRA, on behalf of the Exchange, may obtain 
trading information regarding trading in the Shares from such markets 
and other entities.\37\ In addition, the Exchange may obtain 
information regarding trading in the Shares from markets and other 
entities that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.\38\
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    \30\ See id. at 56973.
    \31\ See id. at 56975.
    \32\ See id.
    \33\ See id. See also NYSE Arca Equities Rule 8.600(d)(2)(C) 
(providing additional considerations for the suspension of trading 
in or removal from listing of Managed Fund Shares on the Exchange). 
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 in Shares of the Fund 
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. See Notice, supra 
note 3, 78 FR at 56975.
    \34\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \35\ See Notice, supra note 3, 78 FR at 56976.
    \36\ See supra note 6 and accompanying text. The Commission 
notes that an investment adviser to an open-end fund is required to 
be registered under the Investment Advisers Act of 1940 (``Advisers 
Act''). As a result, the Adviser and Sub-Adviser and their related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
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.
    \37\ See Notice, supra note 3, 78 FR at 56976.
    \38\ See id.
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    The Exchange further 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.\39\ In support of this proposal, the Exchange has made 
representations, including:
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    \39\ See id. at 56975.
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    (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 trading surveillance procedures administered by FINRA on 
behalf of the Exchange 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 Equity Trading Permit Holders (``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 
individually redeemable); (b) NYSE Arca Equities Rule 9.2(a), which 
imposes a duty of due diligence on its ETP Holders to learn the 
essential facts relating to every customer prior to trading the Shares; 
(c) the risks involved in trading the Shares during the Opening and 
Late Trading Sessions when an updated 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) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\40\ as provided by 
NYSE Arca Equities Rule 5.3.
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    \40\ 17 CFR 240.10A-3.
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    (6) Under normal market conditions, at least 80% of the Fund's net 
assets will be invested in securities issued or guaranteed by the U.S. 
government or its agencies or instrumentalities.
    (7) The Fund will not invest in options, futures contracts, or swap 
agreements, other than investments in interest rate, fixed income 
index, bond, and U.S. Treasury futures contracts as permitted by the 
Exemptive Order.
    (8) No more than 20% of the value of the Fund's net assets will be 
invested in derivative instruments, and any such derivative investments 
will be consistent with the Fund's investment goal and will not be used 
to enhance leverage.
    (9) 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 Rule 144A securities deemed illiquid by the Manager; will 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of then-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 securities.
    (10) The Fund may lend a portfolio of securities up to one-third of 
the value of its total assets (measured at the time of the most recent 
loan), and in exchange, the Fund will receive from the borrower or 
borrowers cash collateral at least equal to the value of the securities 
loaned by the Fund.
    (11) A minimum of 100,000 Shares of the Fund will be outstanding at 
the commencement of trading on the Exchange.
    This order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Act \41\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \41\ 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,\42\ that the proposed rule change (SR-NYSEArca-2013-86), as 
modified by Amendment

[[Page 66413]]

No. 1 thereto, be, and it hereby is, approved.
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    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26409 Filed 11-4-13; 8:45 am]
BILLING CODE 8011-01-P