Document ID: SEC-2012-1635-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-10-09T04:00Z

[Federal Register Volume 77, Number 195 (Tuesday, October 9, 2012)]
[Notices]
[Pages 61453-61457]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24738]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67963; File No. SR-NYSEArca-2012-82]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
FlexShares Ready Access Variable Income Fund Under NYSE Arca Equities 
Rule 8.600

October 2, 2012.

I. Introduction

    On August 7, 2012, 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 
FlexShares Ready Access Variable Income Fund (``Fund'') under NYSE Arca 
Equities Rule 8.600. The proposed rule change was published for comment 
in the Federal Register on August 23, 2012.\3\ The Commission received 
no comments on the proposed rule change. 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. 67682 (August 17, 
2012), 77 FR 51081 (``Notice'').
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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 
FlexShares Trust (``Trust''), a statutory trust organized under the 
laws of Maryland and registered with the Commission as an open-end 
management investment company.\4\ The investment adviser to the Fund 
will be Northern Trust Investments, Inc. (``Investment Adviser''). 
Foreside Fund Services, LLC will serve as the distributor for the Fund 
(``Distributor''). J.P. Morgan Chase Bank, N.A. will serve as the 
administrator, custodian, and transfer agent for the Fund (``Transfer 
Agent'').
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    \4\ The Trust is registered under the 1940 Act (``1940 Act''). 
On June 28, 2012, the Trust filed with the Commission a post-
effective amendment to Form N-1A under the Securities Act of 1933 
(``1933 Act'') and the 1940 Act relating to the Fund (File Nos. 333-
173967 and 811-22555) (``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. 
30068 (May 22, 2012) (File No. 812-13868) (``Exemptive Order'').
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    The Investment Adviser is affiliated with a broker-dealer and has 
implemented a ``fire wall'' with respect to such broker-dealer 
regarding access to information concerning the composition and/or 
changes to the Fund's portfolio. If a sub-adviser that is also 
affiliated with a broker-dealer is hired for the Fund, such sub-adviser 
will implement a fire wall with respect to such broker-dealer regarding 
access to information concerning the composition and/or changes to the 
portfolio. In the event (a) the Investment Adviser or any sub-adviser 
becomes newly affiliated with a broker-dealer, or (b) any new manager, 
adviser, or sub-adviser becomes affiliated with a broker-dealer, it 
will implement a fire wall with respect to such broker-dealer regarding 
access to information concerning the composition and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material, non-public information regarding 
such portfolio.\5\
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    \5\ See NYSE Arca Equities Rule 8.600, Commentary .06.
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    The Fund will not be an index fund. The Fund will be actively 
managed and will not seek to replicate the performance of a specified 
index.
    The Fund will seek maximum current income consistent with the 
preservation of capital and liquidity. The Fund will seek to achieve 
its investment objective by investing under normal circumstances \6\ at 
least 65% of its total assets in a non-diversified portfolio \7\ of 
fixed income instruments, including bonds, debt securities, and other 
similar instruments issued by U.S. and non-U.S. public and private 
sector entities.\8\ Such issuers include, without limitation, U.S. and 
non-U.S. governments and their subdivisions, agencies, 
instrumentalities, or sponsored enterprises, U.S. state and local 
governments, international agencies and supranational entities, and 
U.S. and non-U.S. private-sector entities, such as corporations and 
banks. The average portfolio duration \9\ of the Fund will vary based 
on The Northern Trust Company Investment Policy Committee's forecast 
for interest rates and will normally not exceed one year. The dollar-
weighted average portfolio maturity of the Fund is normally not 
expected to exceed two years.
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    \6\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of extreme volatility or trading halts in 
the fixed income 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.
    \7\ The Fund will be ``non-diversified'' under the 1940 Act and 
may invest more of its assets in fewer issuers than ``diversified'' 
funds.
    \8\ ``Fixed income instruments'' includes, but is not limited 
to: securities issued or guaranteed by the U.S. Government, its 
agencies, or government sponsored enterprises; corporate debt 
securities, including corporate commercial paper; mortgage-backed 
and other asset-backed securities; inflation-indexed bonds issued 
both by governments and corporations; bank capital and trust 
preferred securities; fixed and variable rate loan participations 
and assignments; bank certificates of deposit, fixed time deposits 
and bankers' acceptances; repurchase agreements on fixed income 
instruments; and reverse repurchase agreements on fixed income 
instruments.
    \9\ Duration measures the price sensitivity of a fixed-income 
security to changes in interest rates. Interest rate changes have a 
greater effect on the price of fixed-income securities with longer 
durations.
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    The Fund will invest in debt securities that are, at the time of 
investment, rated within the top four rating categories by a Nationally 
Recognized Statistical Rating Organization (``NRSRO'') or of comparable 
quality as determined by the Investment Adviser.\10\ Subsequent to its 
purchase by the Fund, a rated security may cease to be rated or its 
rating may be reduced below investment grade or a security may no 
longer be considered to be investment grade. In such case, the Fund is 
not required to dispose of the security. The Investment Adviser will 
determine what action,

[[Page 61454]]

including potential sale, is in the best interest of the Fund.
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    \10\ In determining whether a security is of ``comparable 
quality,'' the Investment Adviser may consider, for example, whether 
the issuer of the security has issued other rated securities, 
whether the obligations under the security are guaranteed by another 
entity and the rating of such guarantor (if any), whether and (if 
applicable) how the security is collateralized, other forms of 
credit enhancement (if any), the security's maturity date, liquidity 
features (if any), relevant cash flow(s), valuation features, other 
structural analysis, macroeconomic analysis, and sector or industry 
analysis.
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    The Fund may invest, without limitation, in fixed income 
instruments of foreign issuers in developed and emerging markets,\11\ 
including, without limitation, debt securities of emerging-market 
foreign governments in the following regions: Asia and Pacific, Central 
and South America, Eastern Europe, Africa, and the Middle East. Within 
these regions, the Fund may invest in countries such as Brazil, Chile, 
China, Columbia, Czech Republic, Egypt, Hungary, India, Indonesia, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, South Korea, Taiwan, Thailand, and Turkey, although this list 
may change as market developments occur and may include additional 
emerging market countries that conform to selected ratings, liquidity, 
and other criteria. Notwithstanding the foregoing, the Fund will not 
invest more than 20% of its total assets in fixed income instruments of 
foreign issuers in emerging markets.\12\
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    \11\ While there is no universally accepted definition of what 
constitutes an ``emerging market,'' in general, emerging market 
countries are characterized by developing commercial and financial 
infrastructure with significant potential for economic growth and 
increased capital market participation by foreign investors. The 
Investment Adviser will look at a variety of commonly-used factors 
when determining whether a country is an ``emerging'' market. In 
general, the Investment Adviser will consider a country to be an 
emerging market if:
    (1) It is either (a) classified by the World Bank in the lower 
middle or upper middle income designation for one of the past 3 
years (i.e., per capita gross national product of less than U.S. 
$9,385), or (b) classified by the World Bank as high income in each 
of the last three years, but with a currency that has been primarily 
traded on a non-delivered basis by offshore investors (e.g., Korea 
and Taiwan);
    (2) The country's debt market is considered relatively 
accessible by foreign investors in terms of capital flow and 
settlement considerations; and
    (3) The country has issued the equivalent of $5 billion in local 
currency sovereign debt.
    The criteria used to evaluate whether a country is an ``emerging 
market'' will change from time to time based on economic and other 
events.
    \12\ The Fund may invest more than 25% of its total assets in 
fixed income securities and instruments of issuers in a single 
developed market country.
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    Foreign debt securities include direct investments in non-U.S. 
dollar-denominated debt securities traded primarily outside of the 
United States and dollar-denominated debt securities of foreign 
issuers. The Fund will invest in non-U.S. corporate bonds that the 
Investment Adviser deems to be sufficiently liquid at the time of 
investment.\13\ Foreign government obligations may include debt 
obligations of supranational entities, including international 
organizations (such as the European Coal and Steel Community and the 
International Bank for Reconstruction and Development, also known as 
the World Bank) and international banking institutions and related 
government agencies. The Fund also may invest in foreign time deposits 
and other short-term instruments. The Fund may invest a portion of its 
assets in the obligations of foreign banks and foreign branches of 
domestic banks.
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    \13\ The Fund will invest only in non-U.S. corporate bonds that 
the Investment Adviser deems to be sufficiently liquid at time of 
investment. Generally, a corporate bond must have $200 million (or 
an equivalent value if denominated in a currency other than U.S. 
dollars) or more par amount outstanding and significant par value 
traded to be considered as an eligible investment. Economic and 
other conditions may, from time to time, lead to a decrease in the 
average par amount outstanding of bond issuances. Therefore, 
although the Fund does not intend to do so, the Fund may invest up 
to 20% of its net assets in corporate bonds with less than $200 
million par amount outstanding, including up to 5% of its assets in 
corporate bonds with less than $100 million par amount outstanding, 
if (i) the Investment Adviser deems such security to be sufficiently 
liquid based on its analysis of the market for such security (based 
on, for example, broker-dealer quotations or its analysis of the 
trading history of the security or the trading history of other 
securities issued by the issuer), (ii) such investment is consistent 
with the Fund's goal of seeking maximum current income consistent 
with the preservation of capital and liquidity, and (iii) such 
investment is deemed by the Investment Adviser to be in the best 
interest of the Fund.
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    The Fund may invest, without limitation, in mortgage- or asset-
backed securities, other structured securities, including 
collateralized mortgage obligations (``CMOs''), and also including to-
be-announced transactions (or ``TBA Transactions'').\14\ A TBA 
Transaction is a method of trading mortgage-backed securities.\15\ 
However, the Fund will not invest more than 10% of its total assets in 
non-agency \16\ mortgage- or asset-backed securities.
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    \14\ In addition to credit and market risk, asset-backed 
securities may involve prepayment risk because the underlying assets 
(loans) may be prepaid at any time. Prepayment (or call) risk is the 
risk that an issuer will exercise its right to pay principal on an 
obligation held by the Fund (such as a mortgage-backed security) 
earlier than expected. This may happen during a period of declining 
interest rates. Under these circumstances, the Fund may be unable to 
recoup all of its initial investment and will suffer from having to 
reinvest in lower yielding securities. The loss of higher yielding 
securities and the reinvestment at lower interest rates can reduce 
the Fund's income, total return, and share price. The value of these 
securities also may change because of actual or perceived changes in 
the creditworthiness of the originator, the service agent, the 
financial institution providing the credit support, or the 
counterparty. Like other fixed-income securities, when interest 
rates rise, the value of an asset-backed security generally will 
decline. Credit supports generally apply only to a fraction of a 
security's value. However, when interest rates decline, the value of 
an asset-backed security with prepayment features may not increase 
as much as that of other fixed-income securities. In addition, non-
mortgage asset-backed securities involve certain risks not presented 
by mortgage-backed securities. Primarily, these securities do not 
have the benefit of the same security interest in the underlying 
collateral. If the issuer of the security has no security interest 
in the related collateral, there is the risk that the Fund could 
lose money if the issuer defaults.
    \15\ In a TBA Transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par 
amount, and price. The actual pools delivered generally are 
determined two days prior to the settlement date.
    \16\ ``Non-agency'' securities are financial instruments that 
have been issued by an entity that is not a government-sponsored 
agency, such as the Federal National Mortgage Association (``Fannie 
Mae''), Federal Home Loan Mortgage Corporation (``Freddie Mac''), 
Federal Home Loan Banks, or the Government National Mortgage 
Association (``Ginnie Mae'').
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    The Fund may invest in variable and floating rate instruments. 
Variable and floating rate instruments have interest rates that 
periodically are adjusted either at set intervals or that float at a 
margin tied to a specified index rate. These instruments include 
variable amount master demand notes, long-term variable and floating 
rate bonds where the Fund obtains at the time of purchase the right to 
put the bond back to the issuer or a third party at par at a specified 
date, and leveraged inverse floating rate instruments (``inverse 
floaters''). Some variable and floating rate instruments have interest 
rates that periodically are adjusted as a result of changes in 
inflation rates.
    Because there is no active secondary market for certain variable 
and floating rate instruments, they may be more difficult to sell if 
the issuer defaults on its payment obligations or during periods when 
the Fund is not entitled to exercise its demand rights. In addition, 
variable and floating rate instruments are subject to changes in value 
based on changes in market interest rates or changes in the issuer's or 
guarantor's creditworthiness.
    The Fund may borrow money and enter into reverse repurchase 
agreements in amounts not exceeding one-fourth of the value of its 
total assets (including the amount borrowed). To the extent consistent 
with its investment objective and strategies, the Fund may enter into 
repurchase agreements with financial institutions such as banks and 
broker-dealers that are deemed to be creditworthy by the Investment 
Adviser and may invest a portion of its assets in custodial receipts.

Other Investments

    The Fund may engage in forward foreign currency transactions for 
hedging purposes in order to protect against uncertainty in the level 
of future foreign currency exchange rates, to facilitate local 
settlements, or to protect against currency exposure in connection

[[Page 61455]]

with its distributions to shareholders.\17\ The Fund, however, does not 
expect to engage in currency transactions for speculative purposes 
(e.g., for potential income or capital gain). A forward currency 
exchange contract is an obligation to exchange one currency for another 
on a future date at a specified exchange rate.
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    \17\ Liquid assets equal to the amount of the Fund's assets that 
could be required to consummate forward contracts will be segregated 
except to the extent the contracts are otherwise ``covered.'' The 
segregated assets will be valued at market or fair value. If the 
market or fair value of such assets declines, additional liquid 
assets will be segregated daily so that the value of the segregated 
assets will equal the amount of such commitments by the Fund. A 
forward contract to sell a foreign currency is ``covered'' if the 
Fund owns the currency (or securities denominated in the currency) 
underlying the contract, or holds a forward contract (or call 
option) permitting the Fund to buy the same currency at a price that 
is (i) no higher than the Fund's price to sell the currency or (ii) 
greater than the Fund's price to sell the currency provided the Fund 
segregates liquid assets in the amount of the difference. A forward 
contract to buy a foreign currency is ``covered'' if the Fund holds 
a forward contract (or call option) permitting the Fund to sell the 
same currency at a price that is (i) as high as or higher than the 
Fund's price to buy the currency or (ii) lower than the Fund's price 
to buy the currency provided the Fund segregates liquid assets in 
the amount of the difference.
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    To the extent consistent with its investment policies, the Fund may 
hold up to 15% of its net assets in securities that are illiquid 
(calculated at the time of investment), including Rule 144A Securities 
and master demand notes. The aggregate value of all of the Fund's 
illiquid securities, Rule 144A Securities, master demand notes, fixed 
and variable rate loan participations and assignments, inverse 
floaters, and long-term variable and floating rate bonds where the Fund 
obtains at the time of purchase the right to put the bond back to the 
issuer or a third party at par at a specified date shall not exceed 15% 
of the Fund's total assets. 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.
    The Fund may purchase and sell securities on a when-issued, delayed 
delivery, or forward commitment basis. The Fund also may, without 
limitation, seek to obtain market exposure to the securities in which 
it primarily invests by entering into a series of purchase and sale 
contracts (such as buy backs or mortgage dollar rolls).
    The Fund may temporarily hold cash and cash-like instruments or 
invest in short-term obligations pending investment or to meet 
anticipated redemption requests. The Fund also may hold up to 100% of 
its total assets in cash or cash-like instruments or invest in short-
term obligations as a temporary measure mainly designed to limit the 
Fund's losses in response to adverse market, economic, or other 
conditions. The Fund may not achieve its investment objective when it 
holds cash or cash-like instruments, or invests its assets in short-
term obligations or otherwise makes temporary investments. The Fund 
also may miss investment opportunities and have a lower total return 
during these periods.
    The Fund may not purchase or sell physical commodities unless 
acquired as a result of ownership of securities or other instruments.
    The Fund may not concentrate its investments (i.e., invest 25% or 
more of its total assets in the securities of a particular industry or 
industry group). For purposes of this limitation, securities of the 
U.S. government (including its agencies and instrumentalities), 
repurchase agreements collateralized by U.S. government securities, and 
securities of state or municipal governments and their political 
subdivisions are not considered to be issued by members of any 
industry.
    The Fund may invest in the securities of other investment 
companies. Such investments will be limited so that, as determined 
after a purchase is made, either: (a) not more than 3% of the total 
outstanding stock of such investment company will be owned by the Fund, 
the Trust as a whole, and its affiliated persons (as defined in the 
1940 Act); or (b)(i) not more than 5% of the value of the total assets 
of the Fund will be invested in the securities of any one investment 
company, (ii) not more than 10% of the value of its total assets will 
be invested in the aggregate 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. These limits will 
not apply to the investment of uninvested cash balances in shares of 
registered or unregistered money market funds whether affiliated or 
unaffiliated. The foregoing exemption, however, only applies to an 
unregistered money market fund that (i) limits its investments to those 
in which a money market fund may invest under Rule 2a-7 of the 1940 
Act, and (ii) undertakes to comply with all the other provisions of 
Rule 2a-7.
    Investments by the Fund in other investment companies, including 
exchange-traded funds (``ETFs''),\18\ will be subject to the 
limitations of the 1940 Act except as expressly permitted by Commission 
orders. The Fund also may invest in other types of U.S. exchange-traded 
products, such as Exchange-Traded Notes.\19\
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    \18\ For purposes of this proposed rule change, ETFs are 
securities registered under the 1940 Act such as those listed and 
traded on the Exchange under NYSE Arca Equities Rules 5.2(j)(3), 
8.100, and 8.600.
    \19\ For purposes of this proposed rule change, Exchange Traded 
Notes are securities registered under the 1933 Act such as those 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(6).
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    The Fund intends to qualify as a regulated investment company under 
Subchapter M of Subtitle A, Chapter 1, of the Internal Revenue Code.
    The Fund will not invest in any non-U.S registered equity 
securities. The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage. That is, 
while the Fund will be permitted to borrow as permitted under the 1940 
Act, the Fund's investments will not be used to seek performance that 
is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund's 
benchmark (i.e., the Citigroup 3-Month Treasury Bill Index).
    Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements.
    The Exchange represents that the Shares will conform to the initial 
and continued listing criteria under NYSE Arca Equities Rule 8.600. 
Consistent with NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the 
Investment Adviser will 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 Fund's 
portfolio. The Exchange represents that, for initial and/or continued 
listing, the Fund will be in compliance with Rule 10A-3 under the 
Exchange Act,\20\ as provided by NYSE Arca Equities Rule 5.3. A minimum 
of 100,000 Shares will be outstanding at the commencement of trading on 
the Exchange. The Exchange will obtain a representation from the issuer 
of the Shares that the net asset value (``NAV'') per Share will be 
calculated daily and that the NAV and the 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.
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    \20\ 17 CFR 240.10A-3.

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[[Page 61456]]

    Additional information regarding the Trust, Fund, Shares, Fund's 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings and disclosure policies, distributions and taxes, 
availability of information, trading rules and halts, and surveillance 
procedures, among other things, can be found in the Notice and/or the 
Registration Statement, as applicable.\21\
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    \21\ See Notice and Registration Statement, supra notes 3 and 4, 
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 \22\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\23\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\24\ 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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    \22\ 15 U.S.C. 78f.
    \23\ 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).
    \24\ 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,\25\ 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. 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 Core Trading Session.\26\ On each 
business day, before commencement of trading in Shares in the Core 
Trading Session on the Exchange, the Fund will disclose on the Trust's 
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.\27\ The NAV of the Fund will normally 
be determined as of the close of the regular trading session 
(ordinarily 4:00 p.m., Eastern Time) on the New York Stock Exchange 
(``NYSE'') on each business day. Further, a basket composition file, 
which includes the security names and share quantities, if applicable, 
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 NYSE via the National Securities 
Clearing Corporation. 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. 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. In addition, price information for 
the debt securities, fixed income instruments, and other investments, 
including forwards and securities of other investment companies, held 
by the Fund will be available through major market data vendors and/or 
the securities exchange on which they are listed and traded. The 
Trust's Web site will include a form of the prospectus for the Fund and 
additional data relating to NAV and other applicable quantitative 
information.
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    \25\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \26\ According to the Exchange, several major market data 
vendors display and/or make widely available Portfolio Indicative 
Values published on CTA or other data feeds.
    \27\ On a daily basis, the Fund will disclose for each portfolio 
security and other financial instrument of the Fund the following 
information on the Trust's Web site: ticker symbol (if applicable), 
name of securities and financial instruments, number of shares or 
dollar value of securities and financial instruments held in the 
portfolio, and percentage weighting of the securities and financial 
instruments in the portfolio. The Web site information will be 
publicly available at no charge.
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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 per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.\28\ 
In addition, trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted. The Exchange may halt trading 
in the Shares if trading is not occurring in the securities and/or the 
financial instruments comprising 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.\29\ 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.\30\ The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. The Exchange also states that the Investment Adviser is 
affiliated with a broker-dealer and has implemented a ``fire wall'' 
with respect to such broker-dealer regarding access to information 
concerning the composition and/or changes to the Fund's portfolio.\31\ 
Moreover, the

[[Page 61457]]

Exchange represents that it is able to obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges that are 
members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
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    \28\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \29\ See 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.
    \30\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii). The 
Exchange represents that, consistent with NYSE Arca Equities Rule 
8.600(d)(2)(B)(ii), the Investment Adviser will 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 Fund's portfolio.
    \31\ See supra note 5 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 Investment Adviser and its 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.
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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 applicable to derivative 
products, which include Managed Fund Shares, 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/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\32\ as provided by 
NYSE Arca Equities Rule 5.3.
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    \32\ 17 CFR 240.10A-3.
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    (6) The Fund will invest in debt securities that are, at the time 
of investment, rated within the top four rating categories by an NRSRO.
    (7) The Fund will invest only in non-U.S. corporate bonds that the 
Investment Adviser deems to be sufficiently liquid at time of 
investment. Generally, a corporate bond must have $200 million (or an 
equivalent value if denominated in a currency other than U.S. dollars) 
or more par amount outstanding and significant par value traded to be 
considered as an eligible investment.
    (8) The Fund will not invest: (a) More than 20% of its total assets 
in fixed income instruments of foreign issuers in emerging markets; (b) 
more than 10% of its total assets in non-agency mortgage- or asset-
backed securities; (c) consistent with the Exemptive Order, in options 
contracts, futures contracts, or swap agreements; and (d) in any non-
U.S. registered equity securities.
    (9) The aggregate value of all of the Fund's illiquid securities, 
Rule 144A Securities, master demand notes, fixed and variable rate loan 
participations and assignments, inverse floaters, and long-term 
variable and floating rate bonds where the Fund obtains at the time of 
purchase the right to put the bond back to the issuer or a third party 
at par at a specified date shall not exceed 15% of the Fund's total 
assets.
    (10) The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
    (11) A minimum of 100,000 Shares of the Fund will be outstanding at 
the commencement of trading on the Exchange.

This approval 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 is consistent with Section 6(b)(5) of the Act \33\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \33\ 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,\34\ that the proposed rule change (SR-NYSEArca-2012-82) be, and it 
hereby is, approved.
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    \34\ 15 U.S.C. 78s(b)(2).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24738 Filed 10-5-12; 8:45 am]
BILLING CODE 8011-01-P